[Congressional Record Volume 158, Number 32 (Wednesday, February 29, 2012)]
[Senate]
[Pages S1103-S1104]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STOCK OPTION LOOPHOLE
Mr. LEVIN. Madam President, there has been a great deal of
conversation recently about the need to close tax loopholes. This is a
welcome development for those of us who have gone after these loopholes
for years. It is particularly timely as the public is focusing more and
more on how tax loopholes distort economic incentives and often benefit
the wealthiest among us at the expense of most U.S. taxpayers.
Last week, President Obama released a framework for business tax
reform that took aim at many corporate tax loopholes. I look forward to
working with the administration and with our colleagues in the Senate
to make real reform a reality--reform that brings greater fairness to
the Tax Code, eliminates incentives for moving jobs and assets
overseas, restores revenue lost to unjustified tax loopholes, and helps
us reduce the deficit without damaging vital programs for education,
transportation, health care, and national security.
One recent and very public announcement illustrates dramatically our
Tax Code's distortions and the need for reform. At the center of this
story is Facebook and its founder and CEO Mark Zuckerberg. Mr.
Zuckerberg and his company have become a remarkable American business
success story. As part of that success, Facebook is in the process of
making its initial public offering of stock. The public documents that
Facebook is required to file as part of that offering tell another
compelling story about one of our Tax Code's unjustified corporate
loopholes.
According to its filings, when Facebook goes public, Mr. Zuckerberg
plans to exercise options to purchase 120 million shares of stock for 6
cents a share. Obviously, Mr. Zuckerberg's shares are going to be worth
a great deal more than 6 cents each--a total of about $7 million. They
will apparently be worth in the neighborhood of $5 billion.
Here is where the tax loophole comes in. Under current law, Facebook
can, perfectly legally, tell investors and the public and regulators
that the stock options he received cost the company a mere 6 cents a
share. That is the expense shown on the company's books. But the
company can also, perfectly legally, later on file a tax return
claiming that those same options cost the company something close to
what the shares actually sell for later on--perhaps $40 a share. The
company can take a tax deduction for that far larger amount. So the
books show a highly profitable company--profitable, in part, because of
the relatively small expense the company shows on its books for the
stock options it grants to its employees--but when it comes time to pay
taxes, to pay Uncle Sam, the loophole in the Tax Code allows the
company to take a tax deduction for a far larger expense than they have
shown on their books.
In addition, Facebook is allowed by law to carry back the so-called
loss arising from this deduction for 2 years into the past, which means
it can claim a tax refund for the income tax it has paid over the past
2 years--a refund that the company estimates at $\1/2\ billion. So
instead of paying taxes to the Treasury, this profitable company will
claim a hefty refund on the taxes already paid.
[[Page S1104]]
But that is not all. The company says it will, as allowed by law,
also carry forward the so-called losses arising from this tax deduction
for over 20 years into the future, thereby reducing any taxes that it
owes in the years ahead. Over the years, this loophole could give a tax
break of up to $3 billion. The end result is that a profitable U.S.
corporation--a success story--could end up paying no taxes at all for
years, even decades.
I emphasize that Facebook's actions are within the law. As with so
much of our Tax Code, it is not the law-breaking that shocks the
conscience, it is the stuff that is perfectly legal. For years, my
Permanent Subcommittee on Investigations has identified this stock
option loophole and tried to explain its cost, its unfairness, and why
it should be closed. Facebook's $3 billion tax break brings the issue
into sharp focus.
Again, the stock option loophole allows corporations to compensate
their executives with stock options, report a specific stock option
expense to their shareholders, and then later take a tax deduction for
typically a much higher amount. Stock option grants are the only kind
of compensation where the Tax Code allows companies to claim a higher
expense for tax purposes than it shows on its books. Our subcommittee
found that the difference between what U.S. corporations tell the
public and what they told the IRS was as much as $61 billion in 1 year.
Facebook's use of this loophole is the most pointed illustration yet
of the cost of this loophole. It is difficult to get our minds around a
$3 billion tax break for a single corporation. Just how big is it?
Well, consider this: In 2009, the most recent year for which IRS data
is available, taxpayers from 11 States in our Union sent less than $3
billion in individual income tax revenue to the Treasury. How does this
make any sense? After all, American taxpayers are going to have to make
up for what Facebook's tax deduction costs the Treasury. That $3
billion is either going to come out of the pockets of American families
now or it will add to the deficit they are going to have to pay for
later.
What could our Nation do with the $3 billion it will lose when
Facebook exploits the stock option loophole? We could reduce the
Federal deficit or we could pay for programs that protect our seniors,
put cops on the beat or teachers in classrooms. The $3 billion Facebook
will get in tax deductions would more than triple the budget of the
Small Business Administration, which seeks to help American
entrepreneurs create jobs and grow the economy. Three billion dollars
would pay for the Pentagon's budget for housing our military families
for nearly 2 full years. It would pay the budget of the National
Institute of Science and Technology for 4 full years. It would more
than triple what we plan to spend helping homeless veterans next year.
It would pay 6 times over for the 24 Reaper unmanned aerial vehicles
the Air Force plans to buy next year.
Some are going to argue that Facebook's tax break is offset by the
fact that Mr. Zuckerberg himself, as well as the other executives who
are receiving stock options, will pay taxes as individuals. As various
news reports indicate, Mr. Zuckerberg will face a substantial tax bill
on the $5 billion in compensation he is about to receive--perhaps in
the neighborhood of a $2 billion tax bill. But it is unlikely that the
individual taxes Mr. Zuckerberg pays will offset the tax revenues lost
to this loophole. What the Treasury receives from Mr. Zuckerberg on the
one hand, it will return, and then some, to his company with the other
hand. We also should remember that Mr. Zuckerberg's financial future is
closely tied to that of his company. The value of the options and his
retained interest make that clear. To the extent that his corporation
benefits--and as I have shown, Facebook will benefit handsomely from
the use of this loophole--Mr. Zuckerberg stands to benefit as well. Put
simply, some of that big tax bill he faces right now will come back to
him through the corporation he will still own a huge part of and will
control.
Our tax system is built on the principle that businesses as well as
individuals ought to help pay our Nation's bills. Corporations impose
plenty of costs on society, from environmental disasters, financial
bailouts, product recalls, and more. Businesses also want and need
government services, including efficient transportation systems, patent
protections, even Federal loan guarantees. Paying those costs is why we
have a corporate income tax to begin with. Both businesses and
individuals are required by law to contribute, and should do so, to
meet their civic obligations and to pay their fair share. There is no
reason Facebook and the other corporations that use this tax loophole
should continue to receive these windfall tax deductions.
Senator Conrad and I earlier this month introduced S. 2075, the Cut
Unjustified Tax Loopholes Act, or CUT Loopholes Act. This bill, similar
to the legislation I have introduced in the past few Congresses, would
close this loophole. Under our bill, corporations would no longer be
allowed to claim tax deductions for options that are larger than the
expense they report to their shareholders and to people considering
buying their stock. It would also subject stock options to the same $1
million cap on deductions for executive compensation that now applies
to other forms of compensation. At the same time--and this is important
to know--our bill would leave unchanged the way the law applies to
individuals who receive stock options, and it would leave unchanged
incentive stock options that are offered by startup companies. We would
not affect that.
The stock option loophole should have been closed long before Mr.
Zuckerberg's extraordinarily lucrative options became public. But
surely the case of Facebook illustrates to the Senate, to the Congress,
and to the American people that we must close this loophole.
I have spoken today about one corporate tax loophole, but there are
many more. The momentum has never been stronger for tax reform that
brings more fairness to the Tax Code, restores revenue lost to
unjustified tax loopholes, reduces the deficit, and protects important
priorities. I look forward to working with our colleagues and with the
administration to turn that momentum into real reform.
Madam President, I thank the Chair, I yield the floor, and I note the
absence of a quorum.
The ACTING PRESIDENT pro tempore. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. SCHUMER. Madam President, I ask unanimous consent that the order
for the quorum call be rescinded.
The ACTING PRESIDENT pro tempore. Without objection, it is so
ordered.
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