In summary, I would say that the tax compact set in the Revenue Act of 1950 was that the employee would get capital gains only at sale and the corporation would forego a tax deduction. For the next 50 years, I would suggest that we change that tax compact. We would continue to allow no taxation at exercise of the option for the employee; the employee would only be taxed at sale. We would permit the corporation to obtain a tax deduction at exercise, which would remove the financial inefficiency. And in exchange for that, the employee, when he is subject to tax, would pay ordinary income on the value at exercise and capital gains on the remainder. Unverified source (2000)