[Pages S12335-S12340]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

By Mr. LEVIN:
S. 2116. A bill to amend the Internal Revenue Code of 1986 to provide
that corporate tax benefits based upon stock option compensation
expenses be consistent with accounting expenses shown in corporate
financial statements for such compensation; to the Committee on
Finance.
Mr. LEVIN. Mr. President, there is a growing chasm in our country
between the amount of money paid to our corporate executives and the
earnings of the rank and file workers.
J.P. Morgan once said that executive pay should not exceed 20 times
average worker pay. In the U.S., in 1990, average pay for the chief
executive officer, CEO, of a large U.S. corporation was 100 times
average worker pay; in 2004, the difference was 300 times; today, it is
nearly 400 times.
The single biggest factor responsible for this massive pay gap is
stock options. Stock options are a huge contributor to executive pay. A
key factor encouraging companies to pay their executives with stock
options is a set of outdated and misguided Federal tax provisions that
favor stock options over other types of compensation. That is why I am
introducing today a bill to eliminate federal corporate tax breaks that
give special tax treatment to corporations that pay their executives
with stock options. It's called the Ending Corporate Tax Favors for
Stock Options Act.
This bill has been endorsed by the Consumer Federation of America,
Citizens for Tax Justice, the Tax Justice Network--USA, OMBWatch, the
Financial Policy Forum, and the AFL-CIO, each of which sees it as
needed to eliminate federal tax breaks providing special tax favors for
corporations that issue large stock option grants to their executives.
Stock options give employees the right to buy company stock at a set
price for a specified period of time, typically 10 years. Virtually
every CEO in America is paid with stock options, which are a major
contributor to sky-high executive pay.
According to Forbes magazine, in 2006, the average pay of CEOs at 500
of the largest U.S. companies was $15.2 million. Nearly half of that
amount, 48 percent, came from stock options that had been cashed in for
an average gain of about $7.3 million. In 2006, one CEO cashed in stock
options for about $290 million; another cashed them in for about $270
million. Forbes also published a list of 30 CEOs who, in 2006, each had
at least $100 million in vested stock options that had yet to be
exercised. Corporate executives are, in short, showered with stock
options and the millions of dollars they produce.
A key reason behind this flood of executive stock options is the tax
code which, when combined with certain U.S. accounting rules, favors
the issuance of stock option grants. Right now, U.S. accounting rules
require companies to report their stock option expenses one way on the
corporate books, while Federal tax rules require them to report the
same stock options a completely different way on their tax returns. In
most cases, the resulting book expense is far smaller than the
resulting tax deduction. That means, under current U.S. accounting and
tax rules, stock option tax deductions often far exceed the stock
option expenses recorded by the companies.
Stock options are the only type of compensation where the Federal tax
code permits companies to claim a bigger deduction on their tax returns
than the corresponding expense on their books. For all other types of
compensation, cash, stock, bonuses, and more, the tax return deduction
equals the book expense. In fact, companies cannot deduct more than the
compensation expense shown on their books, because that would be tax
fraud. The sole exception to this rule is stock options. In the case of
stock options, the tax code allows companies to claim a tax deduction
that can be two, three, even ten times larger than the actual expense
shown on their books.
When a company's compensation committee learns that stock options can
produce a low compensation expense on the books, while generating a
generous tax deduction that is multiple times larger, it is a pretty
tempting proposition for the company to pay its executives with stock
options instead of cash or stock. It is a classic case of U.S. tax
policy creating an unintended incentive for corporations to act.
The problem is that these mismatched stock option accounting and tax
rules also shortchange the Treasury to the tune of billions of dollars
each year, while fueling the growing chasm between executive pay and
average worker pay. This same mismatch also results in companies
reporting one set of stock option compensation expenses to investors
and the public through their public financial statements, and a
completely different set of expenses to the Internal Revenue Service on
their tax returns. Such huge book-tax disparities breed confusion,
distrust, and schemes to maximize the differences.
The bill I am introducing today would put an end to these
contradictions and to the harmful, unintended consequences that have
resulted. It would put a stop to the stock option book-tax disparity,
an end to the conflicting stock option expenses reported to investors
and Uncle Sam, and an end to the special tax treatment that currently
fuels excessive stock option compensation.
To understand why this bill is needed it helps to understand how
stock option accounting and tax rules got so out of kilter with each
other in the first place.
Calculating the cost of stock options may sound straightforward, but
for years, companies and their accountants engaged the Financial
Accounting Standards Board, FASB, in an all-out, knock-down battle over
how companies should record stock option compensation expenses on their
books.
U.S. publicly traded corporations are required by law to follow
Generally Accepted Accounting Principles, GAAP, issued by FASB, which
is overseen by the Securities and Exchange Commission, SEC. For many
years, GAAP allowed U.S. companies to issue stock options to employees
and, unlike any other type of compensation, report a zero compensation
expense on their books, so long as, on the grant date, the stock
option's exercise price equaled the market price at which the stock
could be sold.
Assigning a zero value to stock options that routinely produced
millions of dollars in executive pay provoked deep disagreements within
the accounting community. In 1993, FASB proposed assigning a ``fair
value'' to stock options on the date they are granted to an employee,
using a mathematical valuation tool such as the Black Scholes model.
FASB proposed further that companies include that amount as a
compensation expense on

[[Page S12336]]

their financial statements. Critics responded that it was impossible
accurately to estimate the value of executive stock options on their
grant date. A bruising battle over stock option expensing followed,
involving the accounting profession, corporate executives, FASB, the
SEC, and Congress.
In the end, after years of fighting and negotiation, FASB issued a
new accounting standard, Financial Accounting Standard, FAS, 123R,
which was endorsed by the SEC and became mandatory for all publicly
traded corporations in 2005. In essence, FAS 123R requires all
companies to record a compensation expense equal to the fair value on
grant date of all stock options provided to an employee in exchange for
the employee's services.
The details of this accounting rule are complex, because they reflect
an effort to accommodate varying viewpoints on the true cost of stock
options. Companies are allowed to use a variety of mathematical models,
for example, to calculate a stock option's fair value. Option grants
that vest over time are expensed over the specified period so that, for
example, a stock option which vests over four years results in 25
percent of the cost being expensed each year. If a stock option grant
never vests, the rule allows any previously booked expense to be
recovered. On the other hand, stock options that do vest are required
to be fully expensed, even if never exercised, because the compensation
was actually awarded. These and other provisions of this hard-fought
accounting rule reflect painstaking judgments on how to show a stock
option's value.
Opponents of the new accounting rule had predicted that, if
implemented, it would severely damage U.S. capital markets. They warned
that stock option expensing would eliminate corporate profits,
discourage investment, depress stock prices, and stifle innovation.
Last year, 2006, was the first year in which all U.S. publicly traded
companies were required to expense stock options. Instead of tumbling,
both the New York Stock Exchange and Nasdaq turned in strong
performances, as did initial public offerings by new companies. The
dire predictions were flat out wrong.
During the years the battle raged over stock option accounting,
relatively little attention was paid to the taxation of stock options.
Section 83 of the tax code, first enacted in 1969 and still in place
after more than three decades, is the key statutory provision. It
essentially provides that, when an employee exercises compensatory
stock options, the employee must report as income the difference
between what the employee paid to exercise the options and the market
value of the stock received. The corporation can then take a mirror
deduction for whatever amount of income the employee realized.
For example, suppose a company gave an executive options to buy 1
million shares of the company stock at $10 per share. Suppose, 5 years
later, the executive exercised the options when the stock was selling
at $30 per share. The executive's income would be $20 per share for a
total of $20 million. The executive would declare $20 million as
ordinary income, and in the same year, the company would take a
corresponding tax deduction for $20 million. Although in 1993, Congress
enacted a $1 million cap on the compensation that a corporation can
deduct from its taxes, so taxpayers wouldn't be forced to subsidize
millions of dollars in executive pay, the cap was not applied to stock
options, allowing companies to deduct any amount of stock option
compensation, without limit.
The stock option accounting and tax rules that evolved over the years
are now at odds with each other. Accounting rules require companies to
expense stock options on the grant date. Tax rules tell companies to
deduct stock option expenses on the exercise date. Companies have to
report grant date expenses to investors on their financial statements,
and exercise date expenses on their tax returns. The financial
statements report on all stock options granted during the year, while
the tax returns report on all stock options exercised during the year.
In short, company financial statements and tax returns report expenses
for different groups of stock options, using different valuation
methods, and resulting in widely divergent stock option expenses for
the same year.
To examine the nature and consequences of the stock option book-tax
differences, the Permanent Subcommittee on Investigations, which I
chair, initiated an investigation and held a hearing on June 5, 2007.
Here is what we found.
To test just how far the book and tax figures for stock options
diverge, the Subcommittee contacted a number of companies to compare
the stock option expenses they reported for accounting and tax
purposes. The subcommittee asked each company to identify stock options
that had been exercised by one or more of its executives from 2002 to
2006. The subcommittee then asked each company to identify the
compensation expense they reported on their financial statements versus
the compensation expense on their tax returns. In addition, we asked
the companies' help in estimating what effect the new accounting rule
would have had on their book expense if it had been in place when their
stock options were granted. At the hearing, we disclosed the resulting
stock option data for nine companies, including three companies that
were asked to testify. The subcommittee very much appreciated the
cooperation and assistance provided by the nine companies we worked
with.
The data provided by the companies showed that, under then existing
rules, the 9 companies showed a zero expense on their books for the
stock options that had been awarded to their executives, but claimed
millions of dollars in tax deductions for the same compensation. The
one exception was Occidental Petroleum which, in 2005, began
voluntarily expensing its stock options, but even this company reported
massively greater tax deductions than the stock option expenses shown
on its books. When the subcommittee asked the companies what their book
expense would have been if the new FASB rule had been in effect, all 9
calculated book expenses that remained dramatically lower than their
tax deductions. Altogether, the nine companies calculated that they
would have claimed $1 billion more in stock option tax deductions than
they would have shown as book expenses, even using the tougher new
accounting rule. Let me repeat that just 9 companies produced a stock
option book-tax difference of more than $1 billion.
KB Home, for example, is a company that builds residential homes. Its
stock price has more than quadrupled over the past 10 years. Over the
same time period, it has repeatedly granted stock options to its then
CEO. Company records show that, over the past 5 years, KB Home gave him
5.5 million stock options of which, by 2006, he had exercised more than
3 million.
With respect to those 3 million stock options, KB Home recorded a
zero expense on its books. Had the new accounting rule been in effect,
KB Home calculated that it would have reported on its books a
compensation expense of about $11.5 million. KB Home also disclosed
that the same 3 million stock options enabled it to claim compensation
expenses on its tax returns totaling about $143.7 million. In other
words, KB Home claimed a $143 million tax deduction for expenses that
on its books, under current accounting rules, would have totaled $11.5
million. That is a tax deduction 12 times bigger than the book expense.
Occidental Petroleum disclosed a similar book-tax discrepancy. This
company's stock price has also skyrocketed in recent years,
dramatically increasing the value of the 16 million stock options
granted to its CEO since 1993. Of the 12 million stock options the CEO
actually exercised over the past five years, Occidental Petroleum
claimed a $353 million tax deduction for a book expense that, under
current accounting rules, would have totaled just $29 million. That is
a book-tax difference of more than 1200 percent.
Similar book-tax discrepancies applied to the other companies we
examined. Cisco System's CEO exercised nearly 19 million stock options
over the past 5 years, and provided the company with a $169 million tax
deduction for a book expense which, under current accounting rules,
would have totaled about $21 million. UnitedHealth's former CEO
exercised over 9 million stock options in the past 5 years, providing
the company with a $318 million tax deduction for a book expense which
would have totaled about $46 million.

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Safeway's CEO exercised over 2 million stock options, providing the
company with a $39 million tax deduction for a book expense which would
have totaled about $6.5 million.
Altogether, these 9 companies took stock option tax deductions
totaling $1.2 billion, a figure five times larger than the $217 million
that their combined stock option book expenses would have been. The
resulting $1 billion in excess tax deductions represents a windfall for
these companies simply because they issued lots of stock options to
their CEOs.
Tax rules that produce outsized tax deductions that are many times
larger than the related stock option book expenses give companies an
incentive to issue huge stock option grants, because they know the
stock options will produce a relatively small hit to the profits shown
on their books, while also knowing that they are likely to get a much
larger tax deduction that can dramatically lower their taxes.
The data we gathered for nine companies alone disclosed stock option
tax deductions that were five times larger than their book expenses,
generating over $1 billion in excess tax deductions. To gauge whether
the same tax gap applied to stock options across the country as a
whole, the subcommittee asked the IRS to perform an analysis of some
newly obtained stock option data.
For the first time last year, large corporations were required to
file a new tax Schedule M-3 with their tax returns. The M-3 Schedule
asks companies to identify differences in how they report corporate
income to investors versus what they report to Uncle Sam, so that the
IRS can track and analyze significant book-tax differences. The first
batch of M-3 data, which became available earlier this year, applies
mostly to 2004 tax returns.
In analyzing this data, the IRS found that stock option compensation
expenses were one of the biggest factors in the difference between book
and tax income reported by U.S. corporations. The data shows that, in
2004, stock option compensation expenses produced a book-tax gap of
about $43 billion, which is about 30 percent of the entire book-tax
difference reported for the period. That means, as a whole,
corporations took deductions on their tax returns for stock option
compensation expenses which were $43 billion greater than the stock
option expenses actually shown on their financial statements for the
same year. Those massive tax deductions enabled the corporations, as a
whole, to legally reduce their 2004 taxes by billions of dollars,
perhaps by as much as $15 billion.
When asked to look deeper into who benefited from these stock option
deductions, the IRS was able to determine that the entire $43 billion
book-tax difference was attributable to about 3,200 corporations
nationwide, of which about 250 corporations accounted for 82 percent of
the total difference. In other words, a relatively small number of
corporations was able to generate $43 billion in tax deductions simply
by handing out substantial stock options to their executives.
There were other surprises in the data as well. One set of issues
disclosed by the data involves what happens to unexercised stock
options. Under the current mismatched set of accounting and tax rules,
stock options which are granted, vested, but never exercised by the
option holder turn out to produce a corporate book expense but no tax
deduction.
Cisco Systems told the subcommittee, for example, that in addition to
the 19 million exercised stock options previously mentioned, their CEO
holds about 8 million options that, due to a stock price drop, will
likely expire without being exercised. Cisco calculated that, had FAS
123R been in effect at the time those options were granted, the company
would have had to show a $139 million book expense, but would never be
able to claim a tax deduction for this expense since the options would
never be exercised. Apple made a similar point. It told the
subcommittee that, in 2003, it allowed its CEO to trade 17.5 million in
underwater stock options for 5 million shares of restricted stock. That
trade meant the stock options would never be exercised and, under
current rules, would produce a book expense without ever producing a
tax deduction.
In both of these cases, under FAS 123R, it is possible that the stock
options given to a corporate executive would have produced a reported
book expense greater than the company's tax deduction. While the M-3
data indicates that, overall, accounting expenses lag far behind
claimed tax deductions, the possible financial impact on an
individual company of a large number of unexercised stock options is
additional evidence that existing stock option accounting and tax rules
are out of kilter and should be brought into alignment. Under our bill,
if a company incurred a stock option expense, it would always be able
to claim a tax deduction for that expense.

A second set of issues brought to light by the data focuses on the
fact that the current stock option tax deduction is typically claimed
years later than the initial book expense. Normally, a corporation
dispenses compensation to an employee and takes a tax deduction in the
same year for the expense. The company controls the timing and amount
of the compensation expense and the corresponding tax deduction. With
respect to stock options, however, corporations may have to wait years
to see if, when, and how much of a deduction can be taken. That is
because the corporate tax deduction is wholly dependent upon when an
individual corporate executive decides to exercise his or her stock
options.
UnitedHealth, for example, told the subcommittee that it gave its
former CEO 8 million stock options in 1999, of which, by 2006, only
about 730,000 had been exercised. It does not know if or when he will
exercise the remaining 7 million options, and so cannot calculate when
or how much of a tax deduction it will be able to claim for this
compensation expense.
Right now, stock options are the only form of compensation in which
the book expense and tax deduction often take place in different years,
and the timing of the deduction is under the control of the employee,
rather than the employer. Under current law, it is not unusual for a
stock option tax deduction to be claimed 3, 5, or even 10 years after
the year in which the stock option compensation was granted. Our bill
would completely eliminate this delay and uncertainty, by requiring
stock option expenses to be deducted in the same year as they appear on
the company books.
If the rules for stock option tax deductions were changed as
suggested in our bill, companies would typically be able to take the
deduction years earlier than they do now, without waiting to see if and
when particular options are exercised. Companies would also be allowed
to deduct stock options that are vested but never exercised. In
addition, by requiring stock option expenses to be deducted in the same
year they appear on the company books, stock options would become more
consistent with how other forms of compensation are treated in the tax
code.
Right now, U.S. stock option accounting and tax rules are mismatched,
misaligned, and out of kilter. They allow companies collectively to
deduct billions of dollars in stock option expenses in excess of the
expenses that actually appear on the company books. They disallow tax
deductions for stock options that are given as compensation but never
exercised. They often force companies to wait years to claim a tax
deduction for a compensation expense that could and should be claimed
in the same year it appears on the company books.
The bill we are introducing today would cure these problems. It would
bring stock option accounting and tax rules into alignment, so that the
two sets of rules would apply in a consistent manner. It would
accomplish that goal simply by requiring the corporate stock option tax
deduction to equal the stock option expenses shown on the corporate
books each year. Stock option deductions would no longer exceed the
expenses recorded on a company's publicly available financial reports.
Stock option expenses for both accounting and tax purposes would be the
same.
Specifically, the bill would end use of the current stock option
deduction under Section 83 of the tax code, which allows corporations
to deduct stock option expenses when exercised in an amount equal to
the income declared by the individual exercising the option, replacing
it with a new Section 162(q),

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which would require companies to deduct the stock option expenses shown
on their books each year.
The bill would apply only to corporate stock option deductions; it
would make no changes to the rules that apply to individuals who have
been given stock options as part of their compensation. Individuals
would still report their compensation on the day they exercised their
stock options. They would still report as income the difference between
what they paid to exercise the options and the fair market value of the
stock they received upon exercise. The gain would continue to be
treated as ordinary income rather than a capital gain, since the option
holder did not invest any capital in the stock prior to exercising the
stock option and the only reason the person obtained the stock was
because of the services they performed for the corporation.
The amount of income declared by the individual after exercising a
stock option will likely often be greater than the stock option expense
booked and deducted by the corporation who employed that individual.
That is in part because the individual's gain often comes years later
than the original stock option grant, and the underlying stock will
usually have gained in value. In addition, the individual's gain is
typically provided, not by the corporation that supplied the stock
options years earlier, but by third parties active in the stock market.
Consider, for example, an executive who exercises options to buy 1
million shares of stock at $10 per share, obtains the shares from the
corporation, and then immediately sells them on the open market for $30
per share, making a total profit of $20 million. The individual's
corporation didn't supply the $20 million. Just the opposite. Rather
than paying cash to its executive, the corporation received a $10
million payment from the executive in exchange for the 1 million
shares. The $20 million profit from selling the shares was paid, not by
the corporation, but by third parties in the marketplace who purchased
the stock. That's why it makes no sense for the company to declare as
an expense the amount of profit that an employee, or sometimes a former
employee, obtained from unrelated parties in the marketplace.
The bill we are introducing today would put an end to the current
approach of using the stock option income declared by an individual as
the tax deduction claimed by the corporation that supplied the stock
options. It would break that old artificial symmetry and replace it
with a new symmetry more consistent with other tax code provisions, one
in which the corporation's stock option tax deduction would match its
book expense.
I consider the current approach to corporate stock option tax
deductions to be artificial, because it uses a construct in the tax
code that, when first implemented over thirty years ago, enabled
corporations to calculate their stock option expense on the exercise
date, when there was no consensus on how to calculate stock option
expenses on the grant date. The artificiality of the approach is
demonstrated by the fact that it allows companies to claim a deductible
expense for money that generally does not come from a company's
coffers, but from third parties in the stock market. Now that U.S.
accounting rules provide a detailed rule for calculating stock option
expenses on the grant date, however, there is no longer any need to
rely on an artificial construct that calculates corporate stock option
expenses on the exercise date using third party funds.
Our bill would eliminate the existing grant date-exercise date
disparity between U.S. accounting and tax rules, and eliminate the
stock option double standard by ensuring that companies' stock option
tax deductions are equal to, and not greater than, the actual stock
option expenses shown on their books.
It is also important to note that the bill would not affect in any
way current tax provisions that provide favored tax treatment to so-
called Incentive Stock Options under Sections 421 and 422 of the tax
code. Under these sections, in certain circumstances, corporations can
surrender their stock option deductions in favor of allowing their
employees with stock option gains to be taxed at a capital gains rate
instead of ordinary income tax rates. Many start-up companies use these
types of stock options, because they don't yet have taxable profits and
don't need a stock option tax deduction. So they forfeit their stock
option corporate deduction in favor of giving their employees more
favorable treatment of their stock option income. Incentive Stock
Options would not be affected by our legislation and would remain
available to any corporation providing stock options to its employees.
And again, as mentioned earlier, the bill would have no effect on the
tax treatment of stock options for individuals; the bill would affect
only corporations.
The bill would make one other important change to the tax code as it
relates to corporate stock option tax deductions. Right now, Section
162(m) of the tax code applies a $1 million cap on corporate deductions
for the compensation paid to the top executives of publicly held
corporations. The purpose of this cap is to eliminate any taxpayer
subsidy for compensation that exceeds $1 million annually and is paid
to a top corporate executive. As currently written, however, the cap
does not apply to compensation paid in the form of stock options. By
exempting stock option compensation from the $1 million cap, the
provision creates a significant incentive for corporations to pay their
executives with stock options. The bill would eliminate this favored
treatment of executive stock options by making deductions for this type
of compensation subject to the same $1 million cap that applies to
other forms of compensation covered by Section 162(m).
The bill also contains several technical provisions. First, it would
make a conforming change to the research tax credit so that stock
option expenses claimed under that credit would match the stock option
deductions taken under the new tax code section 162(q). Second, the
bill would authorize the Secretary of the Treasury to adopt regulations
governing how to calculate the deduction for stock options issued by a
parent corporation to the employees of a subsidiary.
Finally, the bill contains a transition rule for applying the new
Section 162(q) stock option tax deduction to existing and future stock
option grants. This transition rule would make it clear that the new
tax deduction would not apply to any stock option exercised prior to
the date of enactment of the bill.
The bill would also allow the old Section 83 deduction rules to apply
to any option which was vested prior to the effective date of Financial
Accounting Standard, FAS, 123R, and exercised after the date of
enactment of the bill. The effective date of FAS 123R is June 15, 2005
for most corporations, and December 31, 2005, for most small
businesses. Prior to the effective date of FAS 123R, most corporations
would have shown a zero expense on their books for the stock options
issued to their executives and, thus, would be unable to claim a tax
deduction under the new Section 162(q). For that reason, the bill would
allow these corporations to continue to use Section 83 to claim stock
option deductions on their tax returns.
For stock options that vested after the effective date of FAS 123R
and were exercised after the date of enactment, the bill takes another
tack. Under FAS 123R, these corporations would have had to show the
appropriate stock option expense on their books, but would have been
unable to take a tax deduction until the executive actually exercised
the option. For these options, the bill would allow corporations to
take an immediate tax deduction, in the first year that the bill was in
effect, for all of the expenses shown on their books with respect to
these options. This ``catch-up deduction'' in the first year after
enactment would enable corporations, in the following years, to begin
with a clean slate so that their tax returns the next year would
reflect their actual stock option book expenses for that same year.
After that catch-up year, all stock option expenses incurred by a
company each year would be reflected in their annual tax deductions
under the new Section 162(q).
The current differences between stock option accounting and tax rules
make no sense. They require companies to show one stock option expense
on their books and a completely different expense on their tax returns.
They require corporations to report one set of

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figures to their investors and a different set of figures to the IRS.
The current book-tax difference is the historical product of
accounting and tax policies that have not been coordinated or
integrated. The resulting mismatch has allowed companies to take tax
deductions that, usually, are many times larger than the actual stock
option book expenses shown on their books, which not only shortchanges
the Treasury, but also provides a windfall to companies doling out huge
stock options, and creates an incentive for those companies to keep
right on doling out those options and producing outsized executive pay.
Right now, stock options are the only compensation expense where the
tax code allows companies to deduct more than their actual expenses. In
2004, companies used the existing book-tax disparity to claim $43
billion more in stock option tax deductions than the expenses shown on
their books. We cannot afford this multi-billion dollar loss to the
Treasury, not only because of deep federal deficits, but also because
this stock option book-tax difference contributes to the ever deepening
chasm between the pay of executives and the pay of average workers.
I urge my colleagues to join me in enacting this bill into law this
year.
I ask unanimous consent that the text of thje bill and a bill summary
be printed in the Record.
There being no objection, the material was ordered to be placed in
the Record, as follows:

S. 2116

Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ``Ending Corporate Tax Favors
for Stock Options Act''.

SEC. 2. CONSISTENT TREATMENT OF STOCK OPTIONS BY
CORPORATIONS.

(a) Consistent Treatment for Wage Deduction.--
(1) In general.--Section 83(h) of the Internal Revenue Code
of 1986 (relating to deduction of employer) is amended--
(A) by striking ``In the case of'' and inserting:
``(1) In general.--In the case of'', and
(B) by adding at the end the following new paragraph:
``(2) Stock options.--In the case of property transferred
to a person in connection with the exercise of a stock
option, any deduction by the employer related to such stock
option shall be allowed only under section 162(q) and
paragraph (1) shall not apply.''.
(2) Treatment of compensation paid with stock options.--
Section 162 of such Code (relating to trade or business
expenses) is amended by redesignating subsection (q) as
subsection (r) and by inserting after subsection (p) the
following new subsection:
``(q) Treatment of Compensation Paid With Stock Options.--
``(1) In general.--In the case of compensation for personal
services that is paid with stock options, the deduction under
subsection (a)(1) shall not exceed the amount the taxpayer
has treated as an expense with respect to such stock options
for the purpose of ascertaining income, profit, or loss in a
report or statement to shareholders, partners, or other
proprietors (or to beneficiaries), and shall be allowed in
the same period that the accounting expense is recognized.
``(2) Special rules for controlled groups.--The Secretary
shall prescribe rules for the application of paragraph (1) in
cases where the stock option is granted by a parent or
subsidiary corporation (within the meaning of section 424) of
the employer corporation.''.
(b) Consistent Treatment for Research Tax Credit.--Section
41(b)(2)(D) of the Internal Revenue Code of 1986 (defining
wages for purposes of credit for increasing research
expenses) is amended by inserting at the end the following
new clause:
``(iv) Special rule for stock options.--The amount which
may be treated as wages for any taxable year in connection
with the issuance of a stock option shall not exceed the
amount allowed for such taxable year as a compensation
deduction under section 162(q) with respect to such stock
option.''.
(c) Application of Amendments.--The amendments made by this
section shall apply to stock options exercised after the date
of the enactment of this Act, except that--
(1) such amendments shall not apply to stock options that
were granted before such date and that vested in taxable
periods beginning on or before June 15, 2005,
(2) for stock options that were granted before such date of
enactment and vested during taxable periods beginning after
June 15, 2005, and ending before such date of enactment, a
deduction under section 162(q) of the Internal Revenue Code
of 1986 (as added by subsection (a)(2)) shall be allowed in
the first taxable period of the taxpayer that ends after such
date of enactment,
(3) for public entities reporting as small business issuers
and for non-public entities required to file public reports
of financial condition, paragraphs (1) and (2) shall be
applied by substituting ``December 15, 2005'' for ``June 15,
2005'', and
(4) no deduction shall be allowed under section 83(h) or
section 162(q) of such Code with respect to any stock option
the vesting date of which is changed to accelerate the time
at which the option may be exercised in order to avoid the
applicability of such amendments.

SEC. 3. APPLICATION OF EXECUTIVE PAY DEDUCTION LIMIT.

(a) In General.--Subparagraph (D) of section 162(m)(4) of
the Internal Revenue Code of 1986 (defining applicable
employee remuneration) is amended to read as follows:
``(D) Stock option compensation.--The term `applicable
employee remuneration' shall include any compensation
deducted under subsection (q), and such compensation shall
not qualify as performance-based compensation under
subparagraph (C).''.
(b) Effective Date.--The amendment made by this section
shall apply to stock options exercised or granted after the
date of the enactment of this Act.
____

Section 1--Short title
``Ending Corporate Tax Favors for Stock Options Act''
Section 2--Consistent treatment of stock options by
corporations
Eliminates favored tax treatment of corporate stock option
deductions, in which corporations are currently allowed to
deduct a higher stock option compensation expense on their
tax returns than shown on their financial books--(1) creates
a new corporate stock option deduction under a new tax code
section 162(q) requiring the tax deduction to be consistent
with the book expense, and (2) eliminates the existing
corporate stock option deduction under tax code section 83(h)
allowing excess deductions.
Allows corporations to deduct stock option compensation in
the same year it is recorded on the company books, without
waiting for the options to be exercised.
Makes a conforming change to the research tax credit so
that stock option expenses under that credit will match the
deductions taken under the new tax code section 162(q).
Authorizes Treasury to issue regulations applying the new
deduction to stock options issued by a parent corporation to
subsidiary employees.
Establishes a transition rule applying the new deduction to
stock options exercised after enactment, permitting
deductions under the old rule for options vested prior to
adoption of Financial Accounting Standard (FAS) 123R (on
expensing stock options) on June 15, 2005, and allowing a
catch-up deduction in the first year after enactment for
options that vested between adoption of FAS 123R and the date
of enactment.
Makes no change to stock option compensation rules for
individuals.
Section 3--Application of executive pay deduction limit
Eliminates favored treatment of corporate executive stock
options under tax code section 162(m) by making executive
stock option compensation deductions subject to the same $1
million cap on corporate deductions that applies to other
types of compensation paid to the top executives of publicly
held corporations.
______

By Mr. LUGAR (for himself and Mr. Bingaman):
S. 2117. A bill to encourage the development of research-proven
programs funded under the Elementary and Secondary Education Act of
1965; to the Committee on Health, Education, Labor, and Pensions.
Mr. BINGAMAN. Mr. President, I rise today, along with Senator Lugar,
to introduce the Proven Programs for the Future of Education Act of
2007, and the Education Research and Development to Improve Achievement
Act of 2007. These bills would encourage the use and development of
research-proven programs in the Elementary and Secondary Education Act
of 1965.
In 2002, Congress enacted the No Child Left Behind Act to close the
achievement gap between low-income, underperforming students, and their
more affluent peers. Without a renewed dedication to the quality of
programs used in our schools, this goal, as well as providing an
excellent education for students, will be difficult to achieve. While
there is no question that we have made progress in recent years in
advancing educational opportunity, I remain concerned about the number
of schools that are failing to meet the criteria set out in the No
Child Left Behind Act. We need to look at ways to improve the quality
of education in a meaningful and comprehensive manner.
The purpose of the bills that I am introducing today is to create
incentives for schools to use the programs that meet the highest
standards for evidence of effectiveness and provide increased
investment in the research and development to create and evaluate new
programs. The future of our students' success depends on the quality

[[Page S12340]]

of their educational experience. It is for that reason I have been
committed to, and will continue to strive for, an improved educational
system.
It is my strong belief that one of the clearest ways we can improve
the quality of education in our schools is to encourage schools to
focus on existing proven programs that meet the highest quality
standards. The Proven Programs for the Future of Education Act would
offer a competitive preference of 10 percent of the total number of
points awarded to grant applicants who choose to use research-proven
programs.
In addition, this legislation would also provide a ten-percent
competitive preference for applicants who choose research-proven
reading programs. I believe that the goals of the Reading First program
are important in improving students' literacy levels. While I am very
concerned that this program has been beleaguered by greed and
partisanship, the program has shown to be effective, particularly in
New Mexico, where according to reports from the U.S. Department of
Education, in 2006-2007, 58 percent of New Mexico's third-grade
students in Reading First programs scored proficient or above in
reading. This is up from 39 percent in 2003-2004. That said, it is
crucial that states such as New Mexico have the opportunity to consider
and use research-proven reading programs to further advance educational
opportunity.
I believe that stressing quality education programs fosters greater
academic achievement and motivation in later years, particularly for
children from low-income families. To this end, this legislation
provides schools the incentive to advance research-proven programs,
raising the bar for all educational programs both now and in the
future.
As you know, title I-A provides supplemental services to low-
achieving students attending schools with a relatively high
concentration of students from low-income families. Title I-A is the
largest Federal elementary and secondary education assistance program,
with services provided to more than 90 percent of all local educational
agencies; approximately 52,000--54 percent of all--public schools; and
approximately 16.5 million--34 percent of all--pupils, including
approximately 188,000 pupils attending private schools. If the national
goal of leaving no child behind is to be met, attention and resources
must also be invested in the research necessary to bring improved
quality and increased innovation to core areas of title I.
The Education Research and Development to Improve Achievement Act
would authorize at least $100 million for rapid development and
rigorous evaluation of practical programs for use in title I programs
capable of increasing student achievement in such areas as School
Improvement and Restructuring, Supplemental Educational Services,
Reading First, and other areas determined to be in need of further
development.
I want to thank Senator Lugar for his leadership and commitment to
improving education in this country. Senator Lugar remains a tireless
advocate for our Nation's students, and I am pleased to be working with
him on this legislation as we begin reauthorizing the No Child Left
Behind Act.
This legislation represents a critical step forward in advancing
research-proven programs for millions of students across the country,
and I urge my colleagues to support this legislation.

____________________