Floor Statements

I ask unanimous consent that the Senate now proceed to a period of morning business, with Senators permitted to speak for up to 10 minutes each.

I ask unanimous consent that the Senate proceed to the immediate consideration of H.J. Res. 56, which was received from the House.

I ask unanimous consent that the joint resolution be read a third time and passed, the motion to reconsider be laid upon the table, and that any statements relating thereto be printed in the Record.

I suggest the absence of a quorum.

Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. President, I indicated there were 18 amendments that had been cleared by Senator McCain and the leadership and myself, which under the previous UC would then be automatically adopted and made part of the bill. In fact, there were 19 amendments on this list as it now appears, including that modified Sessions amendment. So I wanted to clarify the Record on that point. There are 19 amendments on that list, No. 19 being one that we, frankly, thought we previously approved but apparently had not. So it is intended that it is on that list, and we are assured by the staff that this is the way we can correct that problem.

I thank the Presiding Officer. And I thank Senator McCain's staff for bringing that to our attention.

Mr. President, I ask unanimous consent that when the Senate completes its business today, it adjourn until 9:30 a.m. tomorrow, Friday, July 24; that following the prayer and pledge, the Journal of proceedings be approved to date, the morning hour be deemed expired, the time for the two leaders be reserved for their use later in the day; that there then be a moment of silence in honor of the fallen Capitol Police officers, and that following the moment of silence, there be a period of morning business, with Senators permitted to speak therein for up to 10 minutes each.

Mr. President, there will be no rollcall votes during tomorrow's session of the Senate. Senators should expect the next vote to begin around 5:30 p.m. on Monday.

Mr. President, if there is no further business to come before the Senate, I ask unanimous consent that it adjourn under the previous order.

Mr. President, under current law each State adopts and enforces their own eligibility standards for who is qualified to obtain a concealed carry permit. Carrying a concealed weapon is a crime if those eligibility standards are violated and a citizen of that State carries a concealed weapon. For example, 35 States prohibit those with criminal misdemeanor convictions from obtaining a concealed carry permit.

The Thune amendment would federally authorize an individual who has been issued a concealed carry permit in one State the right to carry a concealed weapon in 47 other States, even though those other States prohibit an individual who resides in those other 47 States from carrying a concealed weapon. A Federal standard is thereby imposed on the States.

The 35 States that prohibit criminal misdemeanants from carrying concealed weapons are told under the Thune amendment: You can enforce your own laws regarding your own residents but cannot enforce your own laws against residents of the 13 States who issue concealed carry permits to convicted criminal misdemeanants when those nonresidents visit your State. The laws of those 35 States cannot be applied to all persons in their States--those from 13 other States who get permits under weaker laws are immunized.

A double standard would be adopted and would be imposed on the States.

A terrible precedent of a national standard would also be adopted and imposed on the States, superseding a State's ability should they choose to regulate concealed possesion of a firearm in their States by visiting criminal misdemeanants who do not meet their standards for concealed firearms possession.

So while the Thune amendment says it doesn't preempt any provision of State law with respect to the issuance of licenses or permits to carry concealed firearms, that is true only as to residents--it does preempt the right of the States to apply its laws as to who can carry a concealed weapon to all persons in the State, residents and nonresidents alike.

Senator Thune's statement that everyone must comply with restrictions of States they are in is not accurate then as to the key restriction relating to who can carry concealed weapons.

The amendment will also create serious problems for law enforcement. Law enforcement officials use concealed carry permits as an important tool in combating illegal trafficking. In most States, carrying a firearm without a permit is a crime. The Thune amendment would hamper law enforcement's ability to identify and arrest illegal traffickers before they are able to sell their weapons on the black market, for instance: This is one reason why the amendment is opposed by the International Association of Chiefs of Police, the Major Cities Chiefs Associations, Mayors Against Illegal Guns and State Legislatures Against Illegal Guns.

The National Defense Authorization Act is enacted every year to help make this a safer nation. This amendment will not do that. I urge my colleagues to vote against it.

Mr. President, I ask unanimous consent that Senator Kyl be recognized as in morning business for 10 minutes, and that Senator Tester then be recognized for 10 minutes.

Mr. President, we are expecting that unanimous consent agreement can be propounded within the next few minutes so we can continue to press forward.

I ask unanimous consent that the pending amendment be set aside so that I may call up an amendment.

On behalf of Senator Kerry, Senator Lugar, and myself, I call up amendment No. 1761.

I ask unanimous consent that amendment Nos. 1761 and 1597 be debated concurrently for up to 30 minutes, with the time equally divided and controlled between Senators Kerry and Brownback or their designees; that upon the use or yielding back of time, the Senate proceed to vote in relation to amendment No. 1761, to be followed by a vote in relation to No. 1597; that no amendment be in order to either amendment; that prior to the second vote there be 2 minutes of debate divided as provided above.

Mr. President, the language in the Kerry amendment does one other thing relative to this report. It says if the United States determines that the Government of North Korea has indeed engaged in terrorist activities, then the Secretary of State shall ``immediately list North Korea as a state sponsor of terrorism.'' So it requires a report in not more than 30 days. That could come at any time. But it also requires action if the Secretary of State makes the finding.

The last administration, the Bush administration, delisted North Korea. They found there was no credible evidence of state-supported terrorism. We are a government of laws. Our laws

provide for a listing of countries that engage in terrorist activities or support terrorist activities. It does not provide for a listing of countries that, no matter all of the other things they do which are so wrong, so bad, so objectionable to the international community, so justifiably producing sanctions and other kinds of diplomatic actions against them--regardless of those activities, unless they are a supporter of terrorist acts, our laws do not provide that they be put on the terrorist list. That is our law. That is what the Bush administration was applying when they delisted North Korea.

North Korea is a country which engages in horrendous activities. That is not the issue. I don't know of anybody in this Senate who does not believe North Korea engages in repressive, authoritarian activities. I don't know of anybody in this Senate who does not believe the North Korean leadership is reprehensible in the way it treats its citizens. There is a long list of actions on the part of North Korea in terms of its pursuit of ballistic missiles, provocative actions it has taken of the testing of nuclear devices, firing a series of missiles. It has clearly solidified its status as a pariah of the region and of the international community at large.

So the question isn't whether strong action should be taken. We should take strong action which will be effective against the government--not the people but the government--of North Korea. The Kerry amendment lays out a course of action, exploring additional sanctions so that we can put additional power and leverage against the Government of North Korea, as well as requiring our administration to consider whether the Government of North Korea should be listed again. And if so, if they find that under our law there is reason to put it back on the terrorist list, then they must, under the Kerry amendment, take that step.

What the Kerry amendment avoids doing is what the Brownback amendment does in one part of the Brownback amendment, which is saying that the Government of North Korea should be on a list of terrorist states when the last thing we have heard from an American administration was from the Bush administration taking the North Korean Government off the list because they could not find credible evidence that the government took actions which would require it being placed on the list of terrorist states.

So again, it seems to me that clearly our goals here are similar. I had hoped we might be able to reach a consensus on common language, but so long as this body expresses itself very strongly, as the Kerry and Lugar amendment does, it seems to me we will then have made an important statement to the Government of North Korea and at the same time avoided taking a step which our laws do not provide for.

One of our arguments with North Korea is that they are lawless, they are a totalitarian government. Our government is a government of laws. We have a law that provides for the listing of countries that support terrorist acts. The administration, after a long assessment, concluded there was no credible evidence that North Korea engaged in the activities which appropriately required it or appropriately permitted it to be listed on the terrorist state list and therefore removed it from that list. That is the last action by the administration.

By the way, being on that terrorist list did not change the actions or the activities of the Government of North Korea, in any event. I very much support that terrorist list. I very much support it being kept up to date and being used appropriately. But I don't think we should in any way kid ourselves as to whether being on that list is going to change the activities of North Korea.

We need other countries to support us in putting maximum pressure on North Korea. When we act lawfully--when we put sanctions on North Korea, working with other countries, we are acting lawfully. If we do not abide by our own law which defines when a country will go on a terrorist list, we are setting the wrong example for the world, and it makes it more difficult for us to obtain the kind of support from other countries which we deserve in going after the abominable activities of the Government of North Korea.

I don't know whether our side has any time left, but if we do, I reserve the remainder of our time.

Mr. President, I ask for the yeas and nays on both amendments.

Parliamentary inquiry.

Mr. President, after the conclusion of this vote, is there any pending amendment?

Mr. President, to let folks know, I intend to ask for a quorum call immediately following this vote to try to work out an orderly way to proceed on amendments.

I move to lay that motion on the table.

The motion to lay on the table was agreed to.

Mr. President, I suggest the absence of a quorum.

Mr. President, I ask unanimous consent the order for the quorum call be rescinded.

Mr. President, I ask unanimous consent that, first, there be a period of morning business of 5 minutes, so Senator Brown can speak as in morning business. Then we proceed to consideration of the amendment of Senator Cardin, amendment No. 1763. After the disposition of that amendment, that the Senator Kyl amendment, No. 1760, be in order. There may or may not be a second-degree amendment to that of Senator Kyl--that it be in order if there is a second-degree amendment. After the disposition of the amendment of Senator Kyl and the second- degree amendment thereto, we then proceed--presumably it would be in the morning--to an amendment by Senator Lieberman, No. 1744, with a 1- hour time agreement and a side-by-side amendment or a second-degree amendment of Senator Bayh relative to the--relevant to the Lieberman amendment, which would also have a 1-hour time agreement.

That presumably might be adopted without a rollcall as well.

Mr. President, let me revise my unanimous consent request for Senator Cardin's amendment having a 15-minute time agreement, that there not be a time agreement set yet on the Lieberman amendment No. 1744 and the Bayh second-degree amendment or side-by-side amendment to it because apparently we could not get that, for some reason I don't understand or know. I don't understand the reason or the objection.

One other correction. The Cardin amendment is No. 1475, not No. 1763.

There are a number of people who have asked to be put in line at this point. We have been unable to go beyond where we are. That took enough time. We thought, if we went any further, it would be impossible to get this unanimous consent done because there are many people who are in the same position as our friend from Alabama.

I thank the Presiding Officer and thank Senator Sessions as well. As I understand it, the amendments Senator Sessions was referring to were amendments relating to al-Qaida; am I correct?

Mr. President, the unanimous consent request indicated that there would be 15 minutes on the Cardin amendment, No. 1475. I am wondering if my friend from Arizona might listen to this as well. On Senator Cardin's amendment, we did not say ``equally divided.'' We are not sure whether there is opposition to it. If there is, we should now say ``equally divided.'' If not, Senator Cardin only needs about 5 to 10 minutes.

In that case, I ask unanimous consent we say ``equally divided'' in case anyone changes their mind.

Mr. President, I move to reconsider the vote.

I suggest the absence of a quorum.

Mr. President, I suggest the absence of a quorum.

I ask unanimous consent that the order for the quorum call be rescinded.

Mr. President, under the existing unanimous consent agreement, the Lieberman amendment that would be in order after the disposition of the Kyl amendment was listed as being amendment 1744. The correct number is 1627. I ask unanimous consent that the consent agreement be so modified.

I suggest the absence of a quorum.

Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. President, I send a series of 30 amendments to the desk, which have been cleared by myself and Senator McCain, and I ask for their immediate consideration.

Mr. President, the amendments, I understand, have been cleared by the Republican side.

Mr. President, I now ask unanimous consent that the amendments be agreed to en bloc and that the motions to reconsider be laid upon the table en bloc.

Now, Mr. President, I would ask unanimous consent that Senator Udall be recognized as in morning business for 10 minutes; then that Senator Akaka be recognized to speak on an amendment, which he intends to offer, and which we will do everything we can to make in order tomorrow; and then that Senator Murray be recognized for 10 minutes as in morning business.

No. The UC, I believe, as it reads, is that we will take up the Kyl amendment tomorrow, with a possible second degree or side- by-side; and then after they are disposed of, then we would go to the Lieberman amendment and a second degree or a side-by-side amendment of Senator Bayh.

On the alternate engine.

Then a possible second degree or side-by-side to Kyl. Then, after the disposition of Kyl and any side-by-side or second degree, we would move to the Lieberman amendment on alternate engines, with a Bayh second degree or side-by-side.

We do not have a time agreement yet on any of the amendments. We hope in the morning to have time agreements. But we did not have the language available for any--we did not have either the second-degree amendment language or the side-by-side available, so your side was unable, understandably, to agree to a time agreement.

If it is not already agreed to, I think there was an understanding on the Lieberman and on the Bayh amendments there would be an hour for each.

We need the language before that can be agreed to. But that is the understanding or intent.

There will be no more votes tonight.

Mr. President, I ask unanimous consent that after the remarks of the Senator from Hawaii, the Senate go into a period of morning business, with Senator Murray to be recognized first for 10 minutes and other Members of the body permitted to speak for up to 10 minutes each.

Mr. President, Senator McCain and I are introducing today a bill to eliminate Federal corporate tax breaks that give special tax treatment to corporations that pay their executives with stock options. It is called the Ending excessive Corporate Deductions for Stock Options Act, and it has been endorsed by OMB Watch, the Consumer Federation of America, the Tax Justice Network-USA, and the AFL-CIO.

We are in a financial crisis. We are spending hundreds of billions of taxpayer dollars to try to stop the housing bust and prop up Wall Street. Too many of the middle class are watching the American dream slip away, while executives are getting mutli-million dollar compensation packages.

At the same time, mismatched stock option accounting and tax rules are shortchanging the Treasury to the tune of billions of dollars each year, while fueling the growing chasm between executive pay and average worker pay. The mismatch is this: companies are allowed to report one set of stock option compensation expenses to investors and the public through their public financial statements, and a completely different set of expenses to the Internal Revenue Service, IRS, on their tax returns. Put simply, our precious tax dollars are being wasted by an outdated and unfair corporate tax loophole that encourages corporations to hand out massive stock option grants to their executives. It is time to put an end to the excessive tax deductions being reaped by corporations at taxpayers' expense.

J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. In the United States, in 1990, average pay for the chief executive officer of a large U.S. corporation was 100 times average worker pay. Recently, CEO pay was nearly 400 times that of the average worker.

The single biggest factor responsible for this massive pay gap is stock options. Stock options are a huge contributor to executive pay. A key factor encouraging companies to pay their executives with stock options is the misguided Federal tax system that favors stock options over other types of compensation. Stock options give employees the right to buy company stock at a set price for a specified period of time, often 5 or 10 years. Virtually every CEO in America is paid with stock options, which are a major contributor to sky-high executive pay. According to Forbes magazine, in 2008, the CEOs at the 500 largest U.S. companies took home a combined $5.7 billion, averaging $11.4 million each.

For example, according to an Equilar Inc. analysis of 2008 filings with the Securities and Exchange Commission, SEC, Oracle Corporation's CEO was granted options estimated in value at more than $71 million just last year. That grant was on top of the pay he received from vested and exercised stock options given to him by his company in the past. In 2008 alone, those stock options amounted to a personal gain of more than $543 million. That is $543 million in stock option gains in a single year. Stunningly, his company gets to deduct this outlandish ``compensation'' from its taxes--even though the company never paid him that amount, and even though the existing tax code generally limits corporate deductions for executive pay to $1 million per executive.

Oracle's CEO was not alone. Equilar has identified dozens of U.S. executives who obtained tens of millions or even hundreds of millions of dollars from stock options in 2008. For example, the CEO of Qualcomm Inc., had $209 million in stock options gains in 2008, while the CEO of Occidental Petroleum had gains of $184 million.

Between the repricing of some stock options and grants being made while stock prices are low, the recent stock market recovery will likely mean that many executives will continue to reap astronomical stock option-related compensation, and their companies will continue to reap unwarranted tax deductions from stock options gains.

Why do corporate executives have so many stock options to cash in? A key reason is that U.S. accounting rules allow companies to report their stock option expenses one way on the corporate books, while Federal tax rules require them to report the same stock options a completely different way on their tax returns. In most cases, the resulting book expense is far smaller than the resulting tax deduction. That means, under current U.S. accounting and tax rules, stock option tax deductions taken by corporations often far exceed the recorded stock option expenses shown on the companies' books. The result is a tax windfall.

Stock options are the only type of compensation where the Federal tax code permits companies to claim a bigger deduction on their tax returns than the corresponding expense on their books. For all other types of compensation--cash, stock, bonuses, and more--the tax return deduction equals the book expense. In fact, companies cannot deduct more than the compensation expense shown on their books, because that would be tax fraud. The sole exception to this rule is stock options. In the case of stock options, the tax code allows companies to claim a tax deduction that can be two, three, ten or one hundred times larger than the expense shown on their books.

When a company's compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it creates a temptation for the company to pay its executives with stock options instead of cash or stock. It is a classic case of U.S. tax policy creating an unintended incentive for corporations to act in a particular way.

This bill is particularly timely given the new administration's stated goals to close unfair corporate tax loopholes, strengthen tax fairness, and reign in excessive executive compensation. Given the current financial crisis, staggering health care costs, and ongoing defense needs, now more than ever, we cannot afford this multi-billion dollar loss to the Treasury.

To understand why this bill is needed it helps to understand how stock option accounting and tax rules got so out of kilter with each other in the first place.

Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board (FASB) in an all-out, knock-down battle over how companies should record stock option compensation expenses on their books.

U.S. publicly traded corporations are required by law to follow Generally Accepted Accounting Principles, GAAP, issued by FASB, which is overseen by the SEC. For many years, GAAP allowed U.S. companies to issue stock options to employees and, unlike any other type of compensation, report a zero compensation expense on their books, so long as, on the grant date, the stock option's exercise price equaled the market price at which the stock could be sold.

Assigning a zero value to stock options that routinely produce huge amounts of executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they are granted to an employee, using mathematical valuation tools. FASB proposed further that companies include that amount as a compensation expense on their financial statements. A battle over stock option expensing followed, involving the accounting profession, corporate executives, FASB, the SEC, and Congress.

In the end, after years of fighting and negotiation, FASB issued a new accounting standard, Financial Accounting Standard, FAS, 123R, which was endorsed by the SEC and became mandatory for all publicly traded corporations in 2005. In essence, FAS 123R requires all companies to record a compensation expense equal to the fair value on grant date of all stock options provided to an employee in exchange for the employee's services.

The details of this accounting rule are complex, because they reflect an effort to accommodate varying viewpoints on the true cost of stock options. Companies are allowed to use a variety of mathematical models, for

example, to calculate a stock option's fair value. Option grants that vest over time are expensed over the specified period so that, for example, a stock option which vests over four years results in 25 percent of the cost being expensed each year. If a stock option grant never vests, the rule allows any previously booked expense to be recovered. On the other hand, stock options that do vest are required to be fully expensed, even if never exercised, because the compensation was actually awarded. These and other provisions of this hard-fought accounting rule reflect painstaking judgments on how to show a stock option's value.

Opponents of the new accounting rule had predicted that, if implemented, it would severely damage U.S. capital markets. They warned that stock option expensing would eliminate corporate profits, discourage investment, depress stock prices, and stifle innovation. 2006 was the first year in which all U.S. publicly traded companies were required to expense stock options. Instead of tumbling, both the New York Stock Exchange and Nasdaq turned in strong performances, as did initial public offerings by new companies. The dire predictions were wrong. Stock option expensing has been fully implemented without any detrimental impact to the markets.

During the years the battle raged over stock option accounting, relatively little attention was paid to the taxation of stock options. Section 83 of the tax code, first enacted in 1969 and still in place after four decades, is the key statutory provision. It essentially provides that, when an employee exercises compensatory stock options, the employee must report as income the difference between what the employee paid to exercise the options and the market value of the stock received. The corporation can then take a mirror deduction for whatever amount of income the employee realized.

For example, suppose a company gave an executive options to buy 1 million shares of the company stock at $10 per share. Suppose, 5 years later, the executive exercised the options when the stock was selling at $30 per share. The executive's income would be $20 per share for a total of $20 million. The executive would declare $20 million as ordinary income, and in the same year, the company would take a corresponding tax deduction for $20 million.

The two main problems with this approach are that: the deduction amount is significantly greater than the value of what the company gave away, often years earlier, and the $20 million in income obtained by the executive did not come out of the company's coffers. In most cases, the $20 million was paid by unrelated parties on the stock market. Yet the tax code allowed the corporation to declare the $20 million as a business expense and take it as a tax deduction. The reasoning was that the exercise date value was the only way to get a clear figure for stock option tax deduction purposes. That reasoning lost its persuasive character, however, once consensus was reached on how to calculate stock option expenses when granted.

Stock option accounting and tax rules have evolved separately over the years and are now at odds with each other. Accounting rules require companies to expense stock options on their books on the grant date. Tax rules provide that companies deduct stock option expenses on the exercise date. Companies have to report the grant date expense to investors on their financial statements, and the exercise date expense on their tax returns. The financial statements report on all stock options granted during the year, while the tax returns report on all stock options exercised during the year. In short, company financial statements and tax returns identify expenses for different groups of stock options, using different valuation methods, and resulting in widely divergent stock option expenses for the same year.

To examine the nature and consequences of the stock option book-tax differences, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing 2 years ago, in June 2007. Here is what we found.

To test just how far the book and tax figures for stock options diverge, the Subcommittee contacted a number of companies to compare the stock option expenses they reported for accounting and tax purposes. The Subcommittee asked each company to identify stock options that had been exercised by one or more of its executives from 2002 to 2006. The Subcommittee then asked each company to identify the compensation expense they reported on their financial statements versus the compensation expense on their tax returns. In addition, we asked the companies' help in estimating what effect the new accounting rule would have had on their book expense if it had been in place when their stock options were granted. At the hearing, we disclosed the resulting stock option data for 9 companies, including three companies that were asked to testify. The Subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with.

The data provided by the companies showed that, under then existing rules, the nine companies showed a zero expense on their books for that stock options that had been awarded to their executives, but claimed millions of dollars in tax deductions for the same compensation. The one exception was Occidential Petroleum which, in 2005, began voluntarily expensing its stock options, but even this company reported significantly greater tax deductions than the stock option expenses shown on its books. When the Subcommittee asked the companies what their book expense would have been if the new FASB rule had been in effect, all nine calculated book expenses that remained dramatically lower than their tax deductions. Altogether the 9 companies calculated that they would have claimed $1 billion more in stock option tax deductions than they would have shown as book expenses, even using the tougher new accounting rule. Let me repeat that--just nine companies produced a stock option book-tax difference of more than $1 billion.

KB Home, for example, is a company that builds residential homes. Its stock price had more than quadrupled over the past 10 years. Over the same time period, it had repeatedly granted stock options to its then CEO. Company records show that, over five years, KB Home gave him 5.5 million stock options of which, by 2006, he had exercised more than 3 million.

With respect to those 3 million stock options, KB Home recorded a zero expense on its books. Had the new accounting rule been in effect, KB Home calculated that it would have reported on its books a compensation expense of about $11.5 million. KB Home also disclosed that the same 3 million stock options enabled it to claim compensation expenses on its tax returns totaling about $143.7 million. In other words, KB Home claimed a $143 million tax deduction for expenses that on its books, under current accounting rules, would have totaled $11.5 million. That's a tax deduction 12 times bigger than the book expense.

Occidental Petroleum disclosed a similar book-tax discrepancy. This company's stock price had also skyrocketed, dramatically increasing the value of the 16 million stock options granted to its CEO since 1993. Of the 12 million stock options the CEO actually exercised over a five- year period, Occidental Petroleum claimed a $353 million tax deduction for a book expense that, under current accounting rules, would have totaled just $29 million. That's a book-tax difference of more than 1200 percent.

Similar book-tax discrepancies applied to the other companies we examined. Cisco System's CEO exercised nearly 19 million stock options over 5 years, and provided the company with a $169 million tax deduction for a book expense which, under current accounting rules, would have totaled about $21 million. UnitedHealth's former CEO exercised over 9 million stock options in 5 years, providing the company with a $318 million tax deduction for a book expense which would have totaled about $46 million. Safeway's CEO exercised over 2 million stock options, providing the company with a $39 million tax deduction for a book expense which would have totaled about $6.5 million.

Altogether, these nine companies took stock option tax deductions totaling $1.2 billion, a figure 5 times larger than the $217 million that their combined stock option book expenses would have been. The resulting $1 billion in excess tax deductions represents

a tax windfall for these companies simply because they issued lots of stock options to their CEOs.

Tax rules that produce huge tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue massive stock option grants, because they know the stock options will produce a relatively small hit to the profits shown on their books, while also knowing that they are likely to get a much larger tax deduction that can dramatically lower their taxes.

The data we gathered for nine companies alone disclosed stock option tax deductions that were five times larger than their book expenses, generating over $1 billion in excess tax deductions. To gauge whether the same tax gap applied to stock options across the country as a whole, the Subcommittee asked the IRS to perform an analysis of some newly obtained stock option data.

For the first time in 2004, large corporations were required to file a new tax Schedule M-3 with their tax returns. The M-3 Schedule asks companies to identify differences in how they report corporate income to investors versus what they report to Uncle Sam, so that the IRS can track and analyze significant book-tax differences.

This data shows that, for corporate tax returns filed form July 1, 2005 to June 30, 2006, the first full year in which it was available, companies' stock option tax deductions totaled about $61 billion more than their stock options expenses on their books. Similar data for July 1, 2006 to June 30, 2007, showed that the excess stock option tax deductions totaled about $48 billion. In addition, the IRS data shows that nearly 60 percent of the excess tax deductions in 2007 were attributable to only 100 corporations; 75 percent were attributable to only 250 corporations. The IRS also determined that stock options were one of the most important factors why corporations reported different income on their books compared to their tax returns.

Claiming these massive stock option tax deductions enabled U.S. corporations, as a whole, to legally reduce payment of their taxes by billions of dollars, perhaps as much as $10 billion, $15 billion, even $20 billion per year.

There were other surprises in the data as well. One set of issues disclosed by the data involves what happens to unexercised stock options. Under the current mismatched set of accounting and tax rules, stock options which are granted, vested, but never exercised by the option holder turn out to produce a corporate book expense but no tax deduction.

Cisco Systems told the Subcommittee, for example, that in addition to the 19 million exercised stock options previously mentioned, their CEO held about 8 million options that, due to a stock price drop, would likely expire without being exercised. Cisco calculated that, had FAS 123R been in effect a the time those options were granted, the company would have had to show a $139 million book expense, but would never be able to claim a tax deduction for this expense since the options would never be exercised. Apple made a similar point. It told the Subcommittee that, in 2003, it allowed its CEO to trade 17.5 million in underwater stock options for 5 million shares of restricted stock. That trade meant the stock options would never be exercised and, under current rules, would produce a book expense without ever producing a tax deduction.

In both of these cases, under FAS 123R, it is possible that the stock options given to a corporate executive would have produced a reported book expense greater than the company's tax deduction. While the M-3 data indicates that, overall, accounting expenses lag far behind claimed tax deductions, the possible financial impact on an individual company of a large number of unexercised stock options is additional evidence that existing stock option accounting and tax rules are out of kilter and should be brought into alignment. Under our bill, if a company incurred a stock option expense, it would always be able to claim a tax deduction for that expense.

Another set of issues brought to light by theIRS data focuses on the fact that the current stock option tax deduction is typically claimed years later than the initial book expense. Normally, a corporation dispenses compensation to an employee and takes a tax deduction in the same year for the expense. The company controls the timing and amount of the compensation expense and the corresponding tax deduction. With respect to stock options, however, corporations may have to wait years to see if, when, and how much of a deduction can be taken. That is because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options.

Our bill would require that, when the company gives away something of value, it reflects that expense on its books and claims that same expense on its tax return. The company, and the government, should not have to wait to see whether the stock options given to executives later increased in value and were exercised. As with any other form of compensation, the company should determine the value of what it is giving away, and take the appropriate tax deduction at that time.

UnitedHealth, for example, told the Subcommittee that it gave its former CEO 8 million stock options in 1999, of which, by 2006, only about 730,000 had been exercised. It did not know if or when its former CEO would exercise the remaining 7 million options, and so could not calculate when or how much of a tax deduction it would be able to claim for this compensation expense.

If the rules for stock option tax deductions were changed as suggested in our bill, companies would typically be able to take the deduction years earlier than they do now, without waiting to see if and when particular options are exercised. Companies would also be allowed to deduct stock options that are vested but never exercised. In addition, by requiring stock option expenses to be deducted in the same year they appear on the company books, stock options would become consistent with how other forms of compensation are treated in the tax code.

Right now, U.S. stock option accounting and tax rules are mismatched, misaligned, and out of kilter. They allow companies collectively to deduct billions of dollars in stock option expenses in excess of the expenses that actually appear on the company books. They disallow tax deductions for stock options that are given as compensation but never exercised. They often force companies to wait years to claim a tax deduction for a compensation expense that could and should be claimed in the same year it appears on the company books.

The Levin-McCain bill we are introducing today would cure these problems. It would bring stock option accounting and tax rules into alignment, so that the two sets of rules would apply in a consistent manner. It would accomplish that goal simply by requiring the corporate stock option tax deduction to be no greater than the stock option expenses shown on the corporate books each year.

Specifically, the bill would end use of the current stock option deduction under Section 83 of the tax code, which allows corporations to deduct stock option expenses when exercised in an amount equal to the income declared by the individual exercising the option, replacing it with a new Section 162(q), which would require companies to deduct the stock option expenses shown on their books each year.

The bill would apply only to corporate stock option deductions; it would make no changes to the rules that apply to individuals who have been given stock options as part of their compensation. Individuals would still report their compensation on the day they exercised their stock options. They would still report as income the difference between what they paid to exercise the options and the fair market value of the stock they received upon exercise. The gain would continue to be treated as ordinary income rather than a capital gain, since the option holder did not invest any capital in the stock prior to exercising the stock option and the only reason the person obtained the stock was because of the services they performed for the corporation.

The amount of income declared by the individual after exercising a stock option will likely often be greater than the stock option expense booked and deducted by the corporation who employed that individual. That's in part because the individual's gain often comes years later than the original

stock option grant, and the underlying stock will usually have gained in value. In addition, the individual's gain is typically provided, not by the corporation that supplied the stock options years earlier, but by third parties active in the stock market.

Consider the same example discussed earlier of an executive who exercises options to buy 1 million shares of stock at $10 per share, obtains the shares from the corporation, and then immediately sells them on the open market for $30 per share, making a toal profit of $20 million. The individual's corporation didn't supply the $20 million. Just the opposite. Rather than paying cash to its executive, the corporation received a $10 million payment from the executive in exchange for the 1 million shares. The $20 million profit from selling the shares was paid, not by the corporation, but by third parties in the marketplace who purchased the stock. That is why it makes no sense for the company to declare as an expense the amount of profit that an employee--or former employee--obtained from unrelated parties in the marketplace.

The bill we are introducing today would put an end to the current approach of using the stock option income declared by an individual as the tax deduction claimed by the corporation that supplied the stock options. It would break that old artificial symmetry and replace it with a new symmetry--one in which the corporation's stock option tax deduction would match its book expense.

I describe the current approach to corporate stock option deductions as artificial, because it uses a construct in the tax code that, when first implemented 40 years ago, enabled corporations to calculate their stock option expense on the exercise date, when there was no consensus on how to calculate stock option expenses on the grant date. The artificiality of the approach is demonstrated by the fact that it allows companies to claim a deductible expense for money that comes not from company coffers, but from third parties in the stock market. Now that U.S. accounting rules require the calculation of stock option expenses on the grant date, however, there is no longer any need to rely on an artificial construct that calculated corporate stock option expenses on the exercise date using third party funds.

It is also important to note that the bill would not affect in any way current tax provisions that provide favored tax treatment to so- called Incentive Stock Options under Sections 421 and 422 of the tax code. Under those sections, in certain circumstances, corporations can surrender their stock option deductions in favor of allowing their employees with stock option gains to be taxed at a capital gains rate instead of ordinary income tax rates. Many start-up companies use these types of stock options, because they don't yet have taxable profits and don't need a stock option tax deduction. So they forfeit their stock option corporate deduction in favor of giving their employees more favorable treatment of their stock option income. Incentive Stock Options would not be affected by our legislation and would remain available to any corporation providing stock options to its employees.

The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. In 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so taxpayers would not be forced to subsidize excessive executive pay. However, the cap was not applied to stock options, allowing companies to deduct any amount of stock option compensation, without limit.

By not applying the $1 million cap to stock option compensation, the tax code created a significant incentive for corporations to pay their executives with stock options. Indeed, it is very common for executives to have salaries of $1 million, while simultaneously receiving millions of dollars more in stock options. It is effectively meaningless to cap deductions for executive salary compensation but not also for stock options.

Further, while corporate directors may be comfortable diluting their shareholders' interests and doling out massive amounts of stock options, that does not mean that the taxpayers should subsidize it. This bill would eliminate this favored treatment of executive stock options by making deductions for this type of compensation subject to the same $1 million cap that applies to other forms of compensation covered by Section 162(m).

The bill also contains several technical provisions. First, it would make a conforming change to the research tax credit so that stock option expenses claimed under that credit would match the stock option deductions taken under the new tax code section 162(q). Second, the bill would authorize the Secretary of the Treasury to adopt regulations governing how to calculate the deduction for stock options issued by a parent corporation to the employees of a subsidiary.

Finally, the bill contains a transition rule for applying the new Section 162(q) stock option tax deduction to existing and future stock option grants. This transition rule would make it clear that the new tax deduction would not apply to any stock option exercised prior to the date of enactment of the bill.

The bill would also allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of Financial Accounting Standard, FAS, 123R, and exercised after the date of enactment of the bill. The effective date of FAS 123R is June 15, 2005 for most corporations, and December 31, 2005 for most small businesses. Prior to the effective date of FAS 123R, most corporations would have shown a zero expense on their books for the stock options issued to their executives and, thus, would be unable to claim a tax deduction under the new Section 162(q). For that reason, the bill would allow these corporations to continue to use Section 83 to claim stock option deductions on their tax returns.

For stock options that vested after the effective date of FAS 123R and were exercised after the date of enactment, the bill takes another tack. Under FAS 123R, these corporations would have had to show the appropriate stock option expense on their books, but would have been unable to take a tax deduction until the executive actually exercised the option. For these options, the bill would allow corporations to take an immediate tax deduction--in the first year that the bill is in effect--for all of the expenses shown on their books with respect to these options. This ``catch-up deduction'' in the first year after enactment would enable corporations, in the following years, to begin with a clean slate so that their tax returns the next year would reflect their actual stock option book expenses for that same year.

After that catch-up year, all stock option expenses incurred by a company each year would be reflected in their annual tax deductions under the new Section 162(q).

The current differences between accounting and tax rules for stock options make no sense.

The current book-tax difference is the historical product of accounting and tax policies that have not been coordinated or integrated. The resulting mismatch has allowed companies to take tax deductions that are usually many times larger than the actual stock option expenses shown on their books, at the expense of the Treasury (i.e., other taxpayers). Companies are incentivized to dole out excessive options packages, producing outsized executive pay, while being allowed to reflect much smaller ``expenses'' on their books. They get to avoid paying their fair share to Uncle Sam by simply giving their executives the rights to huge sums of money from the financial markets.

Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their book expenses. In the last year for which the data is available, companies used the existing book-tax disparity to claim $48 billion more in stock option tax deductions than the expenses shown on their books. In these times of financial crisis, we cannot afford this multi-billion dollar loss to the Treasury, not only because of the need to finance the mounting costs of rescuing the economy, but also because this stock option book- tax difference contributes to the anger and social disruption caused by the ever deepening chasm between the pay of executives and the pay of average workers.

The Obama administration has pledged itself to closing unfair corporate tax loopholes and to returning sanity to executive pay. It should start with supporting the ending of excessive stock option corporate deductions. I urge my colleagues to join Senator McCain and me in enacting this bill into law this year.

Mr. President, I ask unanimous consent that the text of the bill and a bill summary be printed in the Record.

Mr. President, Senator McCain and I are introducing today a bill to eliminate Federal corporate tax breaks that give special tax treatment to corporations that pay their executives with stock options. It is called the Ending excessive Corporate Deductions for Stock Options Act, and it has been endorsed by OMB Watch, the Consumer Federation of America, the Tax Justice Network-USA, and the AFL-CIO.

We are in a financial crisis. We are spending hundreds of billions of taxpayer dollars to try to stop the housing bust and prop up Wall Street. Too many of the middle class are watching the American dream slip away, while executives are getting mutli-million dollar compensation packages.

At the same time, mismatched stock option accounting and tax rules are shortchanging the Treasury to the tune of billions of dollars each year, while fueling the growing chasm between executive pay and average worker pay. The mismatch is this: companies are allowed to report one set of stock option compensation expenses to investors and the public through their public financial statements, and a completely different set of expenses to the Internal Revenue Service, IRS, on their tax returns. Put simply, our precious tax dollars are being wasted by an outdated and unfair corporate tax loophole that encourages corporations to hand out massive stock option grants to their executives. It is time to put an end to the excessive tax deductions being reaped by corporations at taxpayers' expense.

J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. In the United States, in 1990, average pay for the chief executive officer of a large U.S. corporation was 100 times average worker pay. Recently, CEO pay was nearly 400 times that of the average worker.

The single biggest factor responsible for this massive pay gap is stock options. Stock options are a huge contributor to executive pay. A key factor encouraging companies to pay their executives with stock options is the misguided Federal tax system that favors stock options over other types of compensation. Stock options give employees the right to buy company stock at a set price for a specified period of time, often 5 or 10 years. Virtually every CEO in America is paid with stock options, which are a major contributor to sky-high executive pay. According to Forbes magazine, in 2008, the CEOs at the 500 largest U.S. companies took home a combined $5.7 billion, averaging $11.4 million each.

For example, according to an Equilar Inc. analysis of 2008 filings with the Securities and Exchange Commission, SEC, Oracle Corporation's CEO was granted options estimated in value at more than $71 million just last year. That grant was on top of the pay he received from vested and exercised stock options given to him by his company in the past. In 2008 alone, those stock options amounted to a personal gain of more than $543 million. That is $543 million in stock option gains in a single year. Stunningly, his company gets to deduct this outlandish ``compensation'' from its taxes--even though the company never paid him that amount, and even though the existing tax code generally limits corporate deductions for executive pay to $1 million per executive.

Oracle's CEO was not alone. Equilar has identified dozens of U.S. executives who obtained tens of millions or even hundreds of millions of dollars from stock options in 2008. For example, the CEO of Qualcomm Inc., had $209 million in stock options gains in 2008, while the CEO of Occidental Petroleum had gains of $184 million.

Between the repricing of some stock options and grants being made while stock prices are low, the recent stock market recovery will likely mean that many executives will continue to reap astronomical stock option-related compensation, and their companies will continue to reap unwarranted tax deductions from stock options gains.

Why do corporate executives have so many stock options to cash in? A key reason is that U.S. accounting rules allow companies to report their stock option expenses one way on the corporate books, while Federal tax rules require them to report the same stock options a completely different way on their tax returns. In most cases, the resulting book expense is far smaller than the resulting tax deduction. That means, under current U.S. accounting and tax rules, stock option tax deductions taken by corporations often far exceed the recorded stock option expenses shown on the companies' books. The result is a tax windfall.

Stock options are the only type of compensation where the Federal tax code permits companies to claim a bigger deduction on their tax returns than the corresponding expense on their books. For all other types of compensation--cash, stock, bonuses, and more--the tax return deduction equals the book expense. In fact, companies cannot deduct more than the compensation expense shown on their books, because that would be tax fraud. The sole exception to this rule is stock options. In the case of stock options, the tax code allows companies to claim a tax deduction that can be two, three, ten or one hundred times larger than the expense shown on their books.

When a company's compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it creates a temptation for the company to pay its executives with stock options instead of cash or stock. It is a classic case of U.S. tax policy creating an unintended incentive for corporations to act in a particular way.

This bill is particularly timely given the new administration's stated goals to close unfair corporate tax loopholes, strengthen tax fairness, and reign in excessive executive compensation. Given the current financial crisis, staggering health care costs, and ongoing defense needs, now more than ever, we cannot afford this multi-billion dollar loss to the Treasury.

To understand why this bill is needed it helps to understand how stock option accounting and tax rules got so out of kilter with each other in the first place.

Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board (FASB) in an all-out, knock-down battle over how companies should record stock option compensation expenses on their books.

U.S. publicly traded corporations are required by law to follow Generally Accepted Accounting Principles, GAAP, issued by FASB, which is overseen by the SEC. For many years, GAAP allowed U.S. companies to issue stock options to employees and, unlike any other type of compensation, report a zero compensation expense on their books, so long as, on the grant date, the stock option's exercise price equaled the market price at which the stock could be sold.

Assigning a zero value to stock options that routinely produce huge amounts of executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they are granted to an employee, using mathematical valuation tools. FASB proposed further that companies include that amount as a compensation expense on their financial statements. A battle over stock option expensing followed, involving the accounting profession, corporate executives, FASB, the SEC, and Congress.

In the end, after years of fighting and negotiation, FASB issued a new accounting standard, Financial Accounting Standard, FAS, 123R, which was endorsed by the SEC and became mandatory for all publicly traded corporations in 2005. In essence, FAS 123R requires all companies to record a compensation expense equal to the fair value on grant date of all stock options provided to an employee in exchange for the employee's services.

The details of this accounting rule are complex, because they reflect an effort to accommodate varying viewpoints on the true cost of stock options. Companies are allowed to use a variety of mathematical models, for

example, to calculate a stock option's fair value. Option grants that vest over time are expensed over the specified period so that, for example, a stock option which vests over four years results in 25 percent of the cost being expensed each year. If a stock option grant never vests, the rule allows any previously booked expense to be recovered. On the other hand, stock options that do vest are required to be fully expensed, even if never exercised, because the compensation was actually awarded. These and other provisions of this hard-fought accounting rule reflect painstaking judgments on how to show a stock option's value.

Opponents of the new accounting rule had predicted that, if implemented, it would severely damage U.S. capital markets. They warned that stock option expensing would eliminate corporate profits, discourage investment, depress stock prices, and stifle innovation. 2006 was the first year in which all U.S. publicly traded companies were required to expense stock options. Instead of tumbling, both the New York Stock Exchange and Nasdaq turned in strong performances, as did initial public offerings by new companies. The dire predictions were wrong. Stock option expensing has been fully implemented without any detrimental impact to the markets.

During the years the battle raged over stock option accounting, relatively little attention was paid to the taxation of stock options. Section 83 of the tax code, first enacted in 1969 and still in place after four decades, is the key statutory provision. It essentially provides that, when an employee exercises compensatory stock options, the employee must report as income the difference between what the employee paid to exercise the options and the market value of the stock received. The corporation can then take a mirror deduction for whatever amount of income the employee realized.

For example, suppose a company gave an executive options to buy 1 million shares of the company stock at $10 per share. Suppose, 5 years later, the executive exercised the options when the stock was selling at $30 per share. The executive's income would be $20 per share for a total of $20 million. The executive would declare $20 million as ordinary income, and in the same year, the company would take a corresponding tax deduction for $20 million.

The two main problems with this approach are that: the deduction amount is significantly greater than the value of what the company gave away, often years earlier, and the $20 million in income obtained by the executive did not come out of the company's coffers. In most cases, the $20 million was paid by unrelated parties on the stock market. Yet the tax code allowed the corporation to declare the $20 million as a business expense and take it as a tax deduction. The reasoning was that the exercise date value was the only way to get a clear figure for stock option tax deduction purposes. That reasoning lost its persuasive character, however, once consensus was reached on how to calculate stock option expenses when granted.

Stock option accounting and tax rules have evolved separately over the years and are now at odds with each other. Accounting rules require companies to expense stock options on their books on the grant date. Tax rules provide that companies deduct stock option expenses on the exercise date. Companies have to report the grant date expense to investors on their financial statements, and the exercise date expense on their tax returns. The financial statements report on all stock options granted during the year, while the tax returns report on all stock options exercised during the year. In short, company financial statements and tax returns identify expenses for different groups of stock options, using different valuation methods, and resulting in widely divergent stock option expenses for the same year.

To examine the nature and consequences of the stock option book-tax differences, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing 2 years ago, in June 2007. Here is what we found.

To test just how far the book and tax figures for stock options diverge, the Subcommittee contacted a number of companies to compare the stock option expenses they reported for accounting and tax purposes. The Subcommittee asked each company to identify stock options that had been exercised by one or more of its executives from 2002 to 2006. The Subcommittee then asked each company to identify the compensation expense they reported on their financial statements versus the compensation expense on their tax returns. In addition, we asked the companies' help in estimating what effect the new accounting rule would have had on their book expense if it had been in place when their stock options were granted. At the hearing, we disclosed the resulting stock option data for 9 companies, including three companies that were asked to testify. The Subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with.

The data provided by the companies showed that, under then existing rules, the nine companies showed a zero expense on their books for that stock options that had been awarded to their executives, but claimed millions of dollars in tax deductions for the same compensation. The one exception was Occidential Petroleum which, in 2005, began voluntarily expensing its stock options, but even this company reported significantly greater tax deductions than the stock option expenses shown on its books. When the Subcommittee asked the companies what their book expense would have been if the new FASB rule had been in effect, all nine calculated book expenses that remained dramatically lower than their tax deductions. Altogether the 9 companies calculated that they would have claimed $1 billion more in stock option tax deductions than they would have shown as book expenses, even using the tougher new accounting rule. Let me repeat that--just nine companies produced a stock option book-tax difference of more than $1 billion.

KB Home, for example, is a company that builds residential homes. Its stock price had more than quadrupled over the past 10 years. Over the same time period, it had repeatedly granted stock options to its then CEO. Company records show that, over five years, KB Home gave him 5.5 million stock options of which, by 2006, he had exercised more than 3 million.

With respect to those 3 million stock options, KB Home recorded a zero expense on its books. Had the new accounting rule been in effect, KB Home calculated that it would have reported on its books a compensation expense of about $11.5 million. KB Home also disclosed that the same 3 million stock options enabled it to claim compensation expenses on its tax returns totaling about $143.7 million. In other words, KB Home claimed a $143 million tax deduction for expenses that on its books, under current accounting rules, would have totaled $11.5 million. That's a tax deduction 12 times bigger than the book expense.

Occidental Petroleum disclosed a similar book-tax discrepancy. This company's stock price had also skyrocketed, dramatically increasing the value of the 16 million stock options granted to its CEO since 1993. Of the 12 million stock options the CEO actually exercised over a five- year period, Occidental Petroleum claimed a $353 million tax deduction for a book expense that, under current accounting rules, would have totaled just $29 million. That's a book-tax difference of more than 1200 percent.

Similar book-tax discrepancies applied to the other companies we examined. Cisco System's CEO exercised nearly 19 million stock options over 5 years, and provided the company with a $169 million tax deduction for a book expense which, under current accounting rules, would have totaled about $21 million. UnitedHealth's former CEO exercised over 9 million stock options in 5 years, providing the company with a $318 million tax deduction for a book expense which would have totaled about $46 million. Safeway's CEO exercised over 2 million stock options, providing the company with a $39 million tax deduction for a book expense which would have totaled about $6.5 million.

Altogether, these nine companies took stock option tax deductions totaling $1.2 billion, a figure 5 times larger than the $217 million that their combined stock option book expenses would have been. The resulting $1 billion in excess tax deductions represents

a tax windfall for these companies simply because they issued lots of stock options to their CEOs.

Tax rules that produce huge tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue massive stock option grants, because they know the stock options will produce a relatively small hit to the profits shown on their books, while also knowing that they are likely to get a much larger tax deduction that can dramatically lower their taxes.

The data we gathered for nine companies alone disclosed stock option tax deductions that were five times larger than their book expenses, generating over $1 billion in excess tax deductions. To gauge whether the same tax gap applied to stock options across the country as a whole, the Subcommittee asked the IRS to perform an analysis of some newly obtained stock option data.

For the first time in 2004, large corporations were required to file a new tax Schedule M-3 with their tax returns. The M-3 Schedule asks companies to identify differences in how they report corporate income to investors versus what they report to Uncle Sam, so that the IRS can track and analyze significant book-tax differences.

This data shows that, for corporate tax returns filed form July 1, 2005 to June 30, 2006, the first full year in which it was available, companies' stock option tax deductions totaled about $61 billion more than their stock options expenses on their books. Similar data for July 1, 2006 to June 30, 2007, showed that the excess stock option tax deductions totaled about $48 billion. In addition, the IRS data shows that nearly 60 percent of the excess tax deductions in 2007 were attributable to only 100 corporations; 75 percent were attributable to only 250 corporations. The IRS also determined that stock options were one of the most important factors why corporations reported different income on their books compared to their tax returns.

Claiming these massive stock option tax deductions enabled U.S. corporations, as a whole, to legally reduce payment of their taxes by billions of dollars, perhaps as much as $10 billion, $15 billion, even $20 billion per year.

There were other surprises in the data as well. One set of issues disclosed by the data involves what happens to unexercised stock options. Under the current mismatched set of accounting and tax rules, stock options which are granted, vested, but never exercised by the option holder turn out to produce a corporate book expense but no tax deduction.

Cisco Systems told the Subcommittee, for example, that in addition to the 19 million exercised stock options previously mentioned, their CEO held about 8 million options that, due to a stock price drop, would likely expire without being exercised. Cisco calculated that, had FAS 123R been in effect a the time those options were granted, the company would have had to show a $139 million book expense, but would never be able to claim a tax deduction for this expense since the options would never be exercised. Apple made a similar point. It told the Subcommittee that, in 2003, it allowed its CEO to trade 17.5 million in underwater stock options for 5 million shares of restricted stock. That trade meant the stock options would never be exercised and, under current rules, would produce a book expense without ever producing a tax deduction.

In both of these cases, under FAS 123R, it is possible that the stock options given to a corporate executive would have produced a reported book expense greater than the company's tax deduction. While the M-3 data indicates that, overall, accounting expenses lag far behind claimed tax deductions, the possible financial impact on an individual company of a large number of unexercised stock options is additional evidence that existing stock option accounting and tax rules are out of kilter and should be brought into alignment. Under our bill, if a company incurred a stock option expense, it would always be able to claim a tax deduction for that expense.

Another set of issues brought to light by theIRS data focuses on the fact that the current stock option tax deduction is typically claimed years later than the initial book expense. Normally, a corporation dispenses compensation to an employee and takes a tax deduction in the same year for the expense. The company controls the timing and amount of the compensation expense and the corresponding tax deduction. With respect to stock options, however, corporations may have to wait years to see if, when, and how much of a deduction can be taken. That is because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options.

Our bill would require that, when the company gives away something of value, it reflects that expense on its books and claims that same expense on its tax return. The company, and the government, should not have to wait to see whether the stock options given to executives later increased in value and were exercised. As with any other form of compensation, the company should determine the value of what it is giving away, and take the appropriate tax deduction at that time.

UnitedHealth, for example, told the Subcommittee that it gave its former CEO 8 million stock options in 1999, of which, by 2006, only about 730,000 had been exercised. It did not know if or when its former CEO would exercise the remaining 7 million options, and so could not calculate when or how much of a tax deduction it would be able to claim for this compensation expense.

If the rules for stock option tax deductions were changed as suggested in our bill, companies would typically be able to take the deduction years earlier than they do now, without waiting to see if and when particular options are exercised. Companies would also be allowed to deduct stock options that are vested but never exercised. In addition, by requiring stock option expenses to be deducted in the same year they appear on the company books, stock options would become consistent with how other forms of compensation are treated in the tax code.

Right now, U.S. stock option accounting and tax rules are mismatched, misaligned, and out of kilter. They allow companies collectively to deduct billions of dollars in stock option expenses in excess of the expenses that actually appear on the company books. They disallow tax deductions for stock options that are given as compensation but never exercised. They often force companies to wait years to claim a tax deduction for a compensation expense that could and should be claimed in the same year it appears on the company books.

The Levin-McCain bill we are introducing today would cure these problems. It would bring stock option accounting and tax rules into alignment, so that the two sets of rules would apply in a consistent manner. It would accomplish that goal simply by requiring the corporate stock option tax deduction to be no greater than the stock option expenses shown on the corporate books each year.

Specifically, the bill would end use of the current stock option deduction under Section 83 of the tax code, which allows corporations to deduct stock option expenses when exercised in an amount equal to the income declared by the individual exercising the option, replacing it with a new Section 162(q), which would require companies to deduct the stock option expenses shown on their books each year.

The bill would apply only to corporate stock option deductions; it would make no changes to the rules that apply to individuals who have been given stock options as part of their compensation. Individuals would still report their compensation on the day they exercised their stock options. They would still report as income the difference between what they paid to exercise the options and the fair market value of the stock they received upon exercise. The gain would continue to be treated as ordinary income rather than a capital gain, since the option holder did not invest any capital in the stock prior to exercising the stock option and the only reason the person obtained the stock was because of the services they performed for the corporation.

The amount of income declared by the individual after exercising a stock option will likely often be greater than the stock option expense booked and deducted by the corporation who employed that individual. That's in part because the individual's gain often comes years later than the original

stock option grant, and the underlying stock will usually have gained in value. In addition, the individual's gain is typically provided, not by the corporation that supplied the stock options years earlier, but by third parties active in the stock market.

Consider the same example discussed earlier of an executive who exercises options to buy 1 million shares of stock at $10 per share, obtains the shares from the corporation, and then immediately sells them on the open market for $30 per share, making a toal profit of $20 million. The individual's corporation didn't supply the $20 million. Just the opposite. Rather than paying cash to its executive, the corporation received a $10 million payment from the executive in exchange for the 1 million shares. The $20 million profit from selling the shares was paid, not by the corporation, but by third parties in the marketplace who purchased the stock. That is why it makes no sense for the company to declare as an expense the amount of profit that an employee--or former employee--obtained from unrelated parties in the marketplace.

The bill we are introducing today would put an end to the current approach of using the stock option income declared by an individual as the tax deduction claimed by the corporation that supplied the stock options. It would break that old artificial symmetry and replace it with a new symmetry--one in which the corporation's stock option tax deduction would match its book expense.

I describe the current approach to corporate stock option deductions as artificial, because it uses a construct in the tax code that, when first implemented 40 years ago, enabled corporations to calculate their stock option expense on the exercise date, when there was no consensus on how to calculate stock option expenses on the grant date. The artificiality of the approach is demonstrated by the fact that it allows companies to claim a deductible expense for money that comes not from company coffers, but from third parties in the stock market. Now that U.S. accounting rules require the calculation of stock option expenses on the grant date, however, there is no longer any need to rely on an artificial construct that calculated corporate stock option expenses on the exercise date using third party funds.

It is also important to note that the bill would not affect in any way current tax provisions that provide favored tax treatment to so- called Incentive Stock Options under Sections 421 and 422 of the tax code. Under those sections, in certain circumstances, corporations can surrender their stock option deductions in favor of allowing their employees with stock option gains to be taxed at a capital gains rate instead of ordinary income tax rates. Many start-up companies use these types of stock options, because they don't yet have taxable profits and don't need a stock option tax deduction. So they forfeit their stock option corporate deduction in favor of giving their employees more favorable treatment of their stock option income. Incentive Stock Options would not be affected by our legislation and would remain available to any corporation providing stock options to its employees.

The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. In 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so taxpayers would not be forced to subsidize excessive executive pay. However, the cap was not applied to stock options, allowing companies to deduct any amount of stock option compensation, without limit.

By not applying the $1 million cap to stock option compensation, the tax code created a significant incentive for corporations to pay their executives with stock options. Indeed, it is very common for executives to have salaries of $1 million, while simultaneously receiving millions of dollars more in stock options. It is effectively meaningless to cap deductions for executive salary compensation but not also for stock options.

Further, while corporate directors may be comfortable diluting their shareholders' interests and doling out massive amounts of stock options, that does not mean that the taxpayers should subsidize it. This bill would eliminate this favored treatment of executive stock options by making deductions for this type of compensation subject to the same $1 million cap that applies to other forms of compensation covered by Section 162(m).

The bill also contains several technical provisions. First, it would make a conforming change to the research tax credit so that stock option expenses claimed under that credit would match the stock option deductions taken under the new tax code section 162(q). Second, the bill would authorize the Secretary of the Treasury to adopt regulations governing how to calculate the deduction for stock options issued by a parent corporation to the employees of a subsidiary.

Finally, the bill contains a transition rule for applying the new Section 162(q) stock option tax deduction to existing and future stock option grants. This transition rule would make it clear that the new tax deduction would not apply to any stock option exercised prior to the date of enactment of the bill.

The bill would also allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of Financial Accounting Standard, FAS, 123R, and exercised after the date of enactment of the bill. The effective date of FAS 123R is June 15, 2005 for most corporations, and December 31, 2005 for most small businesses. Prior to the effective date of FAS 123R, most corporations would have shown a zero expense on their books for the stock options issued to their executives and, thus, would be unable to claim a tax deduction under the new Section 162(q). For that reason, the bill would allow these corporations to continue to use Section 83 to claim stock option deductions on their tax returns.

For stock options that vested after the effective date of FAS 123R and were exercised after the date of enactment, the bill takes another tack. Under FAS 123R, these corporations would have had to show the appropriate stock option expense on their books, but would have been unable to take a tax deduction until the executive actually exercised the option. For these options, the bill would allow corporations to take an immediate tax deduction--in the first year that the bill is in effect--for all of the expenses shown on their books with respect to these options. This ``catch-up deduction'' in the first year after enactment would enable corporations, in the following years, to begin with a clean slate so that their tax returns the next year would reflect their actual stock option book expenses for that same year.

After that catch-up year, all stock option expenses incurred by a company each year would be reflected in their annual tax deductions under the new Section 162(q).

The current differences between accounting and tax rules for stock options make no sense.

The current book-tax difference is the historical product of accounting and tax policies that have not been coordinated or integrated. The resulting mismatch has allowed companies to take tax deductions that are usually many times larger than the actual stock option expenses shown on their books, at the expense of the Treasury (i.e., other taxpayers). Companies are incentivized to dole out excessive options packages, producing outsized executive pay, while being allowed to reflect much smaller ``expenses'' on their books. They get to avoid paying their fair share to Uncle Sam by simply giving their executives the rights to huge sums of money from the financial markets.

Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their book expenses. In the last year for which the data is available, companies used the existing book-tax disparity to claim $48 billion more in stock option tax deductions than the expenses shown on their books. In these times of financial crisis, we cannot afford this multi-billion dollar loss to the Treasury, not only because of the need to finance the mounting costs of rescuing the economy, but also because this stock option book- tax difference contributes to the anger and social disruption caused by the ever deepening chasm between the pay of executives and the pay of average workers.

The Obama administration has pledged itself to closing unfair corporate tax loopholes and to returning sanity to executive pay. It should start with supporting the ending of excessive stock option corporate deductions. I urge my colleagues to join Senator McCain and me in enacting this bill into law this year.

Mr. President, I ask unanimous consent that the text of the bill and a bill summary be printed in the Record.

Mr. President, I ask unanimous consent that Juliet Beyler, a congressional fellow in the office of Senator Gregg, be allowed the privilege of the floor during consideration of S. 1390.

Mr. President, I ask unanimous consent that MAJ Jim DeLapp, a military fellow in the office of Senator Begich, be granted the privilege of the floor for the duration of Senate consideration of

Mr. President, I call up amendment No. 1469.

Mr. President, this amendment will strike $1.75 billion in additional funding for F-22 aircraft that was in the committee-reported bill. It will also restore serious cuts that were made in readiness and military personnel accounts and across-the-board cuts. These cuts were made in order to shift funds to support F-22 production. It is appropriate that the F-22 issue receive the full consideration by the Senate that it has received. The F-22 debate is among the most important debates we will have on the DOD authorization bill this year.

Stating what may be one of the worst kept secrets in Washington today, the Department of Defense budget request called for ending production of several programs, including the F-22 program. I suspect the Department of Defense will seldom shut down any major acquisition program without a fair amount of controversy, and I agree with the Senator from Georgia that Congress should never be a rubberstamp for the executive branch. But neither should we object to terminating production of a weapons system because of parochial reasons.

Terminating production, such as closing a base, can involve some economic loss for communities involved. I know that very personally. But we must do so from time to time and make these difficult decisions based on what is best for the Nation and what is best for the men and women of the Armed Forces.

As President Obama said the other day, in strong support of ending the F-22 production:

To continue to procure additional F-22s would be to waste

valuable resources that should be more usefully employed to

provide our troops with the weapons that they actually do

need.

The Senate has heard from the senior leadership of the Defense Department, both civilian and military, that we should end F-22 production. The recommendation is strong and clear, as strong and clear as I have ever heard when it comes to ending the production of a weapons system.

The Secretary of the Air Force and the Chief of Staff of the Air Force sent me and Senator McCain a letter on this matter. This letter is already part of the Record. It reads, in part, as follows:

This review concluded with . . . a balanced set of

recommendations for our fighter forces: 1) focus procurement

on modern 5th generation aircraft rather than less capable F-

15s and F-16s; 2) given that the F-35 will constitute the

majority of the future fighter force, transition as quickly

as is prudent to F-35 production; 3) complete F-22

procurement at 187 aircraft, while continuing plans for

future F-22 upgrades; and 4) accelerate the retirements of

the old 4th generation aircraft and modify the remaining

aircraft with necessary upgrades in capability.

In summary, we assessed the F-22 decision from all angles,

taking into account competing strategic priorities and

complementary programs and alternatives, all balanced within

the context of available resources. We did not and do not

recommend F-22s be included in the FY10 defense budget. This

is a difficult decision but one with which we are

comfortable. Most importantly, in this and other budget

decisions, we believe it is important for Air Force leaders

to make clear choices, balancing requirements across a range

of Air Force contributions to joint capabilities.

The Senate has also heard from the Secretary of Defense and the Chairman of the Joint Chiefs of Staff. In their letter to me and Senator McCain on July 13, Secretary Gates and Admiral Mullen wrote the following:

There is no doubt that the F-22 is an important capability

for our Nation's defense. To meet future scenarios, however,

the Department of Defense has determined that 187 aircraft

are sufficient, especially considering the future roles of

Unmanned Aerial Systems and the significant number of 5th

generation stealth F-35s coming on-line in our combat air

portfolio.

It is important to note that the F-35 is a half generation

newer aircraft than the F-22, and more capable in a number of

areas such as electronic warfare and combating enemy air

defenses. To sustain U.S. overall air dominance, the

Department's plan is to buy roughly 500 F-35s over the next

five years and more than 2,400 over the life of the program.

Furthermore, under this plan, the U.S. by 2020 is projected

to have some 2,500 manned fighter aircraft, almost 1,000 of

them will be 5th generation F-35s and F-22s. China, by

contrast, is expected to have only slightly more than half as

many manned fighter aircraft by 2020, none of them 5th

generation.

The F-22 program proposed in the President's budget

reflects the judgment of two different Presidents, two

different Secretaries of Defense, three chairmen of the Joint

Chiefs of Staff, and the current secretary and chief of staff

of the Air Force. If the Air Force is forced to buy

additional F-22s beyond what has been requested, it will come

at the expense of other Air Force and Department of Defense

priorities--and require deferring capabilities in areas we

believe are much more critical for our Nation's defense.

For all these reasons, the Secretary of Defense and the Chairman of the Joint Chiefs concluded:

[W]e strongly believe that the time has come to close the

F-22 production line. If the Congress sends legislation to

the President that requires the acquisition of additional F-

22 aircraft beyond Fiscal Year 2009, the Secretary of Defense

will strongly recommend he veto it.

You do not get much stronger statements than that from a Secretary of Defense and a Chairman of the Joint Chiefs.

The Secretary of Defense, just last Thursday, expanded on those thoughts at the Economic Club in Chicago, when he said the following:

. . . supporters of the F-22 lately have promoted its use

for an ever expanding list of potential missions. These range

from protecting the homeland from seaborne cruise missiles

to, as one retired general recommended on TV, using F-22s to

go after Somali pirates who in many cases are teenagers with

AK-47s--a job we already know is better done at much less

cost by three Navy SEALS.

The Secretary, in Chicago, said:

These are examples of how far-fetched some of the arguments

have become for a program that has cost $65 billion--and

counting--to produce 187 aircraft, not to mention the

thousands of uniformed Air Force positions that were

sacrificed to help pay for it.

The Senate has also heard, of course, from President Obama, as follows--this is what he wrote us:

In December 2004, the Department of Defense determined that

183 F-22s would be sufficient to meet its military needs.

This determination was not made casually. The Department

conducted several analyses which support this position based

on the length and type of wars that the Department thinks it

might have to fight in the future, and an estimate of the

future capabilities of likely adversaries. To continue to

procure additional F-22s would be to waste valuable resources

that should be more usefully employed to provide our troops

with the weapons that they actually do need.

So the President, based on his uniformed and civilian advisers' recommendations, has now said he will veto this bill if we keep the additional $1.75 billion in the bill to buy the additional seven F-22s those military leaders--uniformed and civilian--strongly say we do not need.

I know my friend from Georgia has quoted some private sector individuals and one senior military official in particular, GEN John Corley, the Commander of the Air Force's Air Combat Command.

I do not take lightly the recommendations and advice of someone with a distinguished career such as General Corley. However, General Corley's assessment of a high military risk if we end the buy of F-22s at 187 is not shared by the most senior leadership of the Department that is responsible for viewing the F-22 program, and all other Department of Defense programs, from a broader perspective. These same leaders from the previous administration--the previous Secretary of Defense, the previous Chairman of the Joint Chiefs of Staff-- recommended termination to President Bush, and President Bush also urged the termination of this program.

General Cartwright said at his confirmation hearing--or reconfirmation hearing--2 weeks ago the following:

. . . I was probably one of the more vocal and ardent

supporters for the termination of the F-22 production. The

reason's twofold. First . . . there is a study in the Joint

Staff that we just completed and partnered with the Air Force

on that, number one, said that proliferating within the

United States military fifth-generation fighters to all three

services was going to be more significant than having them

based solidly in just one service, because of the way we

deploy and because of the diversity of our deployments.

General Cartwright went on to say the following:

Point number two is, in the production of the F-35 Joint

Strike Fighter, the first aircraft variant will support the

Air Force replacement of their F-16s and F-15s. It is a very

capable aircraft. It is 10 years newer--

``It'' being the F-35 Joint Strike Fighter--

It is 10 years newer in advancement in avionics and

capabilities in comparison to the F-22. It is a better, more

rounded, capable fighter.

Well, that F-35 is in production now. In fact, there are 30 being paid for and bought and produced in the very budget for the Department of Defense which is before this body now.

President Eisenhower noted, from time to time, the military industrial complex will push for more and more, more than is needed. In this case, however--in this case--the senior military leadership is not pushing for more.

Finally, to quote again from Secretary Gates's speech last week--this was in Chicago at the Economic Club--

The grim reality is that with regard to the budget we have

entered a zero-sum game. Every defense dollar diverted to

fund excess or unneeded capacity--whether for more F-22s or

anything else--is a dollar that will be unavailable to take

care of our people, to win the wars we are in, to deter

potential adversaries, and to improve capabilities in areas

where America is underinvested and potentially vulnerable.

Secretary Gates said:

That is a risk I cannot accept and I will not take.

So, Mr. President, the time has come to end F-22 production at 187 F- 22As. That is all we need to buy, that is all we can afford to buy, and that is all we should buy.

Mr. President, I yield the floor and reserve the remainder of our time.

Recognition of the Minority Leader

Madam President, I yield myself 1 minute to give the figures relative to the F-35 production, which are the Pentagon figures. I am not sure where my good friend from Connecticut got his figures on future F-35 production. But the figures from the Pentagon are that there are 30 in this year's budget; in next year's budget, fiscal year 2011, they plan 70 F-35s; in fiscal year 2012, 109 F-35s; in fiscal year 2013, 119 F-35s. Those are far different than the numbers which my friend from Connecticut just gave.

I am not sure the source of his numbers. Perhaps he can give us those numbers at a later time.

At this point, I yield 5 minutes to the Senator from Delaware.

Madam President, how much time remains on our side?

I yield to the Senator from Arizona as much of that time as he requires.

How much time remains for the proponents?

I ask Senator Wyden, how much time does he need?

I yield 10 minutes to Senator Wyden.

Madam President, I am not sure how many other Senators want to speak or whether the opponents have speakers remaining on their side.

We would like to be at the end of the line, Senator McCain and I.

Madam President, how much time remains?

How much time do the opponents have?

Well, if the Senator from Arizona would go, and then Senator Dodd, and then myself.

Madam President, I yield 2 additional minutes to the Senator from Connecticut.

Madam President, how much time remains?

Madam President, I yield 2 minutes to the Senator from Delaware.

Madam President, in terms of the alleged gap, there is no gap. The QDR said we should be building fighters, F-22 production, into fiscal year 2010. As a matter of fact, what we are now doing is exceeding that production with F-35s. We have 30 F-35s in this fiscal year 2010 budget. There is no gap in fighter production.

As to whether the F-35 is a capable fighter, let me just read from what Secretary Gates says:

The F-35 is 10 to 15 years newer than the F-22, carries a

much larger suite of weapons, and is superior in a number of

areas--most importantly, air-to-ground missions such as

destroying sophisticated enemy air defenses. It is a

versatile aircraft, less than half the total cost of the F-

22. . . .

The F-22 is costing an awful lot more than has been represented here because they are asking now, if this amendment is defeated, that we would be spending $1.75 billion for seven F-22s, which is approximately $250 million a copy for the ones the opponents of this amendment want to build this year.

The President of the United States, the last President of the United States, the previous one; two Secretaries of Defense, this one and the previous one; two Chairmen of the Joint Chiefs of Staff, and the Secretary of the Air Force and the Chief of Staff of the Air Force say it is time to end production of the F-22 to move into greater production of the F-35 which will serve three services, not just one. If not now, when? If not now, when? When will we end production of a weapons system, if not now, when we have both President Obama and President Bush trying to end it, Secretaries of Defense trying to end it, Chairmen of the Joint Chiefs trying to end the production of the F- 22? We must now do what is sensible, that which is requested by Secretary Gates, not because he is saluting the Commander in Chief, as has been suggested. He is not just saluting the Commander in Chief; he feels deep in his gut that we must change the way we do business. We must finally bring some of these systems to an end. That is why Secretary Gates so passionately believes we must bring production of the F-22 to an end and move into greater production of the F-35--more F-35s produced in this budget than would be produced of the F-22 if this amendment is defeated.

Madam President, I don't know if there is any more time. If there is, I yield back the remainder of my time, and I ask for the yeas and nays.

Madam President, I move to reconsider the vote.

Mr. President, let me commend Senator Lieberman and others who support this amendment. We in the Armed Services Committee are very supportive of previous increases; indeed, we led the way on some of them. Because of the stress on the Army and the number of commitments which had been made in Iraq and Afghanistan, we must give the kind of support to our troops they deserve and the American people want us to give.

One of the ways we can reduce some of the stress is by increasing the end strength so the dwell time is more sufficient and there are other positive spinoffs as well from this kind of increase in the authorized end strength.

The Secretary made a very powerful speech the other day when he called for an increase of 22,000, I believe, in the end strength. That end strength is temporary, it is almost as large as this--not quite; this is 30,000, but this is surely in the ballpark. It is appropriate. It is authority, it is not mandatory, and I think it is a very positive signal to send to our men and women in uniform and to their families. I very much support the amendment.

First of all, let me commend the Senator from Maryland on his amendment. I support it. I hope it can be cleared or placed in order so that we can adopt it on a rollcall if it cannot be cleared.

Amendment No. 1528

I ask unanimous consent that we now proceed to a vote on the Lieberman amendment, a rollcall vote on the Lieberman amendment.

I move to reconsider the vote, and I move to lay that motion on the table.

The motion to lay on the table was agreed to.

Mr. President, I ask unanimous consent that Senator Leahy be added as a cosponsor on the amendment which we just adopted, the Lieberman amendment.

Mr. President, I ask unanimous consent that the Senate proceed to a period of morning business, with Senator Hatch to be recognized for 15 minutes, then Senator Murray for 8 minutes, then Senator Burris for 6 minutes, and Senator Brown for 10 minutes.