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User Info On This Tax Day....; entered at 2018-04-15 10:32:18
Posts: 152436
Registered: 2007-06-26
@Bodhi -- Well, not really, because the value of the firm is divided by the number of shares out. It's not legalized counterfeiting for that reason.

Nor is the transfer from the shareholders to the executives "forced", in that the shareholders have the ability to vote the board out, and the board has to pass the resolutions to allow this structure.

The tax theft only works for a public company by and large, however, and is relatively ineffective for those without "large" sponsorship in the corporate and market media. Small firms can try this sort of game but if closely-held it doesn't work either because the minority shareholders will sue, might win, and the legal costs defending (win or lose) will be ridiculous for a small company compared against operating cash flow, so you'd be out of your mind to try it as a small C corp.

It doesn't work AT ALL for a Sub-S or LLC because those are pass-throughs and thus there's no tax structure to exploit in this fashion.

This is one of the "**** you" deals that large corporations with substantial sponsorship in the corporate media -- and a large share count -- can abuse to essentially destroy smaller competitors, as there's no ****ing way that I could have pulled something like this at MCSNet and gotten away with it, even through we were a C Corp. I could (and did) bonus out funds based on performance which reduced the tax load on the firm but it just shifted who paid (some of) the tax and, provided the bonus was reasonable, it's a legal (employment) expense but since I had to pay taxes on the bonus as ordinary income in that same year it just changed which bank account the tax check was drawn on. Issuing stock into the treasury against which I could write options (and take those as pay) would have been an extraordinarily-dilutive thing to the other holders and they would have come after me immediately, the firm would have had to pay the legal bills to defend against that, we might have lost (which would have been ruinous if it happened) and that, never mind it being unethical, was plenty of motivation to not attempt it.

Employee stock options are not a taxable event until exercised. In other words while in theory the person they're issued to will eventually pay taxes on them that's by no means assured, and unless FORCED to be exercised that deferment can be nearly indefinite. I was issued options with a firm I worked for that went public; it later blew up and I had toilet paper as a result, but there was no tax implication to me since they were never exercised (and ultimately the firm was de-listed.)

Last modified: 2018-04-15 10:36:30 by tickerguy

2018-04-15 10:32:18