Michael Gray, CPA’s Option Alert #74

An irregular alert for issues relating to employee stock options

November 6, 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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Happy Thanksgiving!

Thanksgiving will be celebrated on November 26, this year. I hope you have many blessings to be thankful for.

With so much unemployment this year, many are less fortunate. Give generously to your local relief agencies.

I hope you are able to celebrate Thanksgiving with your family and friends. If you travel, travel safely.

Thanksgiving is the favorite holiday of my grandson, Panch Baker, because it is the one holiday when he has both sets of grandparents and all of his aunts and uncles together.

For our clients, thank you for your business. The purpose of our business is to serve you, and our existence depends on you.

For our readers, thank you for subscribing to our newsletter. We hope you will continue to find reading it enjoyable and rewarding.

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Now is the time for year-end planning

Now that Halloween is past, we know the year will soon be over. Michael Gray and Dawn Siemer will be taking a family vacation from November 9 through 13, and of course we will be closed on Thanksgiving and the day after and on Christmas Eve and Christmas Day. That means there will be a limited number of year-end planning appointments available. Make your reservation now by calling Dawn Siemer at 408-918-3162.

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California withholding increases November 1

New California withholding tables have been issued that increase withholding for California wages by 10%. This is not a tax increase, and you will not be penalized if you pay enough tax but decrease your withholding by submitting a new Form DE-4 to claim additional exemptions.

If your situation for 2009 is about the same as for 2008, you can base your withholding on the tax from last year’s income tax return. If your adjusted gross income for 2008 was $150,000 or more, you can base your withholding on 110% of the tax from your 2008 income tax return.

The increased withholding is essentially an interest-free loan to the State of California.

If you exercise a non-qualified stock option, the “flat rate” withholding is increased from 9.3% to 10.23%. The only way to reduce this amount is to reduce the withholding for your other wages.

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Payments to employees of former subsidiary were capital contributions

In a Chief Counsel ruling, the IRS has said that payments to employees of a former subsidiary with respect to their nonqualified stock options should be treated by the former parent corporation as capital contributions. The parent corporation lost control of the subsidiary when it went bankrupt and its stock was issued to its creditors.

The payments were made in lieu of issuing stock for the exercise of the stock options.

As a result, the capital loss of the parent for worthless stock will be increased.

The former subsidiary should report the wages taxable to the employees on their W-2 forms and claim a tax deduction for the compensation paid.

(IRS Letter Ruling 200942038, June 26, 2009.)

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Research expense deduction disallowed for exercise of qualified stock options

The IRS Chief Counsel has issued a field attorney’s advice disallowing deductions as research expenses for the exercise of qualified stock options (incentive stock options and employee stock purchase plans).

Under Internal Revenue Code Section 421, no deduction is allowed under Section 162 as an ordinary and necessary business expense for the exercise of an incentive stock option or employee stock purchase plan unless there is a disqualified disposition. The taxpayer at issue was claiming deductions at exercise when there was no disqualified disposition.

The taxpayer claimed that the disallowance of a deduction under Section 162 as an ordinary and necessary business expense did not preclude a deduction under another Section 174 as a research deduction.

The IRS responded that the legislative history indicated that a deduction is not allowed under Section 174. The amount of the spread between the fair market value at exercise over the option price isn’t a “research or experimental expenditure”.

(FAA 20094301F, October 26, 2009.)

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Financial Insider Weekly broadcast schedule for November and December

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.

Here are the scheduled interviews for November and December:

November 11, attorney Naomi Comfort, “Handling retirement accounts after a death”
November 18, Kathleen Wright, American Red Cross, “Financial preparation for a disaster”
November 25, attorney John Hopkins, “How and why to promote community giving in your family”
December 1, attorney Frank Doyle, “Estate planning in uncertain times”
December 8, Phil Price, EA, “Retirement plans for closely held businesses”
December 15, Dick Blakely, “Benefits of a family office”
December 22, Tom Oviatt, “Home mortgage developments”
December 29, attorney Bernard Vogel, III, “Choices of forms for conducting closely-held businesses”

Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

Eventually we will offer DVDs of the interviews for sale.

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!

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

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Follow me on Twitter!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

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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 author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

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