Cause to Pause

WAGES & SALARIES

At their annual meeting in Manhattan last week, stockholders of big Union Carbide & Carbon Corp. considered an “incentive” plan for executives. Under the plan, officers and key employes would be permitted to buy up to 464,000 shares of company stock at 25% below its market value, now $124, and pay for it with money borrowed from the company. By selling the stock, executives could get a quick bonus of nearly $12 million.

But wouldn’t most of the bonus go to taxes? Not at all. Stockholders were told by the board of directors: “It is believed that any profit . . . from resale of the stock would be taxable under capital-gains provisions [if held for six months] at a rate not over 25% … in contrast to present higher tax rates applicable to ordinary income.” So the stockholders gave the option plan an overwhelming vote of approval (5,300,000 shares to 305,521).

For a major corporation smart enough to operate one of the Oak Ridge atom plants and with a large legal department (not to mention outside counsel paid an annual retainer of $30,000), this was a major boner. Only five days before, the U.S. Treasury had announced that the difference between the market and option price of stocks sold to employes will be taxed as income. (Previously there was no tax on exercising options, only the capital gains tax on resale.) The ruling was based on a Supreme Court decision handed down, effective Feb. 25, 1945, on that date. Up till then, stock option plans had been a popular way of getting around heavy taxes. Said Union Carbide & Carbon’s Board Chairman Benjamin O’Shea, after catching up with the times: “The Treasury statement has given us cause to pause. We’ll have to figure out a more efficient plan.”