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Table of Contents

• IRS allowed to apply erroneously paid self employment tax to underwithheld FICA tax
• Golden parachute rules analyzed for sale of a division
• Million dollar compensation cap doesn’t apply to compensation under agreement made before IPO
• 2009 is half over. How is it going?
• Need help with refundable minimum tax credit?
• Half-price offer for 2009 Edition of Secrets of Tax Planning for Employee Stock Options expires July 15!
• Michael Gray presents "Secrets of Tax Planning for Employee Stock Options" telephone seminar on July 30
• Need help finishing an extended 2008 income tax return?
• Have you thanked Reform AMT?
• Questions and Answers
• Do you know about our other newsletters?
• IRS Circular 230 Disclosure
• Consult with a tax advisor
• Subscribe to Michael Gray, CPA's Option Alert!

IRS allowed to apply erroneously paid self employment tax to underwithheld FICA tax

Alan Beane exercised non-qualified stock options during 1997 and 1998. His employer didn't report the income from exercising the options on his Forms W-2 and didn't withhold income taxes or FICA taxes when the options were exercised.

Mr. Beane initially didn't report the income from exercising the options on his 1997 income tax return, and underreported the income on an amended return. He also underreported the income from exercising the options on his 1998 federal income tax return, and erroneously reported the income on Schedule C and paid self- employment tax on the income.

Mr. Beane asserted that he should be refunded the self-employment tax because the FICA tax should have been assessed against his employer. The IRS countered that, under Internal Revenue Code Section 6521(a), if the social security income is incorrectly reported, offsetting self-employment taxes paid against the employee share of the tax is permitted.

The Tax Court agreed with the IRS.

Mr. Beane also claimed that a penalty for underpayment of tax should not apply because an overpayment of his 2009 income taxes should be offset against his 2008 income tax. The Court found that the 2009 overpayment wasn't available when the 2008 income tax return was due, so the underpayment should apply to the 2008 tax due before applying the overpayment from 2009.

(Beane v. Commissioner, T.C. Memo. 2009-152.)

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Golden parachute rules analyzed for sale of a division

A privately-held company granted stock options to its executives.

The option price for its Class A stock was at book value, and the company was obligated to repurchase the Class A stock at book value.

The option price for Class B stock was at par value and the company was obligated to repurchase the Class B stock at par value.

A vesting schedule applied to the options.

The company proposed to sell one of its divisions to an unrelated company and that the remaining operations would continue in a new company (Newco). The distribution of Newco stock to its stockholders would be a taxable transaction.

The company proposed to remove the price restrictions of book value from its Class A shares and to accelerate vesting of the shares so they could be purchased at fair market value from the employees.

Since there would be a change of ownership for a substantial portion of the company's assets, the Golden Parachute rules would apply, resulting in limiting tax deductions for the company and penalty taxes for the employees.

The IRS ruled:

1. The removal of the book value restriction for the Class A common stock is a noncompensatory cancellation of a nonlapse restriction under Internal Revenue Code Section 83.
2. No portion of the transaction consideration payable with respect to the vested Class A common stock will constitute a parachute payment.
3. The acceleration of the vesting of unvested stock rights results in a parachute payment. The book value restriction will not be considered in valuing the payment.

(Letter Ruling 200923031, 2/2/2009.)

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Million dollar compensation cap doesn't apply to compensation under agreement made before IPO

The IRS privately ruled that compensation paid by a publicly held corporation according to an employment agreement made before the corporation was publicly held before the expiration of a reliance period as disclosed in its offering prospectus was not subject to the million dollar limit for compensation paid by a publicly-held corporation.

(Letter Ruling 200919020, 2/2/2009.)

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2009 is half over. How is it going?

Time is passing quickly. (Again!) How is 2009 going? Should we be meeting to discuss your option transactions or planned transactions? Do you need to have an estate plan created or reviewed? To make an appointment, call Dawn Siemer at 408-918- 3162 on Monday, Wednesday or Friday.

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Need help with refundable minimum tax credit?

Some people are finding reconstructing their minimum tax credit information a challenging task. They might have incurred the AMT when they exercised an incentive stock option back in 1999 and 2000 and didn't pick up the carryover information for the credit in the later years.

Effective for 2008, you might be able to get a tax refund for the minimum tax credit plus penalties and interest paid to the IRS relating to an alternative minimum tax for exercise of an incentive stock option.

We understand the mechanics of how the alternative minimum tax works, so we can help you reconstruct this information.

We can claim the refundable minimum tax credit on an amended 2008 federal return or an extended 2008 federal return.

To schedule a complimentary half-hour consultation with no obligation, call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Half-price offer for 2009 Edition of Secrets of Tax Planning For Employee Stock Options expires July 15!

Our half-price offer for the updated 2009 Edition of Secrets of Tax Planning For Employee Stock Options will expire soon. This book is up to date with recently passed legislation, such as the alternative minimum tax credit.

The retail price of the book will be $199.95. If you order by July 15, 2009, you can get the book for half price, $99.98, plus $15.00 shipping and handling and $10.64 California sales tax, if applicable.

For more information, go to www.employeestockoptionsecrets.com. You can also call your order to Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Michael Gray presents "Secrets of Tax Planning For Employee Stock Options" telephone seminar on July 30

Michael Gray, CPA will present a live telephone "Secrets of Tax Planning For Employee Stock Options" seminar on Thursday, July 30, 2009.

For details and a reservation form, go to www.stockoptionadvisors.com/teleconference.pdf. You can also call your reservation to Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Need help finishing an extended 2008 income tax return?

Unlike some commercial tax return preparation companies, we're here all year.

If you exercised employee stock options or sold option stock during 2008, you should seriously consider getting help with your returns. We have seen some crazy errors when people prepare their own income tax returns using off-the-shelf software.

To schedule a complimentary half-hour consultation with no obligation, call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Have you thanked Reform AMT?

It's exciting to finally recover minimum tax credits from ISO exercises that have been "locked up" for years.

I hope you celebrate when you receive your refund check.

I also hope you remember that you received your refund as the result of a nine-year effort by volunteers at Reform AMT. In the process, they incurred significant lobbying expenses that still are unpaid.

Please express your appreciation with a non-deductible donation at http://www.reformamt.org.

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Questions and Answers

Please send your questions to mgray@stockoptionadvisors.com. I will answer selected questions in this newsletter.

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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 now offering our real estate tax newsletter, Michael Gray, CPA's Real Estate Tax Letter, free of charge. Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. To subscribe and read 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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Subscribe to Michael Gray, CPA's Option Alert!

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.

(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.)