Speaker Submits Outline for Hearing on Employer Withholding for Stock Options

 

o Reason for Deferral -- The proposal concerning the $600 reporting generates concern from my vantage point as a practitioner. If the price of failure to report is the loss of the deduction, then Citigroup, needs to develop the software necessary to capture the data, test its ability to assimilate into our payroll system, modify the ESPP and ISO plans under which this software will work, and notify our employees. Citigroup has billions of shares issued, so there is no off the shelf program to manage this volume of data within the accuracy parameters set by the Notice.

I would imagine that a majority of the corporations listed on the major stock exchanges are similarly situated, so Citigroup is not alone in this regard.

o Additional Reason for Deferral -- While I applaud the Treasury's forward thinking in exempting Disqualifying Disposition income from income tax withholding, the administrative relief for the employer unfortunately becomes a quite burdensome when put into practice. Again the issue relates back to the "zero room for error" aspect for reporting. Citigroup's payroll process is analogous to dominos dropping. An income event occurs, applicable tax is calculated, tax is withheld, the tax is timely remitted, the details summarized quarterly, W-2's are issued annually and Citigroup's compensation deduction becomes a tax return line item. While the Notice eliminates income tax withholding it still mandates FICA withholding, we will need to implement a logic change in our system which will classify DD income as non-income taxable, but continue its classification as FICA taxable. We then need to develop a system to capture the applicable FICA tax from the employee, or former employee, as now defined by Notice 2001-72, in order to meet our next business day depositing requirement.

While 2001-72 nominally allows the employer the right not to report (and thus suffer the deduction disallowance) if the total compensation is less than $600, there is no real benefit here, because virtually every employee will exceed $600. For example, if Citigroup pays an employee at merely the amount of the federal poverty level, they will have exceeded the $600 reporting threshold on the eighth working day of the year, including holidays.

 

o Reason for Deferral based on the "Payment Period" Alternative -- While the allowable payment periods could be annually or more frequently, the more frequent alternatives represent deadwood provisions which should not even be discussed. Employers will want to minimize their employment tax liability by choosing an end of year payment period, when the maximum number of employees have reached their FICA wage base.

o Reason for Deferral based on the Special Accounting Rule - When the application of the special accounting rule is analyzed, I think that from the vantage point of the employer, the employee and the Treasury, the implementation of this Notice should be deferred. Employees that have exceeded the FICA wage base surely do not want option income from December pushed into the first quarter of next year when the wage base has not yet been met. Their tax liability would jump from 1.45% to 7.65%. Similarly, employers would not want to unnecessarily drive up their employment liability by pushing statutory stock option income into a high tax period. I also think that Treasury needs to analyze how this Accounting Rule creates an aberration to the timely deposit rules for tax withholdings. Under other circumstances applicable to large employers, the timely deposit rules require that an employer remit withholdings to the US Treasury on the next business day.

Example: Employee has $1,000 in statutory option income on December 1st and Employer immediately collects $76.50 from employee. While Employer would otherwise deposit this on December 2nd, the special accounting rule conceivably allows it to defer depositing this amount until April 15th or thereafter, 135 days later. During this time and in a post- Enron environment, the employees are unsecured creditors with respect to their withholdings and this amount is otherwise subject to creditor claims.

o Reason for Deferral based on the Employee Pre-Funding Proposal -- Prefunding represents an unworkable solution to the FICA tax collections problem because it places an enormous burden on the employer to properly account for and reconcile out the deposited amounts.

o Reason for Deferral based on the Employer Tax Loan Proposal -- Employer advances for taxes are necessarily coupled with timely and full repayment of the loaned amount. We again see the accounting and reconciliation issues mentioned before, but there will be no employer who achieves 100% recovery, particularly if the employer is in a fast-changing or cyclical business, where layoffs, business acquisitions and dispositions are frequent event attributable to the discharge of indebtedness income represented by the occurrences. The write-off of a tax loan would itself become an income event attributable to the discharge of indebtedness income represented by the write-off.