Michael Gray, CPA’s Option Alert #80
An irregular alert for issues relating to employee stock options
May 7, 2010
© 2010 by Michael Gray, CPA
ISSN 1931-2768
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- Happy Memorial Day!
- Do you need help?
- Secrets of Tax Planning for Employee Stock Options Live Seminar
- Secrets of Tax Planning for Employee Stock Options Teleseminar
- Silicon Valley Tax Professionals Save the Date!
- IRS loses on allocation of stock option costs to offshore operations
- California passes conformity legislation
- San Francisco broadcasts Financial Insider Weekly
- Financial Insider Weekly broadcast schedule
- Questions and Answers
- Follow me on Twitter, Facebook and LinkIn!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert
Happy Memorial Day!
Monday, May 31 is Memorial Day, the “unofficial” start of summer. Beach parties! Picnics! Barbecues! Have a fun and safe holiday, and remember to honor those who gave their lives for our country.
Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?
Now that April 15 has passed, it’s time to focus on finishing extended income tax returns. Some of our readers have found errors in or are uncomfortable with tax returns that they prepared using tax software or were prepared by other tax return preparation companies. We can provide a second opinion. Others have received notices for tax audits and sometimes can’t get the help they need from their tax return preparer. We can help with all of these. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162 from 9 a.m. to 5:30 p.m.
Secrets of Tax Planning For Employee Stock Options Live Seminar.
Michael Gray, CPA will lead a LIVE hour and a half Secrets of Tax Planning For Employee Stock Options lunchtime seminar in Campbell, California on Friday, June 18.
To register, click here:
http://www.stockoptionadvisors.com/wp-content/uploads/2015/07/liveregistration.pdf
For details, click here:
http://www.stockoptionadvisors.com/wp-content/uploads/2015/07/seminar.pdf
Secrets of Tax Planning For Employee Stock Options Telephone Seminar.
Michael Gray, CPA will lead an hour and a half Secrets of Tax Planning For Employee Stock Options telephone seminar on Friday, June 25 at 1 p.m. Pacific Daylight Time, 2 p.m. Mountain Daylight Time, 3 p.m. Central Daylight Time and 4 p.m. Eastern Daylight Time.
To register, click here:
http://www.stockoptionadvisors.com/wp-content/uploads/2015/07/teleregistration.pdf
For details, click here:
http://www.stockoptionadvisors.com/wp-content/uploads/2015/07/teleconference.pdf
Silicon Valley Tax Professionals Save The Date!
Michael Gray, CPA will be giving a seminar, The Federal Tax Return Preparer Disclosure and Use Rules (IRC Section 7216) – A Threat To Your Practice and Our Profession?, for the Tax Interest Group of the San Jose Silicon Valley CPAs. The seminar will be a breakfast meeting at Lou’s Village in Los Gatos, California starting at 8 a.m. For details, visit the CalCPA web site at www.calcpa.org or call Stephanie Stewart at 408-983-1122.
IRS loses on allocation of stock option costs to offshore operations.
The Ninth Circuit Court of Appeals upheld a Tax Court decision that costs relating to employee stock options are not required to be allocated to an offshore affiliate because such costs would not normally be shared by unrelated parties. The costs represented the excess of the fair market value of the stock on the exercise date over the option price. The costs were incured relating to a joint venture to develop intangible property during tax years 1997, 1998 and 1999. The Court also agreed that the IRS abused its discretion by reallocating those costs, which should entitle the taxpayer to recover litigation expenses.
(Xlinx, Inc., 2010-1 U.S.Tc.C. 50,302, March 22, 2010.)
California passes conformity legislation.
Governor Schwartzenegger signed SB 401(Wolf), the Conformity Act of 2010, on April 12, 2010. This legislation conforms many Calfornia tax laws to the federal tax rules, mostly as of January 1, 2010. The most important exception is the exclusion for cancellation of debt for a principal residence, which we detailed in the Extra edition of this newsletter on April 22, 2010.
Some other conformity items include:
- Increasing the age of dependent children potentially subject to Kiddie tax to age 23.
- Reduction of exclusion from the sale of a principal residence for non-qualified use after 2008, effective for sales after 2009.
- Surviving spouse can claim the $500,000 exclusion for the sale of a principal residence up to two years after the death of the deceased spouse.
- Charitable contribution rules conformed for documentation requirements, qualified appraisals, deduction disallowed for clothing not in good condition, recapture of deduction for property donated to a tax-exempt entity not used for a tax-exempt purpose and special rules for fractional interest donations.
- Basis adjustment to stock of S corporations that made charitable contributions of appreciated property.
The legislation leaves many nonconformity items, including:
- Payments from federal “Cash for Clunkers” program can be taxable income in California.
- Health Savings Accounts
- Increased Section 179 expense deduction
- 50% bonus depreciation
- Fifteen-year depreciation for improvements for restaurants and retail space.
- Any of the changes in the Federal HIRE Act or Health Care Reform Acts
San Francisco broadcasts Financial Insider Weekly.
We are thrilled that the San Francisco public access station, SF Commons, has agreed to broadcast Financial Insider Weekly Fridays at 6:00 p.m. Pacific Time and as streaming video at the same time at www.bavc.org “public access TV”. Thanks to Karen Baker for agreeing to be our local producer in San Francisco.
Financial Insider Weekly broadcast schedule for May and June.
Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 for those cities. The show is broadcast as streaming video at the same time at www.creatvsj.org.
Here are the scheduled interviews for May and June:
- May 12, Don Pollard of Advanced Professionals, “What Federal Health Care Reform means for individuals”
- May 19, Don Pollard of Advanced Professionals, “What Federal Health Care Reform means for employers”
- May 25, Don Pollard of Advanced Professionals, “Choosing a medical insurance policy”
- June 2, John Hopkins, Esq. of Hopkins & Carley, “Succession planning issues for a family business”
- June 9, Hilary Martin of The Family Wealth Consulting Group, TBA
- June 16, Craig Martin of The Family Wealth Consulting Group, “Alternative investments”
- June 23 and 30, TBA
Financial Insider Weekly is also broadcast as follows:
- Sunday at 5 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
- Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
- Thursday at 7 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
- Thursday at 10 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Friday at 4 p.m. on cable channel 15 in Cupertino, Los Altos and Mountain View
- Friday at 4:30 p.m. on Comcast channel 15 in Los Gatos
- Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org “public access TV”.
Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
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!
Questions and Answers
Question
What are the tax implications of making gifts of nonqualified stock options to family members? Is the donee liable for the tax on the difference between the fair market value of the stock at exercise and the option price?
Answer
This is actually a fairly loaded question, and my answer probably won’t be complete.
Since non-qualified stock options don’t have the requirements of incentive stock options that they be held by employees, gifts are apparently permitted. With recent favorable rulings by the IRS, more employers are permitting gifts of NQSOs.
According to Revenue Ruling 98-21, the gift won’t be completed until the shares are vested. The IRS issued guidance in Revenue Procedure 98-34 to value the options using the Black Scholes model or an accepted version of the binomial model. The details are beyond the scope of this explanation. If a gift is made of unvested shares, the valuation is done and the gift reported when the shares vest.
There is no taxable income to the donor when the gift is made. When the donee exercises the option, taxable income is reported by the donor-employee for the excess of the fair market value of the stock over the option price. The donee adds the income reported by the donor to the tax basis of the stock, so it will be the fair market value on the date of exercise. (Letter Ruling 199952012.)
From an estate planning perspective, the employee receives two “benefits” of making lifetime gifts of NQSOs. If the stock value goes up after the gift, the appreciation is shifted from the employee’s estate. In addition, the employee’s estate is reduced by the income taxes related to the exercise. Since the income taxes are a personal liability of the employee, the payment of income taxes should not be a taxable gift.
The employee is taking a risk that the stock could appreciate so much that paying the income tax when the option is exercised could create a financial hardship.
Some transfers of non-qualified stock options can be reportable or listed transactions, so proceed with caution.
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.
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.
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.)