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Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
19 July 2000
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The Death Tax Where Art Thou; Is There A Conflict Of Interest; The Tax Train Is Rolling.

1. There is a voice of reason, lets take it.

Two years ago, which seems like a very long time, the Tax Relief Act of 1998 was passed by the House of Representatives at a project cost of $85B over five [5] years. That would break the bank we were told and with a threaten veto by the President the Senate let it die. Today we are told that we have a projected annual surplus in the $100B range and a project surplus of $2T over the next ten [10] years. That bill would have raised the Estate and Gift Tax Unified Transfer Credit to $1M, effective January 1999. Today the Democrats are proposing $4M and rate reductions, and more for small businesses and family farms. Moreover, there is no loss in the stepup in basis.

Will the compromise happen as suggested above? It will IF the Chairman of House Ways and Means Committee wants a legacy, President Clinton wants a legacy, and Chairman Roth of the Senate Finance Committee wants to stay in office. Given that result then having a home-based business will become the "'Thing to do," if you live in the Southamptons, Rancho Santa Fe, Del Mar, and all areas of that type where $5M to $10M homes are common place. "Wowing Them With Excess in the Hamptons," New York Times Front Page, July 18, 2000. It may be even popular in Boulder Colorado where startups begin at $500,000 to $1M. [Lots of History is to be found in this beautiful college town, and thus lots of Historic Tax Credits for commercial rentals like a home- based business]. The life style in this beautiful city is really something to see and appreciate.

2. Is there a conflict of interest in stock options?

We were sent many e-mails yesterday regarding our comment about Zero Capital Gains vs. Ordinary Income for employees exercising stock options. What we forgot was the sleeper of them all, that being, IF the employee has ordinary income, the employer gets a tax deduction. Thus when the employee get hit with a potential 50% tax the employer could be getting a 50% tax break. That could be serious business if the option is at $6 and the current fair market value is $126, you have 7500 shares available for exercised and you want the startup home at $1M. [The road to regular capital gains at 20% requires an exercise at a cost of $300,000 ($45,000 purchased price plus AMT of $255,000) plus a one-year holding period which may see the stock go back down to $6].

Based on the above, we think Incentive Stock Options [ISO] are going to be a real problem if and when the employees find out there may be an alternative, to wit, Restricted stock [Grants of shares of stock subject to restrictions on sale and risk of forfeiture until vested by continued employment. Restricted stock typically vests in increments over a period of several years. Dividends or dividend equivalent rights may be paid, and award holders may have voting rights, during the restricted period.]. Or, non qualified stock options, exercisable immediately into restrictive stock.

If paying no tax is an option, or 14% Capital Gains rate vs. 50% or 26% AMT rate, then the employees we saw last night on the Pearl Street Mall in Boulder are going to go for it, and their employers better listen. The upcoming Yourself-Inc.Com web site will have a copy of a "Restricted Stock Plan" for employees along with how to raise $1M in Startup Capital, based on that "Super Business Plan".

3. First it was the Death Tax, then Marriage Penalty, then Pension/IRA Reforms, and now Social Security, the Second Time Around.

The Republicans are loose, and they intend to keep the pressure up on the Democrats, with Tax Bill after Tax Bill, all to be rolled up into the "Big Reconciliation Act 2000" come September.

What is the big deal in the Marriage Penalty Debate, that is not discussed? It is the difference between community property/income and seperate property/income, where it is possible to split the income of one spouse and tax it as two. This is going to make it, along with some form of Death Tax, and many others, you heard that here first. As an aside the Internet is changing the Practice of Law and more, with the latter tailered for the Small Business Owner. Yourself- inc.com for the home-based business, is not far behind.

Jim Schneider, LL.M.

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