Michael Gray, CPA’s Option Alert #158
An irregular alert for issues relating to employee stock options
August 14, 2017
© 2017 by Michael Gray, CPA
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Table of Contents
- Estimated tax payments are due September 15
- Extended due date for most calendar year taxpayers except individuals is September 15
- Watch September 30 deadline for inherited IRAs
- ‘Tis the season for extensions
- Appeal circuits disagree about whether income from exercising a nonqualified stock option is subject to Railroad Retirement Tax
- Florida resident taxed on exercised stock option of California ex-spouse
- Possible cutoff for stock option income allocated to California?
- Trader must use first-in, first-out accounting for sales of investments
- Please share your good experiences with Michael Gray, CPA
- Farewell to Financial Insider Weekly
- Financial Insider Weekly broadcast schedule
- Follow me on social media!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
Estimated tax payments are due September 15.
The next due date for quarterly estimated tax payments is September 15. For most taxpayers, there is no California payment due because the first and second payments were “front loaded.”
Extended due date for most calendar year taxpayers except individuals is September 15.
The extended due date for filing income tax returns of calendar year S corporations, partnerships (including LLCs), estates and trusts is September 15. Be sure your tax return preparer has the information to complete your income tax returns.
The extended due date for calendar year C corporations is October 16.
Watch September 30 deadline for inherited IRAs.
For an IRA inherited when the owner was deceased during 2016, the designated beneficiaries must be established by September 30, 2017. In order to qualify for an extended payout over the life expectancy of one or more beneficiaries, all of the beneficiaries must be individuals or certain trusts. Otherwise, the account must be distributed within five years after death. A non-individual beneficiary, such as a charity, can be eliminated from consideration by distributing its share by September 30, 2017. See your tax advisor for details.
‘Tis the season for extensions.
If you need help preparing your income tax returns for which you have filed an extension, call Dawn Siemer at 408-918-3162 on weekday mornings to make an appointment. Remember, there are only two months left to submit your extended 2016 individual income tax return on time!
Appeal circuits disagree about whether income from exercising a nonqualified stock option is subject to Railroad Retirement Tax.
The Eighth Circuit Court of Appeals reversed a federal District Court and found that income from exercising a non-qualified stock option wasn’t subject to the Railroad Retirement Tax. The Court distinguished the Railroad Retirement Tax from Social Security Tax. The Social Security Tax is imposed on all income, but the Railroad Retirement Tax is imposed on money compensation.
The Seventh Circuit Court of Appeals affirmed another federal District Court and held against the employer railroads on the same issue. That court said that a stock certificate that can be sold for money is the same as money for this purpose.
Since there is a conflict between the Circuits, the IRS is in position to appeal the decision of the Eight Circuit Court of Appeals to the United States Supreme Court.
(Union Pacific Railroad Company, U.S. Court of Appeals, Eigth Circuit, 2017-2 U.S.T.C. 50,293, August 1, 2017; Wisconsin Central Ltd., Illinois Central R.R. Co., and Grand Trunk Western R.R. Co., U.S. Court of Appeals, Seventh Circuit, 2017-2 U.S.T.C. 50,295.)
Florida resident taxed on exercised stock option of California ex-spouse.
A taxpayer who was a resident of Florida received stock options from her ex-spouse as part of a property settlement for her divorce. The ex-spouse was a California resident when the options were granted for services provided in California.
The options were exercised and the stock was sold in the same year. $11,434.76 of California tax was withheld.
The Florida taxpayer claimed she shouldn’t be subject to California tax for the exercise. She cited a Franchise Tax Board Publication that said a qualified sale of stock received from the exercise of an incentive stock option (ISO) isn’t subject to California tax for a nonresident of California. A court order stated the options weren’t subject to California income tax because they were qualified ISOs. A Florida CPA also gave his professional opinion, based on facts the taxpayer provided, that her exercise of the option wasn’t subject to California tax.
The State Board of Equalization upheld the Franchise Tax Board in finding the options were nonqualifed stock options, not ISOs, and the exercise was subject to California income tax.
Even if the options were ISOs, the stock was disposed of less than a year after the exercise, resulting in a disqualified disposition, still subject to California tax. (The stock was sold on the day the option was exercised.)
(Appeal of Fiedler, California State Board of Equalization, Case No. 742251, February 24, 2015, release date May 17, 2017. Spidell’s California Taxletter®, August, 2017, page 16, “Exercise of stock options taxable to nonresident.”)
Possible cutoff for stock option income allocated to California?
Attorney and CPA Kathleen Wright, teaching a seminar on Multiple State Taxation for the CalCPA Education Foundation, reminded the class that the California State Board of Equalization ruled that appreciation of a stock option after a taxpayer moved to Nevada was sourced to Nevada and not subject to California income tax. The taxpayer used this method instead of the ratio of workdays in California to total workdays specified by the Franchise Tax Board in its publications. The Franchise Tax Board hasn’t publicized this method. It might be worth trying in the appropriate circumstances.
(Appeal of Montgomery, State Board of Equalization, August 21, 2008.)
Trader must use first-in, first-out accounting for sales of investments.
The general rule is investors are considered to sell their securities according to the earliest acquisition date (first-in, first-out). Taxpayers can make an election by giving instructions to their broker that the last-acquired securities are sold first (last-in, first-out), or specifically identify which securities are sold.
A taxpayer, who was a day trader, tried to use the last-in, first out method, but wasn’t able to prove he had given instructions to the broker. He wasn’t able to give the instructions because of an error on the broker’s web site, even though he followed up with telephone calls.
The Tax Court ruled against the taxpayer. The taxpayer didn’t meet the objective burden of proof.
An accuracy-related penalty was also assessed, which could have been avoided if the taxpayer reported or sought a correction to the Form 1099-B issued by the broker using the first-in, first-out method.
(Turan v. Commissioner, Tax Court Memorandum 2017-141, July 17, 2017.)
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Farewell to Financial Insider Weekly.
After eight years of production, I am discontinuing producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes are catalogued under “past episodes” at www.financialinsiderweekly.com.
Financial Insider Weekly broadcast schedule for August.
Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 August:
- August 24, 2017, James O. Brown, ASA, CFP®, Perisho, Tombor & Brown, PC, “The role of the business valuation specialist”
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
- 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
Broadcast on the internet at the same time as streaming video at www.mhat.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!
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to email@example.com.
See the books mentioned at www.employeestockoptionsecrets.com or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at www.stockoptionadvisors.com/non-q_stock.shtml.
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For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA’s Tax & Business Insight.
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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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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)