US rallies against The Phantom of the Option

Ever wondered what happened to all those employees granted generous stock options at the height of the dot-com boom? Well, some in Silicon Valley are taking to the streets to protest tax payments that may now ruin them. Barbara Morgan reports...

Picture this scenario: it's the first summer of the new millennium and you're a hard-working drone at a US high-tech company. Your company looks to have a bright future - after all, the internet is being deployed around the world.

Part of your package is the annual option to buy 3,000 shares at $2 each. In July 2000, this means they have a stock market value of $420,000 during the period you are able to buy them.

Naturally you dive in and buy. But instead of selling immediately you hang on, thinking you are holding an investment in a company that is going places, a company you are proud to work for.

No matter that buying those shares immediately triggers a capital gain that means you owe more than $70,000 in taxes.

Fast forward to July 2001. High-tech stocks are largely a well-documented disaster and your company's share price is so low the business is in danger of being de-listed from the Nasdaq. Even selling now wouldn't get you back your $6,000 outlay.

But losing that $6,000 is the least of your worries. The Internal Revenue Service is relentlessly pursuing the $71,000 owed in taxes on your "phantom profits", profits that never even made their way into real cash.

In fact, so many high-tech workers are now caught up in the tax trap caused by the obscurely named Alternative Minimum Tax (AMT) that they are holding protest rallies and lobbying the politicians that represent them.

Recently, 250 people in Silicon Valley attended just such a rally. Many of the attendees told tales of woe. Not only had they lost their grasp on the American dream they had, in addition, fallen into the clutches of the IRS.

Before the meeting they marched outside the chosen venue holding placards carrying such slogans as 'Guns Don't Kill People, AMT Kills People', 'Income Tax Should Be On Income', and 'Paper Gains, Real Losses'.

The meeting was organised by Zoe Lofgren, who represents parts of Silicon Valley in the US House of Representatives. "There's something fundamentally troublesome with the concept of taxing income that never existed," she said.

The AMT has been around since 1969 and was passed into law to stop high-flying executives putting their gains into tax shelters. The tax applies to stock options that are purchased and then held into the next calendar year. The taxable value is calculated on the difference between the option price and the market value on the day the employee exercises the option, regardless of what happens to the stock afterwards.

Lofgren has introduced legislation in the House to change the AMT but she faces a tough challenge. One problem the protestors face is that much of the US has little sympathy for their plight. Many Americans feel those hurt by the AMT are just greedy dot-commers who gambled that the internet bubble would never burst.

Howard Greenstein is one worker who agrees that he gambled, but asks: "Where on this earth, in all the shady gambling joints in all the seedy places that exist, does one lose $71,000 on a $6,000 bet? I'll tell you. It's the Internal Revenue Service."

He added: "I would gladly forgo my entire $6,000 gamble for the return of my $71,000 that the IRS stole from me."

A grassroots group called Reform AMT has been formed to change people's perception of the problem. "There is a lack of understanding, a misconception among the public," said Jay Cena, leader of Reform AMT.

And stories like those of 59-year-old Norma Mogilefsky who, on poor advice, took out a loan to purchase her stock options, indeed reveal a more innocent victim. Mogilefsky hoped to retire this year, but now owes over $300,000 to the IRS. "Instead, as I turn 60, I will be re-financing my house and planning my long-term career strategy."

Other victims include engineers, middle managers, admin staff and secretaries, who held onto stock in the hope that it would rise further or recover. They are now faced with enormous tax bills while their actual net worth continues to plummet.

"Most of the AMT victims we see are families with children," said Jackie Perlman, tax research associate at taxation specialist, H&R Block. "We've had a lot of calls this year from people who have been murdered by this."

H&R Block estimates that the number of Americans affected by AMT this year is 1.5 million. Some forecasts say that number could reach 30 million by 2010.

In the political arena, those with problems are running out of time. Reform AMT's Cena acknowledges the need for a short-term lifeline. "We are currently organising rallies in five regions, and would like to protest in Washington, DC. That's hard to fund, though, when over 60 per cent of the membership is facing bankruptcy."