Rushing To Beat the Taxman

By John Greenwald

The feat was worthy of the genie in Aladdin. In the twinkling of an eye, Disney chairman Michael Eisner and president Frank Wells last week turned 7 million stock options into a $263 million profit, one of the richest corporate paydays ever. Eisner alone raked in $202 million. The executives cashed in their options, which were set to expire in 1994, to avoid the tax increases that Bill Clinton has pledged to ask Congress for next year. While both men were staunch Clinton supporters, his proposed tax on wealthy individuals could have cost them an extra $20 million if they had waited to cash in their options. In addition, Disney officials said enactment of Clinton's corporate- tax proposals could also have cost the company as much as $100 million if the executives had hesitated.

Welcome to the great Bill Clinton tax stampede of Christmas 1992. Corporate chieftains, Hollywood celebrities and just plain rich folk are scrambling to claim all the income they can at today's lower rates. "Disney started a trend, and everyone else is going to follow suit," says Stewart Flink, a money manager in Evanston, Illinois. "It's going to be an incredible run to the end of the year."

Executives are hardly the only ones with their eyes on the prize. "My clients are demanding their pay early," says a Los Angeles lawyer whose roster includes singers and actors. "They are requesting recording royalties or percentages of movie takes before Dec. 31. And with no exceptions so far, they are getting them." And why not? "No one is going to argue with a box- office star who wants his one million bucks early," says a former producer. "The goodwill the studio earns by paying him a few months early surely offsets the cash it would get in interest. It's a simple equation."

The name of the game is to stay ahead of Clinton's proposal to raise the top tax rate from 31% to 36% for individuals with an adjusted gross income of $150,000 or more a year and for families earning at least $200,000. Clinton also wants to slap a 10% surtax on income of $1 million or more. And to help curb runaway executive pay, the President-elect may try to bar companies from deducting more than $1 million of an officer's compensation from corporate taxes, which was Disney's biggest worry. Clinton plans to use the money to offset a middle-class tax cut and finance such programs as infrastructure rebuilding and job training.

Clinton aides remained unfazed by the outbreak of tax avoidance, which they said had been expected. "We don't think it changes either the fundamental soundness of our plans or our revenue projections," says Gene Sperling, a senior economic adviser. "It's a onetime, temporary adjustment." If anything, the rush to claim income today could boost federal revenue next year when people pay their 1992 taxes. Nor will revenues fall in later years, Clinton aides argue, if the economy continues to recover. "People have a right to manage their own economic affairs as they see fit, and that's what executives have been doing," says communications director George Stephanopoulos. "But I don't think there are many Disney executives across the country who can do $200 million in stock options overnight. It's an isolated case."

Perhaps so, but the high-profile maneuvering has heightened people's determination to beat the taxman and helped provide a boon to accountants. "We have seen a tremendous increase in inquiries on tax-avoidance strategies since the November election," says Vincent Vaccaro, a tax partner for the accounting firm Coopers & Lybrand. "There has been great interest in seeking to accelerate income into 1992, especially for those in the $200,000 bracket and above."

Executives have been hurrying to use their stock options because shares have surged in recent weeks and holders want to lock in their profits. "Corporations are trying to persuade executives that it's in their best interest to exercise their options and avoid the tax hit next year," says William Wilson, a senior tax planner for the accounting firm Crowe Chizek in South Bend, Indiana. The rush started early at some companies. Chrysler chairman Lee Iacocca and two fellow officers pocketed $5.5 million by cashing in stock options in October, when a Clinton victory seemed almost certain. Iacocca, who plans to retire at the end of the year, earned nearly $2.9 million on his options.

But some experts doubt that plans to limit the tax deductibility of stock options and other types of compensation to $1 million will really curb executive pay. For one thing, corporate officers who have cashed in their options can always go back to their boards to seek new incentives designed to get around the higher taxes. Says compensation specialist Graef Crystal: "What these tax policies will prove, if enacted, is that the answers to excessive corporate compensation lie outside Washington. It will not be until the shareholders begin to demand accountability that executive pay will come into line with reality."

In the meantime, many firms are speeding up annual bonus payments they would normally have made early next year. One major investment house, Morgan Stanley, is allowing employees to take roughly half the value of their bonuses now and the rest in February. In Hollywood, Columbia Pictures and Universal Studios are prepaying actors, directors and producers their share of film profits by Dec. 31. After going gaga for Clinton in the fall campaign, the movie capital is leading the way in grabbing quick gains today while knowing that it may have to share the burden tomorrow.

With reporting by Sally B. Donnelly/Los Angeles and William McWhirter/Chicago