Michael Gray, CPA’s Option Alert #130

An irregular alert for issues relating to employee stock options

January 9, 2015
© 2015 by Michael Gray, CPA
ISSN 1931-2768
(If you find this information valuable, please pass it on to a colleague!)

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‘Tis the season to exercise ISOs?

Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the “escape hatch.”

Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There’s no magic solution in these cases – you could be stuck with a significant tax liability.

For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.

Also remember the wash sale rules can spoil an “escape hatch” transaction. You can’t repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.

Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability can also be payable as an estimated tax liability.)

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Employee fails to recharacterize income as capital gain

Brian Brinkley was an employee of Zave Networks, Inc. Zave was acquired by Google, Inc. in a merger. At the time of the merger, Brinkley owned less than 1% of Zave’s stock, despite having an agreement with the company that his share wouldn’t fall below 3%.

Zave agreed to pay Brinkley the difference between about $3 million, representing 3% of the sale proceeds and the $800,000 value of Brinkley’s stock.

Brinkley initially tried to have the entire amount characterized as proceeds for his stock, but eventually signed an agreement that didn’t do so. He didn’t have the final document that he signed reviewed by his tax and legal counsel. Zave characterized the additional amounts as payments of deferred compensation and other ordinary income to Brinkley, and issued Form W-2 reflecting that treatment.

Brinkley tried to have the company change its position through correspondence but got no response. He then disputed the treatment on his income tax returns.

The Tax Court upheld the IRS in disallowing the recharacterization of income to long-term capital gain. Brinkley had a $369,071 increase in his tax liability plus a $48,036.15 accuracy-related penalty.

The lesson is you can’t get a particular tax result just because you want it. Brinkley couldn’t have more than the $800,000 fair market value of his stock reported as sale proceeds. It’s very difficult to dispute an amount reported as compensation on Form W-2.

(Brinkley v. Commissioner, T.C. Memo. 2014-227, October 30, 2014.)

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Congress extends tax provisions for 2014 only.

Congress has passed and President Obama has approved on December 19, 2014 the Tax Increase Prevention Act of 2014. Many expired provisions, including bonus depreciation and the increased equipment expense limit were extended for 2014 only. We sent a separate email alert with some details. If you missed or misplaced the alert, call Dawn Siemer at 408-918-3162 or send her an email at dgsiemer@taxtrimmers.com and she’ll resend it to you.

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Congress cuts funding for the IRS.

In separate budget legislation, Congress has cut the budget for the IRS for the second year in a row. Although Congress may be seeking to “punish” the IRS for abuses relating to items like perceived abuse of tax exempt agencies that favor conservative causes, the IRS is the agency that keeps revenue flowing to government coffers. In addition, the IRS is facing a huge administrative challenge of implementing Health Care Reform. This was not a wise move.

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Expired tax provisions will make tax planning uncertain for 2015.

Since the tax extenders package only applied for 2014, the tax laws for 2015 are uncertain. This will make planning uncertain. There is also some talk of tax reform legislation, but it doesn’t seem likely to me considering the Republican majority in Congress and President Obama’s lame duck position. It’s clear that President Obama will not approve the repeal of Health Care Reform, and I don’t think Congress will try to do it anyway.

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Special offer for Real Estate Tax Handbook, 2014 Edition extended.

We believe many of our readers missed our offer for the Real Estate Tax Handbook, 2014 Edition because of the holidays, so we are extending our offer. Some updates that are included are the new rules on repairs and capitalization, new rules for materials and supplies, federal estate planning changes, and the 3.8% net investment income tax. As an introductory offer, you can order a copy for $29.99, which is half price, plus $3.50 shipping and handling and, for California residents only, $2.93 sales tax. This offer expires January 31, 2015.

Your can use the form at the end of this newsletter to mail or fax your order or call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays, Thursdays or Fridays to order by telephone.

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Live presentation by Michael Gray, CPA for tax professionals.

Michael Gray will give a lunchtime presentation for the Silicon Valley San Jose chapter of CalCPA on January 15, 2015. The subject is “Survey of Lifetime Gift Planning and Form 709 – Part 1. (Part 2 will be presented on June 18.) The investment is $20 for members and $30 for nonmembers. Here is a link with the details. https://www2.calcpa.org. Call Dawn Siemer at 408-918-3162 for a paper flyer. You can also register by calling Stephanie Stewart at 408-983-1122.

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Tax preparation materials will soon be on the way.

We are mailing instructions to our clients this week and next. If we prepared your tax returns last year and you haven’t received instructions by January 20 or you would otherwise like to receive instructions, call Dawn Siemer at 408-918-3162.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2014 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2015. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year’s facts. Watch the alternative minimum tax. See your tax advisor.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as “How I created a public access television show broadcast on eleven Bay Area stations.” To make arrangements, call Michael Gray at 408-918-3161.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.

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Financial Insider Weekly broadcast schedule for San Mateo County.

Financial Insider Weekly is broadcast in San Mateo County at 10:00 a.m. on Tuesday, Thursday, Saturday and Sunday on Comcast channel 26, Astound Channel 27 and AT&T U-Verse Channel 99.

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Financial Insider Weekly broadcast schedule for January and February.

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 January and February:

January 2, 2015, Bettie Baker Marshall, attorney at law, “Legal considerations of caring for incapacitated relatives and friends”
January 9 and 16, 2015, Kate Levinson, “Emotional currency”
January 23, 2015, Peggy Martin, CLU, The Family Wealth Consulting Group, “Life insurance basics”
January 30, 2015, David Beck, CFP®, Bay Area Planners, “Financial aid for a college education”
February 6, 2015, Jennifer Cunneen, attorney at law, Hopkins & Carley, “Should a family trust be terminated considering recent federal tax law changes?”
February 13 and 20, 2015, Jennifer Cunneen, attorney at law, Hopkins & Carley, “California real estate reassessment change of ownership rules”
February 27, 2015, Richard Schachtili, attorney at law, Hopkins & Carley, “Succession planning for a family business”

Financial Insider Weekly is also broadcast as follows:

    • Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
    • Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
    • Monday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
    • Monday at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
    • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
    • Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
    • Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
    • Tuesday at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
    • Tuesday at 7:00 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

  • Wednesday 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
  • Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • 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
  • Saturday 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
  • Saturday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Saturday at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

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.

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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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.

See the books mentioned at http://http://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-edition or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at http://www.stockoptionadvisors.com/non-q_stock.

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Follow me on social media!

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, www.linkedin.com/in/michaelgraycpa, and Google+.

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Check out my blog.

I have also started a blog at 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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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,

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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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