Editorials

Saturday, August 4, 2001

IRS should tax only the
real thing, not phantom profits

The issue: Many employees in the
beleaguered high-tech industry are
stuck with tax bills on paper profits.

Many workers in the technology industry are finding themselves owing the government taxes on income that existed only on paper, an unfair practice Congress should fix.

This situation developed when technology companies lured tens of thousands of people into jobs that gave them stock options as an incentive, often in lieu of higher pay or benefits. Employees who bought stock, often at less than the price it sold for on the market, hoped they would increase in value, which they often did.

Under a regulation called the alternative minimum tax, the IRS considers the difference between what was paid for the stock and the market price at the end of the tax year to be income and bills stock holders on that amount.

Then came the technology swoon and stock values plummeted. Workers were faced with huge tax bills for profits they made only on paper. Many are declaring bankruptcy or are going into debt, selling their homes and other assets to cover the tax.

Opponents of legislation that would provide these people a one-time exemption from this regulation say the employees should have been aware of the risk when they exercised their options to buy the stock. When the tech industry was riding high, many workers made fortunes by selling the stock they gained through option offers. However, those people made real money -- and paid the taxes on it -- while those holding shares didn't.

The bill's supporters contend that most of these employees are middle-class, middle-level workers, not Internet millionaires. If and when they sell their holdings, they will have to pay taxes on any real profits.

The problem serves as a cautionary tale for any worker who opts to buy incentive stocks, financial advisers say. People should recognize they are taking a gamble just as any market investor does. Although they stand to gain if the stocks increase in value, as long as they hold them there are no guarantees. As with any investment, they would be prudent to figure the worst-case scenario and decide if they are willing to live with that, advisers say.

Proponents argue that even at the estimated $1.3 billion of lost revenue over 10 years, the measure would cost far less than the more comprehensive reform or repeal of the alternative minimum tax that many in Congress favor.

The bill would primarily benefit tech workers and would be a one-time proposition, but Congress should evaluate the alternative minimum tax regulation with a mind toward revisions. As it stands now, it improperly levies a tax on phantom income.

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Published by Oahu Publications Inc., a subsidiary of Black Press.

Don Kendall, President

John Flanagan, publisher and editor in chief 529-4748; jflanagan@starbulletin.com
Frank Bridgewater, managing editor 529-4791; fbridgewater@starbulletin.com
Michael Rovner, assistant managing editor 529-4768; mrovner@starbulletin.com
Lucy Young-Oda, assistant managing editor 529-4762; lyoungoda@starbulletin.com

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