[Michael Buffer says: Welcome fans to the Ultimate Tax Fighting Championship. Our fighters are in the ring, so LET'S GET READY TO RUMBLE!]

To pick the Enron string again. Erik asked about stock options & I sez the tax treatment of stock options is as neutral as the treatment of cash salary. When you issue an option, no tax for the individual and no deduction for the company. When employee exercises (not including ISO and, BTW, this is not tax advice) then employee takes an income tax hit equal to the difference between strike price and fmv. The company gets an equal and offsetting deduction. As a policy matter, during the boom Tech corporations paid very little in taxes [ In large part due to the enormous deductions available under this rule -RM (Stay away from wet paint and DAP, you're getting delirious. Giving away ownership in a company is not a cost? How is that different from selling stock on the market and using the cash to pay employees? As far as subsidy, the employee takes an equal income hit, so net revenue change is in the government's favor for the wealthiest employees (higher individual rate then corp.))] so the deduction didn't drain the treasury. Individuals do pay taxes, so stock exercises flooded the treasury with cash and more cash (which Grey Davis promptly spent, then monetized the future revenues to spend some more. Wooo Hoooo, free cash and revenue forever.)

Anyway, as you can see, options have no more tax benefit to the company then cash. [Bullshit. It's a tax subsidy. (just because you say You farted, doesn't mean I did) The company gives away nothing and gets a deduction. No other country in the world (that is a really good argument, I am floored) provides the same tax dedution and I'd bet that the CBO and GAO call them subsidies for budgeting purposes. - RM Nope, they call the income taken in by the employee as revenue. [Doesn't go to my argument, but, whatever - RM] Try to put this model in your SIMs the Game world: Company A goes IPO and uses the money to pay employees, Company B simply gives stock to the employee. Does your SIMs the Game world treat similarly situated entities differently] But options have a huge, huge accounting/book keeping benefit. By giving away options, you are paying employees, but its not a charge to earnings in the same way . The stock market run-up was basically tied to incredibly earnings projections and faking ways to meet them. So pay a guy $100,000 cash and that knocks your earnings down. Give him options with a FMV strike price, and you have ho expense. Bigger companies like Coke now book the option/ expense as a form of accounting honesty [ Not so much honesty as anticipation of a rule (Stop reading the Comrades To Arms for your news, FASB hasn't passed or proposed any such rule, its shareholder pressure all the way) {Sony, you ignorant Slovak, it's the McCain-Levin bill, not FASB. Not to discount shareholder pressure you fucking cabbage eating bumpkin} steal my own line? Clever, clever. I understand that you're One Froot Loop shy of a full bowl, but even you know that the bill is dead, as is any bill with McCain's name attached. Now go read up on Black-Sholes change requiring booking stock options as an expense in order to qualify for the tax deduction. Again, no other country (if you say that again, I will stop reading this chicken scrawl ) treats this as an expense for book purposes. Deducting the "expense" actually distorts earnings. A company that spent a million dollars to make $100million could have no earnings due to stock options, even though the company clearly has profit to distribute and will never have to pay to acquire the stock underlying the options.. The better way is to show dilution scenarios as now required by the SEC. - RM That is so freaking wrongheaded, I don't know where to start. I've never seen a Fed subsidy that has as its qualification: a market run up in stock coinciding with a vesting schedule and having a third party exercise option. If you don't have all three elements no "subsidy"?. {The qualifactions are irrelvevant. { kind of like a working knowledge of the topic is irrelevant to your posting? } All tax subsidies have qualifiactions. E.g., home ownership.] Lets assume your SIMs the Game Company did not issue options with a one year vesting period (because lord knows, no company I advise would), instead it promised to pay its employees $90 million if they brought it $100 million gross revenues, which happens. It sells stock on the market and pays teh employees. This company gets a legit deduction but your SIMs the Game Company gets a subsidy equal to the deduction? ]

This has nothing to do with Enron. Enron faked earnings by creating related party transactions: Enron buys a Widget for $100, next week Enron sells it to Raptor, LLC (owned by Enron’ VPs, SVPs etc.) for $500. That’s $400 in earnings. I’m not that smart, but if you read a research report back then, you could easily gauge that its earnings were smoke and mirrors. Same with El Paso, to a lesser extent.

the tangential connection is that insiders holding huge equity stakes have a primordial interest in seeing stock appreciate, so they do wahtever it takes. Back then, everyone focused on earnings or market share, so insiders faked earnings and market share growth (i.e. Global crossing and Qwest trading (unused) capacity and booking it as revenue and claiming market gains).

Anyway, That’s Stock Options and Enron As I sees it. I’ll get Rick’s argument that more rules will make everyone honest and happy later.

RM says: Agreed on conclusion, dissent on the dicta. Next issue. The next issue is what makes Rich such a freaking commie regulator? Whatever it is, it works well. Hey what happened to my comments? I'm looking in your direction SH. You can delete all the text you want, but you will still be wrong in your unique Hodurish way. - RM So protests Seriously, I didn't delete anything. Not sure what happened (editing at the same time?) but that kind of thing is flat wrong & I wouldn't do it. [It's cool brother and I never actually thought for a second that you would do such a thing. Well, maybe one second, but that's it, I swear. - RM]