[Congressional Record Volume 149, Number 8 (Thursday, January 16, 2003)]
[Senate]
[Pages S1073-S1075]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself, Mr. McCain, Mr. Durbin, and Mr. 
        Feingold):
  S. 182. A bill to amend the Internal Revenue Code of 1986 to provide 
that corporate tax benefits from stock option compensation expenses are 
allowed only to the extent such expenses

[[Page S1074]]

are included in a corporation's financial statements; to the Committee 
on Finance.
  Mr. LEVIN. Mr. President, I am introducing today on behalf of myself 
and Sen. McCain two separate bills relating to stock options. Stock 
options are unfinished business from the last Congress. They are the 
800-pound gorilla that has yet to be caged by corporate reform.
  Stock options allow a company's employees, usually its top 
executives, to purchase company stock at a set price for a specified 
period of time, perhaps 10 years. If the stock price rises after the 
option is issued, the executive can exercise the option, buy the stock 
at the set price, and then sell it on the open market at a profit. 
Today, most CEOs of U.S. publicly traded companies receive a large 
percentage of their pay from stock options.
  Despite their widespread use, stock options remain a stealth form of 
compensation because, under current accounting rules, they never have 
to appear on the company books as a compensation expense. In fact, they 
are the only form of compensation that companies do not have to book as 
an expense at any time. In addition, stock options are the only form of 
compensation that a company can claim as a deductible business expense 
on its tax return, even when no expense is ever recorded on the company 
books.
  These stock option accounting and tax rules are inconsistent and 
illogical. The two bills we are introducing today, the Stock Option 
Accounting Review Act, and the Ending the Double Standard for Stock 
Options Act, were introduced in the last Congress to address this 
problem. Each bill tackles a different aspect of the stock option 
issue. One addresses stock option accounting; the other addresses the 
stock option tax deduction.
  Last year, Senator McCain and I proposed the accounting provision as 
an amendment to the Sarbanes-Oxley corporate reform bill that was 
before the Senate in July. There appeared to be sufficient support to 
pass it at the time, but we were unable to obtain a vote on it or on 
any other stock option legislation. That is why we are back this 
Congress.
  Congress failed to resolve the issue last year, even though stock 
option abuses were repeatedly linked to serious corporate abuses and 
dishonest accounting. In fact, virtually every corporate disaster that 
has struck in recent years has had a stock option component.
  Enron, of course, was the poster child. Congressional investigations, 
including by the Permanent Subcommittee on Investigations on which I 
sit, showed that, at the same time Enron investors and employees were 
losing their shirts, Enron executives were cashing in their stock 
options for tens or hundreds of millions of dollars. Ken Lay, the 
Chairman of the Board, took home $123 million from stock options in 
2000 alone. Jeff Skilling, the CEO, took home over $60 million. Another 
executive, Lou Pai, topped them all by cashing in Enron stock options, 
in 2000, for $265 million.
  Stock options also contributed to Enron's inflated earnings, since 
despite providing the lion's share of executive pay, this compensation 
never appeared on the company books as an expense nor was it ever 
deducted from earnings. And many have blamed stock options for 
encouraging Enron management to rig the company's financial statements 
through other accounting deceptions to help boost apparent income and, 
in turn, the company stock price, so they could sell their Enron stock 
at enormous profit.
  Still others have noted that Enron used about $600 million in stock 
option tax deductions to avoid paying any corporate income taxes in 
four out of the last five years before its bankruptcy while, at the 
same time, touting record amounts of corporate income. What is now only 
beginning to be understood is that Enron's stock option tax deductions 
played a central role in much of its wrongdoing, after all, Enron was 
able to inflate its corporate income with impunity, in part, because 
its stock option tax deductions allowed it to avoid paying taxes on any 
of its phony inflated income.
  Enron was the poster child for stock option abuses, but it was far 
from the only company in that category last year. Worldcom, Tyco, Qwest 
Communications, and many others have stock option stories that are 
equally disturbing.
  And the problems did not stop with companies engaged in accounting 
deceptions or other corporate misconduct. Even companies that never 
appeared on the 2002 rollcall of corporate deception have been 
excoriated in media reports for giving huge stock option pay to 
executives while socking employees and investors with lower stock 
prices, mounting losses, and lousy corporate performance.
  High tech companies that have been the biggest promoters of stock 
options have been some of the biggest culprits. Company after company 
in Silicon Valley paid their executives big bucks via stock options 
while laying off employees, losing money or market share, and stiffing 
investors. One example frequently cited in the media is Lawrence 
Ellison, CEO of Oracle Corp., who exercised options in 2001 to obtain 
profits of $706 million, while his company's stock price dropped by 
more than 50 percent.
  Aggregate stock option statistics are also sobering. Business Week, 
for example, has estimated that stock options now account for ``a 
staggering 15 percent of all shares outstanding.'' Federal Reserve 
Chairman Alan Greenspan estimated that stock options have been used to 
overstate reported company earnings by an average of 6 to 9 
percent. Perhaps that is why Chairman Greenspan has picked honest stock 
option accounting as his number one post-Enron reform.

  Stock option abuses have been linked to inflated company earnings, 
dishonest accounting, and executive misconduct. These abuses have been 
facilitated by existing accounting and tax rules which allow stock 
option compensation to never appear on a company's books as an expense, 
even when a company claims this compensation as a business expense on 
its tax return. This double standard is fueling Enron-style abuses, and 
it is time for it to end.
  Many in the U.S. business community apparently agree and, unlike the 
Congress, have taken direct action on the stock option issue. In fact, 
over the last year, there has been significant movement in the business 
world to end dishonest stock option accounting.
  Over 120 companies, including such American giants as Coca-Cola, 
General Motors, General Electric, Dow Chemical, Wal-Mart, and Home 
Depot have announced that they will begin expensing options in 2003, 
joining longtime expensers like Boeing and Winn-Dixie. Standard and 
Poors has created additional pressure for honest stock option 
accounting by announcing a new ``core earnings'' calculation for 
companies which requires stock option compensation to be subtracted 
from a company's earnings.
  Accounting experts are also moving. The International Accounting 
Standards Board in London has announced that, by the end of 2003, it 
will issue accounting standards requiring companies to expense stock 
options. The U.S. equivalent, the Financial Accounting Standards Board, 
or FASB, has announced that it will decide by the end of the first 
quarter of this year whether it will issue stock option accounting 
standards similar to those of the International Board.
  While there has been a major shift in the U.S. business world toward 
honest stock option accounting, not all companies are on board. Some 
companies, especially those in the high tech sector, have announced 
that they will not expense stock options until forced to do so. That 
means, until FASB acts, there will be a discrepancy between those 
companies that are voluntarily expensing options and those that are 
not, when there ought to be a level playing field where everyone plays 
by the same accounting rules. It is this discrepancy that continues to 
make our stock option legislation relevant and necessary for 
Congressional action this year.
  Let me describe both bills.
  First is the Stock Option Accounting Review Act. This bill is very 
simple. It would direct FASB to conduct a fresh review of the current 
accounting treatment for stock options and, within one year, establish 
what it deems to be the appropriate stock option accounting standards.
  The bill does not specify the stock option accounting standards that 
FASB should issue; that matter is left to the experts where it belongs. 
But

[[Page S1075]]

the bill does put the Senate on record as urging FASB to review the 
existing rules and take appropriate action within one year. This 
legislative directive is important, because the only other time the 
Senate has spoken on this issue, in 1994, the Senate majority urged 
FASB to keep allowing companies to exclude stock option expenses from 
their financial statements. The Senate's position contradicted FASB's 
position at the time which was to require stock option expensing. It is 
long past time for the Senate to rescind its mistaken advice.
  The second bill we are introducing today is the Ending the Double 
Standard for Stock Options Act. This bill would not address the 
accounting treatment of stock options. Instead, it would address the 
tax treatment of stock option compensation, ending the costly double 
standard in federal law which allows a company to take a tax deduction 
for stock option compensation, even if the company does not show that 
compensation as a business expense on its financial statements.
  Essentially, our bill would prevent a company from claiming a stock 
option expense on its tax return unless the company also includes that 
expense on its books. It would require companies to be consistent in 
how they treat stock options, and take a corporate tax deduction that 
mirrors the expense shown on the company books. If a company took the 
position that it incurred no expense from stock option compensation on 
its books, the bill would allow the company to take that position, but 
would also require it to take the same approach on its tax return and 
forego any deduction. The bill would stop companies from telling 
stockholders one thing, that it has no stock option expenses, while 
telling the opposite to Uncle Sam.
  And to add insult to injury, in 2001, the IRS issued Revenue Ruling 
2001-1 which determined that companies whose tax liability was erased 
through stock option expenses were not subject to the corporate 
alternative minimum tax. That revenue ruling meant that our most 
successful publicly traded companies, if they doled out enough stock 
options to insiders, could arrange their affairs to escape paying any 
taxes. That absurd result leaves the average taxpayer feeling like a 
chump for paying his fair share when a company like Enron can use its 
success in the stock market to apparently end up tax free.
  One last point. Some opponents of stock option reform argue that 
reining in stock options would hurt the average worker, but this 
contention is nothing more than a red herring. While many average 
workers are eligible for stock options, few actually receive them. 
Stock options are overwhelmingly reserved for top corporate executives.
  A recent Bureau of Labor Statistics survey did the research. This 
nationwide government survey found that in 2000, a banner year for 
stock options, only 1.7 percent of non-executive workers actually got 
any stock options. The BLS survey also looked at corporate executives 
and found that only about 5 percent of these corporate executives 
received any stock options. These results are consistent with the 
findings of a private sector group not associated with the government 
called the National Center for Employee Ownership, which favors stock 
options. Looking at a small sample of companies, the Center reported 
that 70 percent of all stock options were given to managers rather than 
other employees, and about 50 percent were given to the most senior 
executives. The reality is that stock options are a perk mainly 
reserved for a very small group, and neither average workers nor most 
executives would be affected by honest accounting or consistent tax and 
accounting treatment for stock options.
  It is also important to understand that neither of our bills would 
bar any company from issuing stock options. Companies would still be 
able to issue stock options to their executives and other employees. 
The goal of this legislation is not to stop the use of stock options, 
but to promote honest accounting and consistent treatment of stock 
options on federal corporate tax returns.
  Stock option abuses have damaged investor confidence in American 
business. I hope our colleagues will support enactment of these bills 
to help restore investor confidence and end stock option abuses. I ask 
unanimous consent to have reprinted in the Record after my remarks the 
text of both bills.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 181

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Stock Option Accounting 
     Review Act''.

     SEC. 2. REVIEW OF STOCK OPTION ACCOUNTING TREATMENT.

       Section 108 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 
     7218, 116 Stat. 768) is amended by adding at the end the 
     following:
       ``(e) Stock Option Accounting Treatment.--The standard 
     setting body described in section 19(b)(1) of the Securities 
     Act of 1933 shall, for purposes of establishing generally 
     accepted accounting principles--
       ``(1) review the accounting treatment of employee stock 
     options; and
       ``(2) not later than 1 year after the date of enactment of 
     this subsection, adopt an appropriate generally accepted 
     accounting principle for the treatment of employee stock 
     options.''.
                                  ____


                                 S. 182

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Ending the Double Standard 
     for Stock Options Act''.

     SEC. 2. REQUIREMENTS FOR CONSISTENT TREATMENT OF STOCK 
                   OPTIONS BY CORPORATIONS.

       (a) Consistent Treatment for Tax Deduction.--Section 83(h) 
     of the Internal Revenue Code of 1986 (relating to deduction 
     of employer) is amended--
       (1) by striking ``In the case of'' and inserting:
       ``(1) In general.--In the case of'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Special rules for property transferred pursuant to 
     stock options.--
       ``(A) In general.--In the case of property transferred in 
     connection with a stock option, the deduction otherwise 
     allowable under paragraph (1) shall not exceed the amount the 
     taxpayer has treated as an expense for the purpose of 
     ascertaining income, profit, or loss in a report or statement 
     to shareholders, partners, or other proprietors (or to 
     beneficiaries). In no event shall such deduction be allowed 
     before the taxable year described in paragraph (1).
       ``(B) Special rules for controlled groups.--The Secretary 
     shall prescribe rules for the application of this paragraph 
     in cases where the stock option is granted by a parent or 
     subsidiary corporation (within the meaning of section 424) of 
     the employer corporation.''.
       (b) Consistent Treatment for Research Tax Credit.--Section 
     41(b)(2)(D) of the Internal Revenue Code of 1986 (defining 
     wages for purposes of credit for increasing research 
     expenses) is amended by inserting at the end the following 
     new clause:
       ``(iv) Special rule for stock options and stock-based 
     plans.--The term `wages' shall not include any amount of 
     property transferred in connection with a stock option and 
     required to be included in a report or statement under 
     section 83(h)(2) until it is so included, and the portion of 
     such amount which may be treated as wages for a taxable year 
     shall not exceed the amount of the deduction allowed under 
     section 83(h) for such taxable year with respect to such 
     amount.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property transferred and wages provided on or 
     after the date of the enactment of this Act.
                                 ______