Michael Gray, CPA’s Option Alert #59

An irregular alert for issues relating to employee stock options

September 6, 2008
© 2008 by Michael Gray, CPA
ISSN 1931-2768

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Third quarter estimated tax payments are due September 15

Third quarter estimated tax payments for calendar year taxpayers, including most individuals, are due September 15. If your withholding won’t be enough to avoid penalties for underpayment of estimated tax, you should be making estimated tax payments based on last year’s tax liability or an annualized computation of this year’s tax. Call Dawn Siemer weekday afternoons at 408-918-3162 to make an appointment if you need help.

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Tax planning and the Presidential election

Barack Obama has indicated he will seek tax increases for high- income taxpayers if he is elected as President of the United States. You might want to accelerate income to 2008, which may be subject to lower income tax rates. Remember, the wash sale rules do not apply to capital gains, so you can sell assets and buy similar ones back to pay taxes for long-term capital gains at the 15% tax rate for 2008. (Do not do this for disqualifying ISO dispositions without consulting a tax advisor.) Consider electing to not use the installment sale method for 2008 sales.

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Missed the deadline for our Employee Stock Options book offer? Here’s another offer

For readers of this newsletter who missed our introductory offer for our Employee Stock Options – Executive Tax Planning book, you can still buy it from us at a 25% discount. Find out more at the Silicon Valley Publishing company’s website or call Dawn Siemer weekday afternoons at 408-918-3162.

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AMT liability from ISO exercise relief may be coming

The IRS has agreed to suspend collection activity for unpaid back- year AMT liabilities resulting from the exercise of incentive stock options until after September 30, 2008. There is proposed legislation that many representatives in Congress believe will soon be passed that would abate the tax liability and related penalties and interest. The proposal would also accelerate the ability to get refundable credits for unused minimum tax credits in some cases. There is bipartisan support for the proposal. Stand by for more developments, which will be explained in detail in this newsletter.

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Taxpayer loses appeal for AMT NOL deduction

In a memorandum decision that can’t be cited as authority, the Ninth Circuit Court of Appeals rejected the appeal of Paul Norman in a summary judgment by the Tax Court. Mr. Norman said he should be able to claim a net operating loss deduction for alternative minimum tax reporting when he sold stock received when he exercised an incentive stock option, so he could carry the loss back to recover the AMT he paid for the year of exercise. The Ninth Circuit agreed with the Tax Court that the loss from the sale of the stock was a capital loss for AMT reporting and ineligible for a carryback.

(Norman v. United States, KTC 2008-355 (9th Circuit, June 3, 2008.))

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Taxpayer loses appeal. Section 83(b) election was valid and AMT NOL deduction denied

Anthony Kadillac lost an appeal to the Ninth Circuit Court of Appeals.

He claimed his Section 83(b) election should be held invalid under a claim of right theory, since he sold shares at a loss and other nonvested shares were forfeited when he lost his job.

Mr. Kadillac also made an alternative claim for an alternative minimum tax net operating loss deduction.

The Court rejected these claims. The Section 83(b) election was intended for the uncertainties that Mr. Kadillac said should render the election invalid. The loss from the sale of shares was a capital loss, and therefore ineligible to be claimed for a net operating loss deduction.

Kadillac claimed an escrow arrangement where his employer held his unvested shares meant there was an incomplete transfer. The Court said IRS regulations supported such an arrangement for unvested property.

(Kadillak v. Commissioner, KTC 2008-350 (9th Circuit, July 29, 2008.))

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IRS makes processing errors for AMT forms

The Treasury Inspector General for Tax Administration (TIGTA) has found the IRS made processing errors transcribing information from paper AMT forms.

The error rate was about 20%. These errors could be probably be avoided with electronic filing.

In 2006, the IRS identified about 61,000 income tax returns where taxpayers appeared to owe an AMT but didn’t report it. Another 165,000 returns had discrepancies between the AMT shown by the taxpayer and the amount calculated by the IRS.

The IRS has pledged to emphasize in its training programs the effect of the AMT on taxpayers and the correct processing of returns containing an AMT.

It’s a sad state of affairs that neither the taxpayers who prepare their own income tax returns nor the IRS that administers the tax laws understands what is becoming a pervasive tax.

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Stock option adjustments for a corporate split up are OK’d

In a private letter ruling, the IRS approved issuing replacement ISOs and NQOs for employees of two corporations resulting from a split up of a previous company. This is a worthwhile “road map” ruling to study for corporations contemplating a similar transaction.

(Letter Ruling 200835019, May 19, 2008.)

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Questions and Answers

To our readers:

The answers to many of your questions can be found in our free reports, “Executive Tax and Financial Planning For Non-Qualified Stock Options” at and “Executive Tax and Financial Planning For Incentive Stock Options.”


My wife is exercising her incentive stock options in a cashless transaction. She is exercising options for 1,000 shares. 500 of the shares will be sold to pay the option price. The company has told her that the transaction is a disqualifying disposition that will be reported on her Form W-2.

Is the disqualifying disposition of 500 shares or all of the shares? Will income be reported for 500 shares on her W-2, or all of the shares?


There is only a disqualifying disposition of the 500 shares that are sold to pay for exercising the option. Only ordinary income relating to the disqualifying disposition of the 500 shares should be reported on your wife’s Form W-2.

Consider getting help with preparing your 2008 income tax returns.

Michael Gray regrets he can no longer answer emails personally. He 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!

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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

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