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By Michael Gray

Corrections on two important questions

I do the best I can to give good information to the people who send us questions. Sometimes I learn new lessons because of new developments and people challenging me. It's OK for you to question my answers, and I encourage you to consult with a tax professional for a second opinion.

Please be aware that I have a heavy tax practice, so it's impossible for me to answer all of your questions. Again, please consult with a tax professional for more timely help.

Question. I know that taxes are withheld when you exercise a non-qualified option. Is that still the case after you leave the employer?

Answer. I have changed my mind on this issue. The IRS explanation for proposed regulations issued late in 2001 relating to withholding for ISOs and ESPPs point back to the definition of wages under the regulations.

For income tax withholding, under Treasury regulations section 31.3401(a)-1(a)(5), "Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them."

A similar rule applies under Treasury Regulations Sections 31.3121(a)-1(i) and 31.3306(b)-1(i) for FICA withholding and FUTA taxes.

There is an exception when an option is exercised after the year of death of a deceased employee. (Revenue Ruling 86-109.)

I do not work extensively in the area of payroll tax reporting. Employers should be seeking their own counsel in this area.

Question. Can you make an IRA contribution based on the additional compensation reported for the exercise of a non-qualified option after retirement? Although you previously said yes, another person I consulted with said no, based on Private Letter Ruling 8304088.

Answer. In this ruling, the Internal Revenue Service took the position that the income reported from the exercise of a non-qualified option is deferred compensation. According to Internal Revenue Code Section 219(f)(1), deferred compensation does not qualify for an IRA deduction. Since I haven't found any other guidance, I would rely on the ruling and say no, you shouldn't make an IRA contribution based on the additional compensation from exercising a non-qualified option.

Our web site operation will be changing

We have been offering all of the information on our web site for free. In order for ESOAA to be financially viable, we can't continue this practice. The current newsletter, our special reports and a few questions and answers will continue to be free. The rest of the site will be available on a subscription basis.

The details will be posted at the site.

For advisors, write about becoming an ESOAA member and our study courses for advisors

For an information package, send your name, company, address, email address, telephone number and fax number to Dawn Gray at info@stockoptionadvisors.com.

For option holders, write for information about our self-study course about tax planning for employee stock options

For an information package, send your name, company, address, email address, telephone number and fax number to Dawn Gray at info@stockoptionadvisors.com.

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Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.

The answers to most questions can be found in our course, "Secrets of Tax Planning For Employee Stock Options". For details write Dawn Gray at info@stockoptionadvisors.com.

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

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