Legislation on Stock Options Proposed

The Senate Democratic leadership has introduced legislation that would affect employee ownership. The "Targeted Investment Incentive and Economic Growth Act of 1997," introduced by Minority Leader Tom Daschle (D-SD), would create "performance stock options (PSOs)." PSOs would combine the best features of an incentive stock option (ISO) and nonqualified stock option (NSO), provided the PSOs were focused on non-highly compensated employees.

PSOs would provide that the spread between the exercise and grant price of an option would not be taxable until the stock purchased was sold. The grant price is the price at which an employee is given the right to purchase shares; the exercise price is the price at which they are actually bought. In an NSO, the spread is tax-deductible to the employer, but taxable as ordinary income to the employee when the option is exercised, even if the stock is not sold till later. In an ISO, the employee can pay capital gains tax on the spread and not pay that till the stock is sold, but the employer cannot take a tax deduction. In a PSO, the spread is deductible, but the employees does not have to pay tax until the stock is sold. Moreover, if the employee holds the stock two years or more, 50% of the gain is excluded from tax. Employers could deduct the spread on the exercise of the option, however. To qualify, the holder of the PSO would have to be a non-highly compensated employee or at least 50% of the value of the PSOs would have to go to non-highly compensated employees. A number of additional restrictions apply as well, mostly very similar to existing rules for ISOs. The bill also specifically excludes beneficiaries of such options from taking advantage of the tax-deferred rollover provisions of sales to qualifying employee stock ownership plans (ESOPs).