Statutory (Qualified) Stock Options

Background

Stock options granted as incentive stock options (ISOs) or under employee stock purchase plans (ESPPs) enable corporations to attract and retain employees and encourage employees to take an interest in the welfare of their companies and participate financially in their growth. The flexibility that corporations have traditionally enjoyed in making these options (also known as "statutory" or "qualified" stock options) available came under assault during the 107th and 108th Congresses, both legislatively and by proposed regulation.

During the 107th Congress, the Levin-McCain Bill (S. 1940) and its companion, the Stark Bill (H.R. 4075), both entitled Ending the Double Standard for Stock Options Act, proposed modifications in the treatment of stock options under the Internal Revenue Code that would force corporations to expense the options when issued—using questionable methodology that would yield speculative valuations—or forgo tax benefits. Similar attacks continued during the 108th Congress and are anticipated in the 109th Congress as well.

Meanwhile, the Treasury Department leveled a regulatory attack against stock options. It proposed regulations that would impose new Federal Insurance Contributions Act and Federal Unemploy-ment Tax Act (FUTA) payroll taxes on the exercise of ISO and ESPP stock options, breaking with more than 30 years of interpretation that exempted these options from payroll taxes. The U.S. Chamber fended off efforts to impose mandatory stock option expensing. It was also successful in obtaining an indefinite moratorium on the effective date of proposed regulations that would impose payroll taxes on the exercise of statutory stock options, and later in working to enact legislation—the American Jobs Creation Act of 2004 (Public Law 108-357)—that preempts regulations of this kind.

U.S. Chamber Position

The Chamber is committed to preventing the mandatory expensing of stock options that would use faulty valuation.