[Congressional Record (Bound Edition), Volume 158 (2012), Part 2]
[Senate]
[Pages 2425-2426]
[From the U.S. 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.
  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

[[Page 2426]]

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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