[Congressional Record Volume 149, Number 2 (Wednesday, January 8, 2003)]
[Extensions of Remarks]
[Page E51]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




A BILL TO CLARIFY THE TREATMENT OF INCENTIVE STOCK OPTIONS AND EMPLOYEE 
                          STOCK PURCHASE PLANS

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                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                       Wednesday, January 8, 2003

  Mr. HOUGHTON. Mr. Speaker, I am pleased to join a number of my 
colleagues in introducing our bill to solve a problem that has been 
facing a number of companies during the past few years who grant stock 
options to their employees. Due to the passage of time, this problem is 
becoming more urgent for a number of reasons mentioned below. I 
introduced an identical bill in the 107th Congress.
  Many companies use stock options as an incentive to attract and 
motivate employees. Companies give their workers the right to purchase 
company stock, at a small discount from the listed price, through 
Employee Stock Purchase Plans and Incentive Stock Options. Employee 
stock ownership motivates workers and can create a positive 
relationship between management and workers, where both reap rewards 
for successful company performance.
  For nearly 30 years the Internal Revenue Service (IRS) took the 
position that the income from these stock options was not subject to 
employment taxes when the option is granted or exercised. Instead tax 
is imposed when the actual stock is sold. However, audits and rulings 
on specific companies a few years ago raised the troubling prospect 
that the IRS was changing its position to require that employment taxes 
should be withheld from the paychecks of individuals who exercised 
stock options under these plans.
  Employee Stock Purchase Plans and Incentive Stock Options were 
created by Congress to provide tools to build strong companies and 
encourage greater employee ownership of company stock. It was not the 
intent of Congress to dilute these incentives by requiring employment 
tax on withholding when the stock is purchased.
  Members of Congress raised concerns about this issue, and in early 
2001 the IRS put in place a moratorium so that no employment taxes 
would be assessed on stock options. The IRS later lifted the moratorium 
for options exercised this year. In response to further opposition, in 
2002 the IRS announced an indefinite moratorium. As a result, the Joint 
Committee on Taxation determined that there would be no revenue loss it 
the law were clarified to prevent withholding on ESPPs and ISOs. If the 
moratorium is lifted by the IRS there will be a substantial revenue 
cost attached to clarifying the law. In 2002, the House passed the 
previous legislation I introduced. Although the Senate Finance 
Committee passed the legislation unanimously, the legislation was not 
considered by the Senate.
  The legislation would clarify that the difference between the 
exercise price and fair market value of a stock is not subject to 
employment taxes when an ISO or ESPP is exercised. In addition, wage 
withholding is not required on disqualifying dispositions of ISO stock 
or on the fifteen percent discount offered to employees by ESPPs.
  I urge my colleagues to support this proposed legislation, so that 
this issue can be resolved as quickly as possible in this Congress.

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