The Ron Speltz Update

Andie Dominick The Register Editorial Board has weighed in on the matter of Ron Speltz, the greedy stock options holder from McLeod USA who exercised options worth $711,118 in 2000 but didn't bother unloading most of the stock until it was worth almost nothing:

In 1992, Ron took a job with McLeodUSA, then a small telecommunications start-up. Compensation included stock options, which he saved for a family nest egg. In 2000, he and June consulted a financial adviser on the best way to cash out the stock. The adviser told them to exercise the stock options and hold the stock for a year to take advantage of low tax rates on capital gains.

Then the stock price fell. What was once worth about $700,000 became worth about $2,000. Yet, they owed more than $250,000 in state and federal taxes due to a quirk in the Alternative Minimum Tax law that targets Incentive Stock Options (ISO-AMT).

When we wrote about the Speltzes and other Iowans in similar straits earlier this year, we received a few letters to the editor stating it was their greed and desire to avoid paying taxes that landed them in such a predicament.

Yes, they tried to take full advantage of tax law. Who doesn’t? But at the end of the day, Americans should not have to pay taxes on money they never collected. It amounts to the U.S. government taking money from people it shouldn’t be entitled to. It’s hard to believe Congress intended such consequences for people whose employers, like McLeod, go bankrupt.

Andie Dominick, who wrote the editorial, left out a lot of information about Speltz.

Mr Speltz would have had options worth around $500,000 in 2000 after he paid his short-term capital gains. He could have sold his options as late as April, 2001, and still been able to pay his taxes and get a small amount of cash.

In addition, The Speltzes cashed out some stock along the way, about $66,000 worth, before eventually cashing it all out at rock bottom value at the year's end (source: Speltz v. Commissioner PDF).

The editorial ends like this:

Here’s a glimmer of hope: When we checked with Sen. Charles Grassley’s office last week, his aide, Jill Kozeny, said the senator was “working to get included some ISO-AMT relief for middle-income taxpayers” in what’s called the “extenders” tax bill being negotiated in a conference committee...

...The senator is the Speltzes’ last hope.

If I'm not mistaken, I don't think the Speltzes would get anything if new legislation passed. A law changing the computation of the "bargain element" as a basis for income certainly wouldn't be made retroactive back to 2000. Who is Andie Dominick and the Register Editorial Board kidding?

Realistically, Congress should eliminate the ability for people vested in company stock option plans from exercising the options but not selling the stock. It's one thing if professional financial traders like Gordon Gekko use this mechanism for whatever reason, but it's not the sort of thing that individuals should be allowed to do.

What's never been fully explained in the press is whether the Speltzes initiated litigation against the financial adviser who gave the advice to exercise the options but not sell the stock. I always got the impression from past articles that the Speltzes didn't, and the consultation was little more than a telephone call. I also got the impression that the Speltzes didn't bother with consulting with any tax advisors during this time, otherwise the Speltzes could have avoided this catastrophe.