Michael Gray, CPA’s Option Alert #83

An irregular alert for issues relating to employee stock options

August 13, 2010
© 2010 by Michael Gray, CPA
ISSN 1931-2768

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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 5:00 p.m. Pacific Time.

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District Court says same-sex married partners qualify to file joint income tax returns

A federal district court in Massachusetts has ruled that a group of same-sex couples legally married in Massachusetts are eligible to file joint income tax returns. The Court found the Defense of Marriage Act of 1996 (DOMA) violates the equal protection provision of the Fifth Amendment’s due process clause.

Expect to see an appeal.

Meanwhile, same-sex married couples should file separate income tax returns and file refund claims for amended income tax returns as married, filing joint returns.

(Gill, DC Mass., July 8, 2010.)

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Federal district court in California overturns same sex marriage ban

Unless you have been in a cave somewhere, you should know a U.S. District Court in California ruled on August 4 that California’s ban on gay marriages is unconstitutional. This will be another in a string of cases that will eventually end up in the U.S. Supreme Court. Judge Vaughn Walker has set a deadline of Wednesday, August 18 for the Court of Appeals to issue an injunction blocking marriages in California; otherwise they will resume on Thursday, August 19. We are living in interesting times.

(Perry et al. v. Schwarzenegger et. Al (August 4, 2010), U.S. District Court, Northern District of California.)

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Financial Insider Weekly broadcast schedule for August and September.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7 p.m., Pacific Time. Note this is a new broadcast time effective August 17 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 the rest of August and September:

August 18: Scott Haislet, Attorney and CPA, “The Short Sale and Foreclosure Wars”
August 25: David Howard, Attorney and retired CPA, “Information reporting requirements for foreign bank accounts and trusts”
September 1: Jim Beall, California Assembly representative, “California’s State Budget Challenge”
September 8: Mark Ericson, Attorney, “Divorce – California style – the basics”
September 15: Craig Martin, CFP, “Investing in Turbulent Times”
September 22: Craig Martin, CFP, “The role of the fee-only financial planner”
September 29: William Mahan, Attorney, “Short sales and foreclosures – mechanics”

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 with online streaming video at www.bavc.org, “public access TV”.

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on “Past Episodes.”

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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Information return procedure issued for 2010

The IRS has issued specifications for information returns, including electronic filing for 2010. The specifications include Form 3921 for Exercise of a Qualified Incentive Stock Option under Section 442(b) and Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c). 2010 is the first year these forms will be required to be issued to employees.

(Revenue Procedure 2010-26.)

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Questions and Answers

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

Question

Are non-qualified stock options eligible for a basis adjustment after a death? Is the “built-in” income for the options subject to both estate tax and income tax?

Answer

Yes. Non-qualified stock options are reported on the decedent’s estate tax return at the fair market value of the option stock less the option price. (Revenue ruling 53-196.) IRS guidance for gifts of non-qualified stock options indicates that other valuation methods, such as the Black-Scholes model, may be appropriate. (Revenue Procedure 98-34.)

There is no basis adjustment for the amount reported on the decedent’s estate tax return because that amount is considered income with respect of a decedent. (IRC Section 691(c).)

Since the income is taxed twice, Congress enacted an imperfect offset by allowing a tax deduction for estate tax (and generation skipping tax) attributable to accrued income. (IRC Section 691(c)(3).)


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Follow me on Twitter, Facebook or LinkedIn!

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.

I’m also on Facebook and Linked In. You can also follow me on other social media sites, www.facebook.com and www.linkedin.com/in/michaelgraycpa.

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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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.

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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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