Microsoft Employees Face Tax Nightmare

Seattle bankruptcy attorneys are reaping unexpected profits from employees of Microsoft who exercised stock options and placed the stock in margin accounts, only to watch the value of Microsoft stock plummet while their income tax bill soared.

Some of these Microsoft stock owners found themselves in the unfortunate position of having to sell the shares of stock with depleted value in order to pay off their margin accounts, leaving them with little or no equity and unpaid tax bills on the exercise of the options.

According to a report in the New York Times, accusations are flying regarding the role played by broker Salomon Smith Barney, promoted to Microsoft employees as the "preferred broker." The brokerage firm offered advise to many owners of the Microsoft options, which resulted in the firm earning high margin interest rates while shareholders faced tax bills they couldn't pay. Salomon Smith Barney is the firm hired by Microsoft to administer the stock option program, and there are rumblings among Microsoft employees about a potential conflict of interest.

Microsoft employees tell stories about brokers at Salomon Smith Barney encouraging them to turn their options into stock, then borrow against the options. As the value of the stock fell, the shares of stock were sold to pay off the margin account, leaving the workers broke yet facing huge tax bills.

Mike Fitzgerald, the bankruptcy trustee who oversees Chapter 13 bankruptcy filings for the western district of Washington, estimates he has seen at least 25 recent cases filed by Microsoft employees as a direct result of the way their Microsoft options were handled.

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