Archive for the ‘Equity Compensation’ Category

Interpretation of Stock Vesting Rule

January 5, 2014

Compensation in stock and optionsThe Tax Court recently rejected an IRS attempt to treat stock as vested based on a provision in the regulations dealing with termination for cause. The court found that the employment agreement used the word “cause” with a different meaning than in the regulation.

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Wrongheaded Attack on Option Deduction

November 7, 2013
By Kaye A. Thomas

Every highly publicized IPO — this time it’s Twitter — provokes renewed attacks on rules permitting corporations to claim a deduction corresponding to the amount of option income reported by executives and other employees. These wrongheaded attacks are based on the notion that current law works to the detriment of the Treasury in allowing an overly generous tax treatment. The truth is exactly the opposite: the government benefits hugely from the current tax treatment of stock options.

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Last Call for Refundable AMT Credit

April 2, 2013
By Kaye A. Thomas

In two important ways, this is the last year for the AMT refundable credit, which is mainly used by people who paid AMT in a previous year in which they exercised incentive stock options.

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Options Backdating Dispute Ruling

March 4, 2013

A tax dispute arising from alleged backdating of stock options granted to prominent entrepreneur Sehat Sutardja continues to play out with a ruling in favor of the government. In a suit seeking a refund of taxes paid under section 409A of the Internal Revenue Code, dealing with nonqualified deferred compensation, the court granted partial summary judgment on a number of issues, including a finding that although regulations establishing that underpriced options would be treated as creating a “deferral of compensation” for this purpose did not take effect until 2008, application of this rule to stock options in earlier years was proper pursuant to IRS Notice 2005-1.

 

Proposed Section 83 Regs

May 30, 2012

Section 83 of the Internal Revenue Code is important to anyone who deals with stock options or other forms of equity compensation: it tells us when the recipient must report income and how to measure its value. The IRS has proposed changes to the regulations that would take effect January 1, 2013. In essence, though, the proposal merely reflects positions the IRS previously staked out in Rev. Rul. 2005-48, so the regulation would confirm the existing view of the IRS rather than make a genuine change in the law.

Minor update: Our book Consider Your Options discusses the effect of various restrictions, and states that a lockup period does not prevent shares from being treated as vested “although there is no direct authority on the issue.” The proposed regulations address this point. The conclusion in our book is accurate, but it is no longer correct to say there is no direct authority.

Uncertainty in ISO Strategies

April 26, 2012
By Kaye A. Thomas

Planning for incentive stock options always involves a level of uncertainty. A typical strategy involves holding at least some of the shares for a year or more after exercising the option, while sweating out the possibility that a decline in the stock price will wipe out the tax benefit and then some. This year option holders face an unusual level of uncertainty in the tax law as well. We’re dealing with at least five significant variables.

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Option Leverage

September 6, 2011

Leverage is a key concept in investing, and one that has special application to stock options. If you’ve received options as part of your compensation, you’ll want to understand how leverage affects your profit. (more…)

Senators Take Swipe at Stock Options

July 20, 2011

Senators Levin (D. Mich) and Brown (D. Ohio) have introduced the Ending Excessive Corporate Deductions for Stock Options Act, legislation that would limit the amount a corporation can deduct in connection with the exercise of compensatory stock options to the amount shown as an expense for the options in its financial statements. Similar proposals have been made in the past without garnering wide support.

Comment: Although it seems superficially logical that the tax deduction should not exceed the accounting expense, these figures differ because their purposes differ. The accounting expense relates to the company’s cost of providing this benefit, which in turn is based on the value of the option when granted. The tax deduction relates to the value of the benefit received by (and taxed to) the option holder, which is based on the bargain element of the option when exercised. A mismatch between these numbers is a normal consequence of ups and downs in stock prices and does not indicate the company has understated its accounting expense or claimed an excessive deduction.

Participating in a Deferred Compensation Plan

October 13, 2010

Someone asked on our message board about whether it makes sense to participate in a deferred compensation plan, and we decided to post a response here so it might be seen by more visitors. There’s more to these plans than meets the eye: the true nature of the tax benefit is far from obvious — and the same is true of the plan’s risk. (more…)

Cashing in Options at Lower Tax Rates

September 15, 2010

A recent post on Janet Novack’s Taxing Matters blog talks about executives rushing to cash in stock options before tax rates go up. Novack cites academic research indicating executives are likely to take this approach, and anecdotal evidence that it is already happening. Chances are that many of these executives will regret that choice. (more…)