Michael Gray, CPA’s Option Alert #60

An irregular alert for issues relating to employee stock options

October 7, 2008
© 2008 by Michael Gray, CPA
ISSN 1931-2768

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Treat! Congress forgives unpaid AMT for ISO exercises and makes more minimum tax credits refundable!

Taxpayers with unpaid tax liabilities relating to ISO exercises before 2008 just received a major gift from the United States Congress – their unpaid liabilities for alternative minimum taxes (AMT), penalties and interest relating to the exercise of incentive stock options have been forgiven as of October 3, 2008. The minimum tax credits available for the refundable minimum tax credit and the regular minimum tax credit are reduced for the abated AMT. (No double dipping!)

President Bush signed the $700 billion bailout legislation on the same day it was passed – Friday, October 3, 2008. The tax section is called the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008.”

For those who have already paid alternative minimum tax with respect to an ISO exercised before 2008, the legislation will accelerate the refundable AMT credit for tax years beginning after 2007 from 20% of the minimum tax credit that is more than three years old to 50%, and will add 50% of penalties plus interest paid before October 3, 2008 attributable to the AMT for an ISO exercised before 2008 to the minimum tax credit for each 2008 and 2009 (a total of 100% for the two years). The AGI phaseout that previously applied to reduce the refundable AMT credit has been eliminated.

The refundable minimum tax credit is still scheduled to expire after 2012. Hopefully, it will be extended along with the “AMT patch” for the inflation adjustment for the AMT exemptions each year in the future.

Taxpayers who dutifully paid their AMT for their ISO exercises may view this “gift” as a rip-off, but there are other taxpayers who are suffering major emotional and financial distress because they have AMT liabilities that they don’t have the cash to pay – especially from the “dot.com crash” in 2000 and 2001.

Another group that didn’t get relief is individuals who exercised non-qualified stock options before the market crash, some of whom made Section 83(b) elections and were stuck with big tax liabilities.

For more information about refundable AMT credits now available, read our new article, “Refundable Alternative Minimum Tax Credit Available for 2008.”

P.S. Thanks to Angela Hartley, who was involved in working for the relief legislation and wrote emails to me with her thoughts and clarifying observations about it.

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AMT exemptions extended for 2008

The “Tax Extenders” act also included an extension of the increased AMT exemption amounts for 2008. The amount for married persons filing a joint return was $66,250 for 2007 and is $69,950 for 2008, and the amount for single persons was $44,350 for 2007 and is $46,200 for 2008.

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Brokers required to report tax basis for securities sold

A revenue offset provision for another part of the bailout legislation, the “Energy Improvement and Extension Act of 2008”, is to require brokerage firms to report the acquisition dates and tax basis of securities sold, mostly effective for stock sold on or after January 1, 2011 and other securities sold on or after January 1, 2013.

The IRS is expected to write regulations explaining that when securities are transferred from one brokerage account to another, the transferring brokerage firm or other person is to provide information necessary to comply with the new reporting requirements to the recipient brokerage firm.

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Trick! The year is three-fourths over!

Pumpkin patches are springing up, soon to become Christmas tree farms. Many people will be glad to see this year come to a close. Hope you have a Happy and Safe Halloween!

Also remember, as Robert Schuller says in his book title, “Tough times don’t last, but tough people do.”

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Extended calendar year non-corporate income tax returns are due October 15

For calendar year individuals, partnerships, estates and trusts, this is the home stretch. If you need help with an extended income tax return, call Dawn Siemer weekday afternoons at 408-918- 3162 and we’ll try to squeeze you in.

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Michael Gray gives 2008 tax legislation update

Michael Gray will be giving a webcast for CPELink on November 19. (This seminar will cover legislation before the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. That Act will be covered in a later seminar.)

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California budget includes tax provisions

The California state budget, signed by Governor Schwartzenegger on September 23, includes several provisions requiring the acceleration of tax payments. Here are a few highlights:

  • Calendar-year LLCs must pay their 2008 fee on April 15, 2009 and estimated 2009 fee on June 15, 2009.
  • The net operating loss (NOL) deduction is suspended for 2008 and 2009 except for certain small businesses. NOLs may be carried back for two years for losses generated in taxable years beginning on or after January 1, 2011.
  • The first two calendar-year 2009 estimated tax payments for individuals and corporations will be increased to 30% each and the last two reduced to 20%.
  • Individual taxpayers with income over $1 million may not use the 110% of last year’s tax safe harbor for estimated tax payments for 2009.

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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. Fax your order using the action form at the above link or call Dawn Siemer weekday afternoons at 408-918-3162.

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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”and “Executive Tax and Financial Planning For Incentive Stock Options”.


You wrote the exercise date is the date the optionee chooses to exercise, not the settlement date when the stock is issued.

Our attorney disagrees. He states the exercise date is considered to be the settlement date.

Can you substantiate your position?


According to Treasury Regulations Section 1.83-7, the income is taxable “at the time the option is exercised or otherwise disposed of.” “If the option is exercised, Sections 83(a) and 83(b) apply to the transfer of property pursuant to such exercise, and the employee or independent contractor realizes compensation upon such transfer at the time and in the amount determined under section 83(a) and 83(b).”

In Walter v. Commissioner, TC Memo 2007-2, January 3, 2007, the Tax Court ruled that income was taxable when the employee/option holder faxed his notice of exercise and not when he later paid for the shares or when the shares were physically issued. (Since he faxed the notice after business hours, it was considered effective the next business day.) The Tax Court held the Mr. Walter had beneficial ownership of the shares when he exercised the option according to the terms of the plan by giving notice to his employer.

The Tax Court cited Treasury Regulations Section 1.83-3(a)(1), which states, “a transfer of property occurs when a person acquires a beneficial ownership interest in such property.” Under the terms of the option agreement, Mr. Walter received the beneficial ownership of the stock when he exercised the option, not when he later paid the option price or when the stock was physically issued.


Let’s say you exercise an incentive stock option received as an employee in California, and pay a California AMT for exercising the option.

If you move out of California to another state, and then sell the stock after meeting the holding period requirements, is there any way to use the California minimum tax credit?


I don’t think so. Since you are no longer a resident of California, the capital gain won’t be taxable in California and you will have no regular California tax to apply the credit to. I don’t think you will be able to claim a state tax credit for the California tax against the income tax for your (new) state of residence, because the California AMT is different a type of income tax paid for a different taxable year.


Does all of your employee stock option tax advice apply to Washington State?


My federal tax advice should apply to Washington State. Washington State doesn’t have an income tax. There are other Washington taxes that I am not familiar with and that you should consult with a local tax advisor about. Also, the community property rules for Washington State operate differently from our California community property rules, so you should consult with a Washington attorney for your estate planning.

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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