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48 days to April 17. Have you made your tax appointment yet?
Tax season is here!
In order for us to prepare your income tax returns and avoid an
extension, we should have most of your information by March 15.
If you haven't received partnership information or some 1099
forms, send us the information you have to get in the system.
When we receive tax information after that date, there is a good
chance that an extension of time to file will be required.
To make an appointment, call Dawn Siemer on a weekday afternoon at 408-918-3162.
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Yes, we do prepare income tax returns!
With our free newsletters and the information we make available
at no charge on the web, some people wonder how we make a living.
We prepare income tax returns and provide tax and business
consulting services. We are accepting selected new clients and
are thrilled when our clients and friends refer their friends,
associates and family members to us. To inquire about becoming a
client of our firm, please call Dawn Siemer at 408-918-3162 or
send an email to her at
mgray@stockoptionadvisors.com. We must receive your tax information
by March 15 to guarantee delivery by April 17.
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No taxable income from grant of transferable NQO
The IRS has privately ruled that the grant of a non-qualified
stock option that may be sold by an employee when it is vested is
not taxable when the option is granted.
According to Treasury Regulations Section 1.83-7(a), Section 83
does not apply to make the transfer (grant) of an option without
a readily ascertainable fair market value currently taxable.
According to Treasury Regulations Section 1.83-7(b), an option is
not considered to have a readily ascertainable fair market value
unless the taxpayer can show that all of the following conditions
exist:
- The option is transfereable by the optionee;
- The option is exercisable immediately in full by the optionee;
- The option or the property subject to the option is not
subject to any restriction or condition (other than a lien or
other condition to secure the payment of the purchase price)
which has a significant effect upon the fair market value of
the option; and
- The fair market value of the option privilege is readily
ascertainable.
If section 83(a) does not apply at the time an option is granted
because the option does not have a readily ascertainable fair
market value, then section 83(a) will not apply until the option
is exercised or otherwise disposed of, even if the fair market
value of the option becomes readily ascertainable before then.
In this case, the IRS found the NQOs would not have a readily
ascertainable fair market value on the grant date, so the grant
would not be currently taxable.
(PLR 200708002, 8/14/2006.)
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NQOs did not have a readily ascertainable
fair market value at grant
In an unpublished opinion which can't be cited as authority, the
9th Circuit Court of Appeals affirmed an unpublished decision of
a Washington state Federal district court that NQOs were not
taxable on the grant date because the fair market value of the
NQOs was not ascertainable.
The options were not transferable by the optionee.
The taxpayer claimed the grant of the options should be taxable
when they were granted during 1996. Evidently, the value
increased significantly after the options were granted.
(Hubbard v. U.S., 9th Circuit Court of Appeals, December 1,
2006.)
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Questions and Answers
Question
I am in an ESPP. I still participate and was invited to tender
shares at $32.50 during 2006. I've been in the ESPP for over two
years and decided to tender all shares. I took a cash
distribution. Do I need to report the entire amount of the
distribution as taxable income or do I report only the capital
gain or loss from the sale?
Answer
Please see the article that we have posted at our web site,
"Employee Stock Purchase Plans compared to Incentive Stock
Options".
The reporting requirements for ESPPs are involved, and you might
need some help preparing your income tax returns this year.
Although the gross receipts are not your income amount, you
probably have made a disqualifying disposition of some of your
ESPP shares, which would result in additional compensation income
that should have been included on your W-2 form.
Question
I have deep in the money ISOs that expire shortly. I am in the
35% tax bracket, and am otherwise subject to a significant AMT
payment already. My choice is to either exercise the ISOs and
pay 2007 AMT (at 28%) or to sell them at market for income this
year. If I exercise and hold for at least one year, could I ever
pay a total of more than the 35% rate for these options?
Answer
Possibly. Especially if the value of the stock goes down.
Please go to our web site and get a copy of our article,
"Incentive Stock Options - Executive Tax and Financial Planning
Strategies".
Question
I currently own ISO shares that I would like to transfer to a
revocable living trust that my wife and I have. Back in February
2004, you indicated that such a transfer would not be a taxable
transaction because "a revocable trust is a disregarded entity
for income tax reporting purposes, so the grantor is considered
to continue to own the stock." Is this answer still current?
Answer
Yes.
Question
When preparing Form 6251, line 28 said "combine lines 1 through
27". "Combine" not "add".
I have values on lines 1, 3, 6 and 7.
Does this mean I should subtract lines 6 and 7 in arriving at the
total?
Answer
Yes. The brackets at lines 6 and 7 mean these are negative
numbers which should be subtracted in arriving at the total.
Question
If we exercise ISOs, do we have to pay state tax for the tax
preference?
Answer
The answer varies by state. If you live in California, the
answer is yes. Check to see if your state has an alternative
minimum tax. If so, then study the instructions for that tax.
Question
My client exercised incentive stock options during November 2006
and then donated the stock to his church. The church immediately
sold the stock.
Does my client still have to report the difference between the
option price and the fair market value on the date of exercise as
a preference item for AMT?
Answer
No. You client has made a disqualifying disposition of the
shares. Ordinary income should be reported on your client's W-2
as additional wages for the disposition. Your client should be
able to claim a charitable contribution for the tax basis of the
shares.
Question
You say in your web site that there is no tax advantage of
exercising NQOs and holding the stock. Aren't capital gains
taxes lower than regular income taxes for most people? What
about the subsequent increases in the stock price?
Answer
My point is you are taxed exactly the same as if you received a
cash bonus and invested the proceeds in company stock. If most
people were given the choice of what to do with the cash, they
would not invest it in a huge block of company stock, which is a
high risk position.
Question
I had an NQSO this year with a gain of $20K and it was reported
on my W-2 as income. I understand I need to fill out a Schedule
D, but do I report it as a gain or loss?
Answer
Report the proceeds from the 1099B form that you received from
your broker as the selling price. Report the option price plus
the income reported on Form W-2 for the option exercise as the
tax basis (tax reporting cost for gain or loss). You should have
either zero income or a small loss on Schedule D.
Question
I exercised ISOs during 2006 from a California employer. I left
the company during July. I received the stock in September, and
I plan to hold the stock until October of 2007, when I should
qualify for long-term capital gain treatment. I plan to move to
another state mid-year and sell the stock after I am no longer a
California resident. Will the gain be subject to California tax?
Answer
The exercise of the ISO is subject to California AMT reporting
for 2006. The sale of the stock will not be subject to
California tax, but you will not receive the benefit of the
California AMT credit, so you will be taxed twice - once by
California and once by your new state of residence -on the gain.
Happy?
Michael Gray regrets he can no longer answer emails personally.
He will answer selected questions in this newsletter.
We do not provide free technical sup