Michael Gray, CPA’s Option Alert #72

An irregular alert for issues relating to employee stock options

September 4, 2009
© 2009 by Michael Gray, CPA
ISSN 1931-2768

(If you find this information valuable, please pass it on to a colleague!)

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IRS tells how to determine stock option grant date for performance-based compensation

The Deputy Division Counsel/Deputy Associate Chief Counsel (Employee Benefits) for the IRS has issued an advice memorandum defining the grant date of a stock option relating to performance- based compensation, Internal Revenue Code Section 162(m). (The $1 million compensation limit for publicly-traded corporations.) In addition, the advice memorandum makes it clear that a mispriced option can’t be “cured” by a reimbursement by the employee for the excess of the fair market value on the date of grant or a subsequent adjustment of the option price to fair market value on the date of grant.

An error in determining a stock grant date could result in a stock option being underpriced, disqualifying the option from an exception from the limitations for performance-based compensation. According to the advice memorandum, the date of grant of a stock option is the date the granting corporation completes the corporate action constituting an offer of sale to an individual of a certain number of shares of stock at a fixed price per share. In the case at hand, the dates used by the taxpayers for purposes of accounting restatements were considered to be reasonable to use for the test under Section 162(m). In the future, the advice indicates that the standards under Internal Revenue Code Sections 421 (for qualified stock options) and 409A (deferred compensation) would be applied.

(AM2009-006, July 17, 2009.)

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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 on Mondays, Wednesdays or Fridays at 408-918-3162 to make an appointment if you need help.

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Do you need help preparing extended income tax returns

The extended due date for 2008 calendar year corporate, partnership and fiduciary income tax returns is September 15, 2009. (Note the change for partnerships and fiduciaries! The extended due date for calendar year returns used to be October 15!) The extended due date for 2008 calendar year individual income tax returns is October 15, 2009.

If your 2008 income tax returns aren’t done yet and you are seeking help from a tax return preparer, call Dawn Siemer on Mondays, Wednesdays or Fridays for an appointment at 408-918-3162.

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CreaTV broadcasts rescheduled

My new television show, Financial Insider Weekly, is broadcast on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 if you live in San Jose or Campbell, California. The show is broadcast as streaming video at the same time at www.creatvsj.org. We will also be posting the shows to YouTube. Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

Interviews about short sales and foreclosures with attorney William Mahan of Campbell, California will be broadcast on September 2 and 9. (They were supposed to be broadcast on August 19 and 26.)

The September 16 and 23 shows will feature attorney Robert Temmerman, Jr. The topics are: “I’m an executor. Now what?” and “I’m a trustee. Now what?”

The September 30 show will feature business broker Michael Sipe, discussing preparing to sell a business.

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Foreign bank account reporting further extended

The IRS has announced that taxpayers that only had signature authority over foreign accounts and taxpayers with foreign hedge funds or private equity accounts will have until June 30, 2010 to report accounts maintained in 2008 and earlier years using Form TD F 90-22. (Notice 2009-62.)

(Although California doesn’t have some of the penalties that apply to failure to report this information to the federal government, California has not agreed to waive criminal prosecution for failure to report offshore income. Source – Spidell’s California Taxletter, August 1, 2009.)

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Switzerland to disclose certain UBS account information with IRS

The United States and Switzerland have negotiated a settlement for certain account information to be disclosed when a UBS bank account appears to potentially be related to tax fraud and the like. This is not a blanket agreement. It’s believed about 4,450 accounts meet the criteria out of about 52,000 under scrutiny.

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Questions and Answers


Can an option labeled as an NQSO in an option agreement be treated as an ISO for tax reporting if it meets all of the requirements for an ISO? Obviously we would need to convince the company not to withhold income taxes when the option is exercised, but assuming all of the other requirements are met and a disqualifying disposition does not occur, is there any reason an option issued as an NQSO but meets all of the tax requirements of an ISO cannot be treated as an ISO?


According to Treasury Regulations Section 1.422-2(a)(4), “If the terms of an option, when granted, provide that it will not be treated as an incentive stock option, such option is not treated as an incentive stock option.”

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

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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