Think Progress, on news from Facebook's upcoming IPO:

if all goes according to plan, Facebook will be able to use its initial public offering—via the stock options it gives its employees—to not only avoid paying corporate income tax for years, but to receive a $500 million refund from the federal government

The idea is that Facebook has issued billions worth of stock options to its employees. When those options are cashed in, Facebook gets to deduct the difference between the option price and the stock price as compensation. It expects this deduction to be so large that it will give the company a net operating loss, one it can carry back up to two years and use to get a refund on past taxes paid.

I'm as progressive as anyone on taxation, but I don't see how this is any kind of dodge. Follow along:

• Facebook issues a single stock option, the right to purchase one share of Facebook stock for $10.
• An employee who received this option cashes it in when the stock price is $100 per share. The employee makes $90 in profit on the transaction.
• Facebook issues one share of stock to redeem the option, because the option is with Facebook itself, not with a third-party broker or anyone else.
• In doing so, Facebook creates an entity (a share of stock) that should sell on the open market for $100, but sells it to the employee for $10. This is a loss for Facebook.
• Since the loss went to an employee as personal profit, it's entered on the books as "compensation" because that's what it is—delayed compensation via a stock option. Facebook therefore doesn't pay taxes on a loss, which pretty much everyone agrees is how losses are supposed to work.
• The employee, on the other hand, gets booked for $90 additional compensation on his annual W-2 form, and the employee pays taxes on the $90 at his or her normal rate. It's not a capital gain, AFAIK, because those kinds of options have no value other than exercise. They can't be sold or transferred, so they're not a capital asset.

We tax money when it changes hands. We tax the person or entity receiving it, not the person or entity paying it. (This is just one reason why the right-wing misnomer of the "death tax" instead of the "estate tax" is so infuriating—you're not taxing the person who died, you're taxing the people who receive the dead person's assets.) In this case, Facebook pays deferred compensation in stock options and deducts it as such, with the ability to carry it back up to two years for when those employees could not receive that compensation (no stock to obtain via options). The recipient pays normal income tax on the deferred compensation, namely the difference between the option price and the stock price ($90 for one share in the example).

Who's dodging anything?

(Sometime this spring, I have to move this blog to WordPress on the newer servers and take down this ancient CMS. Once I do that, I'll post more often.)