Stock Options for Tax-Exempt Organization Managers?
David I. Walker
Boston University School of Law
Tax Notes, Vol. 100, No. 12, September 22, 2003
Recently promulgated regulations under section 457 (Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations) will put an end to tax-exempt organizations' use of options on third-party stock or mutual funds as an executive compensation device. These regulations have sparked protests from exempt organizations and option plan promoters, and a bill has been introduced in Congress that would overturn the regulations. In this article, Professor Walker argues in favor of the new regulations as a matter of tax policy and good corporate governance. Professor Walker argues that (1) exempt organization options are only superficially similar to public company stock options and have been provided solely as a means of avoiding the dollar limitation on qualified deferred compensation under section 457, (2) the limitation under section 457 is justified and should be protected because, unlike public company stock options, exempt organization deferred compensation, including options, results in a fairly certain drain on the public fisc, and (3) option compensation raises very troubling governance issues for exempt organizations: Options are much less transparent than cash, are susceptible to being undervalued, and are difficult and costly to hedge. For all of these reasons, Professor Walker argues that the Treasury was justified in effectively eradicating exempt organization options, and that Congress should refrain from resuscitating them.
Accepted Paper Series
Date posted: September 19, 2003
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