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Employer obligations to expatriates and nonresident aliens.

The excitement created by Disney and Mirage corporate executives' exercise of options (and prompt sale of underlying stock) focused attention on President Clinton's tentative tax proposals and tax-planning steps taken in response.

President Clinton campaigned on a pledge to raise the marginal tax rate to 36% (from 31%) for married taxpayers with adjusted gross incomes over $200,000 (for single taxpayers, the hurdle is $150,000). In addition, he likely will seek a 10% surtax on the tax liability attributable to taxable income exceeding $1 million.

On the corporate side, he apparently has endorsed a well-publicized plan to disallow deductions for "officer" compensation exceeding $1 million.

Accordingly, the normal strategy for deferring income and accelerating expenses was reversed as executives endeavored to report taxable income in 1992 to take advantage of the 31% marginal rate.

In the case of a "nonqualified option," the executive realizes taxable income at the time the option is exercised-provided the stock received is not subject to a substantial risk of forfeiture. The amount of income realized is measured by the excess of the value of the stock received over the strike price of the option. The employer is entitled to a deduction equal to the amount of income reported by the employee.

Observation: In the case of incentive stock options-which were exercised in the Disney and Mirage situations-similar tax principles apply if the executive effects a "disqualifying disposition" of the stock (a disposition that occurs before the latter of one year from the date of exercise and two years from the date the option was granted).
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Feb 1, 1993
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