Michael Gray, CPA’s Option Alert #100

An irregular alert for issues relating to employee stock options

April 30, 2012
© 2012 by Michael Gray, CPA
ISSN 1931-2768

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

Table of Contents

It’s time for tax planning and working on amended, extended and late income tax returns

Now that April 17 has passed, people are calling wanting a second look at the income tax returns that were filed for possible amended income tax returns. Taxpayers who filed extensions are also looking for help income getting their tax returns done.

If you would like our help, call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5:30 p.m. Pacific Time to make an appointment. Dawn’s telephone number is 408-918-3162.

Return to Table of Contents

Bon voyage!

Janet and I will be on a vacation Panama Canal cruise starting April 28 and returning May 14. I won’t be checking email or voice messages during our vacation. Call Dawn Siemer at (408) 918-3162 to make an appointment to see me when I return.

Return to Table of Contents

Taxpayer’s claim that employer paid taxes for stock options disallowed

John McLaine exercised non-qualified stock options of his employer company in December 1998 and January 1999. The employer didn’t issue a request that he pay required withholding taxes for federal income and employment taxes when the options were exercised, so no income taxes were withheld.

John reinvested the proceeds from sale of the option shares, and lost most of the money on poor investments, including Worldcom stock.

He wasn’t able to pay the balance of taxes with his income tax returns.

The employer company was acquired. The successor company underwent a payroll tax audit, for which taxes were assessed for unpaid Medicare taxes relating to the non-qualified stock options. The IRS filed a claim for additional taxes when the successor company became bankrupt, and the claim was disallowed.

John claimed that his taxes were deemed to be paid in the settlement agreement of the employer with the IRS.

The Tax Court found there was no indication that the employer had paid the income taxes and John certainly hadn’t paid them to the employer.

John’s claim for credit was disallowed, and interest and penalties were assessed for the unpaid tax.

The moral of this story is to see to it that applicable withholding is done. Alternatively, be sure to make estimated tax payments yourself or at least reserve cash funds for payment of your income taxes when they are due.

(John J. McLaine v. Commissioner, 138 T.C. No. 10 (March 13, 2012).)

Return to Table of Contents

Taxpayer’s claim that employer stock received when NQSO exercised was worthless is disallowed

Patrick Sheedy exercised a non-qualified stock option for stock in his employer, People’s Choice Home Loan, Inc., when he left the company during June 2006. If he didn’t, the option would have lapsed.

The company filed an S-11 registration statement about the same time Patrick left the company, anticipating an initial public offering.

Patrick’s shares were subject to a restriction from sale for one year under SEC rule 144.

In March 2007, the company declared bankruptcy.

Patrick claimed that his Form W-2 was in error, because the stock that he received was worthless.

The Tax Court upheld the IRS in finding the Form W-2 was valid, because Patrick only asserted his opinion that the stock was worthless, without any corroborative expert valuation report.

The IRS is entitled to rely on the employer’s report on Form W-2 of the fair market value of the share on the date of exercise when the taxpayer doesn’t substantiate a different value.

When John exercised the option, he represented that he was aware of the company’s business affairs and financial condition, and that he understood that public resale of the sharees wouldn’t be allowed until they were held for at least one year.

A restriction under SEC rule 144 doesn’t postpone the taxability of a transfer of stock when a non-qualified stock option is exercised.

(Patrick J. Sheedy and Karen J. Sheedy v. Commissioner, T.C. Memo. 2012-69 (March 14, 2012).)

Return to Table of Contents

Want to make federal tax payments on the internet?

More people are seeking the convenience of making federal tax payments on the internet. It takes some lead time to get it set up. For details, see my article on the subject at http://www.taxtrimmers.com/payments.shtml

Return to Table of Contents

Financial Insider Weekly broadcast schedule for May and June.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for May and June:

April 27, 2012, Richard H. Lambie, professional fiduciary, “The role of the professional fiduciary”
May 4, 2012, Jann Besson, attorney, Besson and Yarbrough, “Using Medi-CAL benefits for long-term care”
May 11, 2012, William Mahan, attorney, “Mechanics of short sales and foreclosures”
May 18, 2012, William Mahan, attorney, “Tax considerations of short sales and foreclosures”
May 25, 2012, Don Pollard, CLU, ChFC, Advanced Professionals, “Health insurance alternatives for individuals”
June 1, 2012, Don Pollard, CLU, ChFC, Advanced Professionals, “Group medical insurance for small businesses”
June 8, 2012, Michael Desmarais, attorney, “Your rights as a beneficiary”
June 15, 2012, Janis Carney, attorney, Carney, Sugai & Sudweeks, LLP, “Life care planning”
June 22, 2012, Jan is Carney, attorney, Carney, Sugai & Sudweeks, LLP, “Veteran’s Administration benefits for long-term care”
June 29, 2012, Peggy Martin, CLU, ChFC, MSFS, The Family Wealth Consulting Group, “Long-term care insurance”

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 5:30 a.m. on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
  • Monday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Monday at 3:30 p.m.on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
  • Monday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Tuesday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Tuesday at 9:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
  • Wednesday at 8 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
  • Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
  • Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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”
  • Friday at 8:00 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
  • Saturdays at 12:30 p.m. on Comcast channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
  • Saturdays at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton

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!

Return to Table of Contents


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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

Return to Table of Contents

Questions and Answers

Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to mgray@stockoptionadvisors.com.

Question

I exercised a stock option for my employer’s stock and filed a Section 83(b) election form. I am preparing to file my income tax returns, but I’m not sure if I can file them electronically, since I need to attach the Section 83(b) election with the tax returns.

What are my options?

Answer

My tax return preparation software now allows me to send a PDF file with the tax returns when I efile.

You might inquire whether you can do the same.

An alternative is to mail Form 1040X with a copy of the Section 83(b) election as an informational copy.

Return to Table of Contents


Follow me on Twitter, Facebook or LinkedIn!

If you enjoy Twitter, please follow me at 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.

Return to Table of Contents

Check out my blog.

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

Return to Table of Contents

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.

Return to Table of Contents

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.

Return to Table of Contents

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.

Return to Table of Contents

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.

Return to Table of Contents

(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

Comments are closed.