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Table of Contents

• Not much time left for year-end tax planning!
• IRS gives short time to fix stock option backdating issues
• SEC Insider Rules have changed
• Tax Court holds against another ISO shareholder
• Do you know about our other newsletters?
• IRS Circular 230 Disclosure
• Consult with a tax advisor
• Subscribe to Michael Gray, CPA's Option Alert

Happy Thanksgiving!

Not much time left for year-end planning - make your reservation now!

One might think that with two months left, there is plenty of time to get ready for the end of the year, but think again. I'll be gone from November 2 until November 16. Then comes Thanksgiving weekend on November 23 and 24. Thi and I will be at a Dan Kennedy program on December 1 and 2 and tax update classes on December 18 and 19, and Christmas is Monday, December 25.

That leaves a very limited calendar for tax consultations. If you need a tax consultation appointment, call Dawn Siemer at 408- 918-3162 to reserve your time now (before she disappears starting Thanksgiving weekend)!

IRS gives short time to fix stock option backdating issues

The IRS has further extended the time to make conforming changes for most non-qualified deferred compensation plans. The final regulations will not become effective until January 1, 2008.

However, transition relief has not been extended for any stock option or stock appreciation right that:

1. was granted with respect to stock of a corporation that was publicly traded when the options or rights were issued;



2. was granted to a person who, as of the date of grant, was subject to the disclosure requirements under section 16(a) of the Securities Exchange Act for the issuer of the options or rights; and



3. with respect to the option or right, the corporation has either reported or reasonably expects to report a financial expense due to the option or right with an exercise price lower than the fair market value of the underlying stock that was not timely reported on financial statements or reports relating to the period the options or rights were issued.

The issuing corporations have until December 31, 2006 to bring the options or rights into compliance with Internal Revenue Code § 409A without being subject to the 20% penalty.

If this situation applies to you, you should already be working on correcting it with your tax and legal counsel.

(Notice 2006-79.)

SEC Insider Rules have changed

The SEC has issued changes to Rule 16b-3 that were effective on August 15, 2006. Since this is not a legal journal, I won't go into the details, but recommend that you consult with legal counsel about how they apply to you.

Under these new rules, the waiting period for insider shares to vest under Internal Revenue Code Section 83(a) may be eliminated.

If you are a corporate insider, consult with your tax and legal counsel.

Tax Court holds against another ISO shareholder

Jonathan Palahnuk received incentive stock options as an employee of Metromedia Fiber Network, Inc.

He exercised options during 2000, and reported $2,086,009 of income from the ISOs on his 2000 AMT schedule.

During 2001, Palahnuk sold the ISO shares. He reported $148,461 of regular tax capital gains and an AMT loss of $1,937,547 from the sale of the Metromedia shares.

Palahnuk claimed the AMT loss should not be subject to the $3,000 capital loss limitation and should be allowed as a net operating loss carryback.

The Tax Court cited previous decisions Allen v. Commissioner (118 T.C. 1, 5 (2002)), Merlo v. Commissioner, Accord Montgomery v. Commissioner, and Spitz v. Commissioner in holding against the taxpayers.

(Palahnuk v. Commissioner, 127 T.C. No. 9 (2006))

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

We do not provide free technical support for TurboTax!

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA's Tax & Business Insight.

We are starting a newsletter devoted to real estate tax issues - Michael Gray, CPA's Real Estate Tax Letter. Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. The subscription rate is $19.95 per month. For a sample issue, visit realestatetaxletter.com.

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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.

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 www.amazon.com or www.barnesandnoble.com or buy it at Stacey’s Books.)

P.S.

To receive the next issue of Michael Gray, CPA's Option Alert with more employee stock option tax developments and answers to questions from our readers automatically via email, subscribe by filling out the form below.

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