Tesla Faces $100 Billion Tax Bill in Musk Pay Package Battle

Tesla is facing a potential tax and accounting nightmare in its ongoing legal battle to reinstate Elon Musk's massive compensation package, reports the Financial Times. The company and its CEO could face over $100 billion in tax and accounting charges if the electric vehicle maker fails to successfully appeal a Delaware judge's ruling that struck down Musk's historic pay package.

Delaware judge Kathaleen McCormick recently denied Tesla's second attempt to reapprove the 2018 compensation plan, which granted Musk the largest package of stock options in history, worth $56 billion at the time and exceeding $129 billion at current share prices. McCormick previously rejected the original deal, citing concerns about fairness and the board's apparent deference to Musk.

This leaves Tesla's board with a difficult choice: pursue a lengthy and uncertain appeal to Delaware's Supreme Court or risk triggering significant tax and accounting consequences by awarding Musk a new compensation package with similar terms.

A new package could result in a $50 billion-plus accounting charge and a hefty tax bill for Musk due to the “in-the-money” nature of the options, meaning they have already exceeded their initial targets. Tesla had previously warned shareholders that reissuing the options would result in a compensation-related accounting charge of over $25 billion. With Tesla's valuation more than doubling since then, this potential charge could be significantly higher.

The tax implications for Musk are also substantial. If Tesla wins its appeal, Musk would pay the standard federal tax rate of 37% when he exercises the original 2018 options. However, if a new package with similar terms is awarded, the options would be considered "in-the-money" from the outset, triggering immediate tax liability under section 409A of the tax code, which governs deferred compensation.

This could result in a 57% tax rate on the difference between the strike price and the current value of the stock, regardless of whether Musk chooses to exercise the options. At current prices, this could translate to a tax bill approaching $70 billion.

"It is very simple. If you grant options that are ‘in the money,’ which they clearly are now, all kinds of bad things happen," said tax attorney Schuyler Moore to the Financial Times.

"The tax issue here is straightforward. If you give him the same non-409A-compliant package now, you face acceleration of the income tax at the point of receipt rather than when he exercises, with the penalty rate on top," said tax attorney Bradford Cohen. "It could be a very expensive, unfortunate mistake."

While Musk has previously stated that he paid the "most taxes ever in history for an individual" in 2021, this potential tax liability could significantly exceed those figures.

The Tesla board also has the option of awarding Musk shares instead of options, which would be subject to a lower tax rate. However, this would still result in a substantial tax bill and could potentially dilute shareholder value if Musk were to sell a large portion of his shares to cover his tax obligations.

The potential tax and accounting implications highlight the significant financial stakes involved in Tesla's ongoing legal battle. The outcome will have far-reaching consequences for both the company and its CEO, potentially reshaping the landscape of executive compensation in the process.