U.S. Loses on Options

Companies are reporting deductions for stock options to the IRS that far exceed what they are reckoning and disclosing to shareholders as expenses against their bottom line, Sen. Carl Levin, a Michigan Democrat, said at a hearing of the Senate Homeland Security and Governmental Affairs investigative subcommittee, the AP reported.

Levin, the panel's chairman, is proposing that the gap be closed with legislation requiring uniform reporting rules for stock options, the AP reported.

An investigation by the subcommittee's staff found a $43 billion "gap" for stock options between corporate tax returns and expenses reported in financial statements for December 2004 to June 2005. During that period, U.S. public companies legally avoided billions of dollars in taxes by claiming $43 billion more in tax deductions for options awards than the compensation for options recorded on their books, the staff inquiry found, the AP reported.

The Senate Permanent Subcommittee on Investigations, using newly available tax reports, said Los Angeles-based KB Home granted $11.5 million in options to executives while claiming tax deductions of $144 million. Los Angeles-based Occidental Petroleum issued $29 million and deducted $353 million, Bloomberg News reported.

The companies benefit from a gap between new accounting rules that require stock options to be reported to shareholders as an expense when granted and 38-year-old tax rules that permit a deduction for any gains when options are exercised, Levin said, according to Bloomberg News.

"The differences are huge," said Levin, who said the more generous tax treatment costs the U.S. Treasury "billions" of dollars a year and widens the divide between executive pay and that of ordinary workers, Bloomberg News reported. "It's a problem," said Levin.

Acting IRS Commissioner Kevin Brown, testifying at Tuesday's hearing, said that based on what the agency has seen, "it is not that difficult for companies to compensate senior executives at whatever level they choose and remain fully compliant with the tax laws," the AP reported.-New York State Society of Certified Public Accountants