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By Michael Gray

Table of Contents

• Third quarter estimated tax payment is due
• IRS issues final Golden Parachute payments regulations
• Legislation for expatriated corporations includes an excise tax
• Regulations include stock options in cost sharing compuations
• Questions and Answers
  • Did you ever amend a prior return to change stock sold TO ISOs?
  • How can I sell my stock?
• Consult with a tax advisor

Third quarter estimated tax payment is due

Estimated tax payments for individuals for the third quarter, 2003 are due September 15.

With the see-saw of events during the last few years, many taxpayers have decided to not base their estimated tax and withholding on the last year's tax. The rising stock market and tax breaks for long-term capital gains in the new federal tax law are promoting transactions that will result in higher income taxes for 2003.

Reconsider whether you should make estimated tax payments and the amounts of those payments for changes in your situation during the year.

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IRS issues final Golden Parachute payments regulations and related valuation guidance for employee stock options

Golden Parachute payments are compensation items paid to certain disqualified persons in connection with a change of ownership of a corporation. No deduction is allowed to the corporation for the payments, and the person who receives the payments is subject to a 20% excise tax.

Domestic corporations that are eligible to be S corporations are not subject to the Golden Parachute rules.

Disqualified persons include corporate officers and certain highly-compensated individuals.

The IRS has issued final regulations explaining the rules for Golden Parachute payments. (T.D. 9083.) The regulations are effective for transactions on or after January 1, 2004. The regulations make it clear that qualified and non-qualified stock options granted in connection with the change of ownership or control are includable in computing Golden Parachute payments. The options are includable when the options become vested, not when they are exercised. Options should be valued based on the facts and circumstances.

The IRS has also issued safe-harbor guidance for how to compute the value of the options. According to the IRS, the value should be computed using the Black-Scholes method and adjusted for the volatility of the stock. The IRS guidance includes an adjustment table. (Revenue Procedure 2003-68.)

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Proposed legislation includes an excise tax for options of expatriated corporations

In response to the rejection by the World Trade Organization of the exclusion of extraterritorial income from U.S. tax as violating European Union treaty requirements, House Ways and Means Chairman William M. Thomas has introduced the American Jobs Creation Act of 2003, HR 2896.

In addition to repealing the exclusion for extra-territorial income, the proposed legislation includes a number of tax incentives for U.S. businesses. It also includes severe penalties for failure to make mandated disclosures of "listed transactions" and certain tax shelter information.

Certain employee stock options of expatriated corporations owned by corporate insiders subject to the Securities Exchange Act of 1934, Section 16(a) and members of their families that otherwise would be exempt from income tax will be subject to a 15% excise tax. The purpose of this provision is to equalize the treatment of corporate executives and insiders with the treatment of shareholders, who would be subject to a 15% capital gains tax on their stock when a company inverts (becomes expatriated).

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Final regulations include stock options in cost sharing computations for off-shore operations

The IRS has issued final regulations for making cost-sharing arrangement computations for allocating expenses between U.S. and off-shore operations under Internal Revenue Code Section 482.

Under the new regulations, all stock-based compensation, including restricted stock, nonstatutory stock options, ISOs, ESPPs, stock appreciation rights and phantom stock should be included as costs to be allocated. The determination of whether stock-based compensation is related to the development of intangibles covered by the qualified cost sharing arrangement is made as of the date the stock-based compensation is granted.

The measurement and timing of operating expenses generally follows the rules that apply to computing deductions allowable on the corporate income tax return. However, the rules excluding or postponing the recognition of income for ISOs and ESPPs are disregarded, and they are treated as non-qualified options for this computation.

Certain corporations whose stock is traded in a U.S. public market may elect to use the amounts reported on their financial statements as an expense relating to granting stock options for making the cost-sharing computations. (T.D. 9088.)

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Questions and Answers

Question

Did you ever amend a prior return to change stock sold "TO" ISO stock in order report ordinary income and avoid the AMT preference item. We held both ISO and regular stock at the time of sale. Can we go back and change our 2000 income tax return?

Answer

Possibly, but probably not.

The sequence of stock sales is the earliest acquired is considered sold first, unless you designate to your broker that you are selling an identified block of stock.

If you didn't make an identified sale and bought the non-ISO shares after you exercised your ISO and erroneously reported the later-acquired shares as sold first, you can go back to correct the error.

Question

I own 21 shares of stock from my former employer. The stock is traded on NASDAQ. I don't know how to sell it. Any suggestions?

Answer

If the stock is in certificate form, take it to a stock broker. If the stock is in a "street account" with a brokerage company, call a representative of the brokerage company. Helping sell publicly traded stock is their business.

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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".

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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.

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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.

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(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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