Stock option loop costs taxpayers billions

WASHINGTON, Dec. 30 (UPI) -- Recession-era stock prices are now haunting U.S. taxpayers in the form of stock options that allow corporations significant tax deductions, records show.

The loop that allows corporations to deduct billions of dollars from their tax bills is simple: When stocks are doing poorly, corporations are loath to part with large sums of cash.

Corporations then pay top executives in stock options, which are agreements to purchase stocks in the future at a set price, The New York Times reported Friday.

With this loop in place, an executive can be paid in options that allow him or her to purchase stock at, for example, 50 cents per share. The executive then waits until hard times are over and stock prices rise before exercising the options granted when prices were low.

That tax loop-de-loop worked for Mel Karmazin, chief executive officer or SiriusXM Radio. In June 2009, he was paid in stock options allowing him to buy company stock at 43 cents per share.

But today's price is around $1.80 per share, the Times reported.

At today's prices, Karmazin's $35 million pay day has morphed into a $165 million pay day. The new element introduced here was simply time, not the executive's work performance in 2009, which hasn't changed.

"These options gave executives a highly leveraged bet that stock prices would rebound from their 2008 and 2009 lows, and are now rewarding them for rising tides rather than performance," said Robert Jackson Jr., an associate professor of law at Columbia University.

"The tax code does nothing to ensure that these rewards go only to executives who have created sustainable long-term value," said Jackson, who served as a consultant to the federal government on executive pay for bailed out companies.

With clever manipulation of stock options, corporations, which deduct the larger sum from their tax obligations, duck out of billions of dollars in tax payments. From 2005 to 2008, Apple and Goldman Sachs avoided paying $1.6 billion and $1.8 billion, respectively, by the use of stock options, the Times said.

Some analysts consider this a simple formula for having taxpayers subsidize payment for U.S. executives.

Records show Goldman Sachs increased the number of stock options granted in December 2008 to 10 times the amount granted the previous year.

General Electric, similarly, granted 18 million options in 2007, before the recession hit. It then granted 25 million in 2008, 159 million in 2009 and 105 million in 2010, the Times reported.