Tax Constraints on Indexed Options

20 Pages Posted: 20 Mar 2001

Date Written: January 1, 2001

Abstract

Indexed stock option grants reward executives for outperforming a benchmark, such as the market as a whole or competitors in the same industry. These options offer superior incentives by diminishing the influence of factors beyond an executive's control, such as general market and industry conditions. Yet indexed options are almost never used. Professor Saul Levmore seeks to explain this puzzle with norms. The main point of this comment on his Article is that tax plays a larger role in this puzzle than Professor Levmore acknowledges, although tax is not a complete explanation. The tax appeal of traditional options is that they offer value that is not really performance-based (i.e., a bet on the market as a whole), but nevertheless is treated as "performance based" under Section 162(m) - and thus is deductible without limitation. Accounting and Professor Levmore's norms-based account are then briefly considered.

Keywords: Indexed options, tax, Section 162(m), accounting

JEL Classification: H25, J33, M41

Suggested Citation

Schizer, David M., Tax Constraints on Indexed Options (January 1, 2001). Available at SSRN: https://ssrn.com/abstract=262177 or http://dx.doi.org/10.2139/ssrn.262177

David M. Schizer (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10027
United States
212 854 2599 (Phone)
212 854 9740 (Fax)

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