AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
ISO, AMT and transfer
Posted by: vyarovoy, October 9, 2014 10:59PM
I am about to exercise 13,000 vested ISO shares from previous employer. The exercise price is $2.57, FMV is expected to be between $8.25 and $10 (pending recent board meeting). The prospects of the company (private) are very positive, they are planning IPO within a year. My questions are:

1. Can I/ should I file 83(b) for this tx?
2. If I later transfer 3,000 shares to my immediate family at exercise price this calendar year (no gain), will I incur any tax liability from the transfer? Will the transfer affect my remaining ISOs (10,000 shares) in any way?

Re: ISO, AMT and transfer
Posted by: triad, October 10, 2014 12:58AM
[www.woodllp.com]

It wouldn't do you any good. For starters, if they have vested, it's past the point of the 83(b).

Gifting stock to a family member would be a mess. They'd have to use your basis to calculate any gain for both regular and AMT purposes. If you gift more than $14K wort to any one person, you'd have to file the gift tax form 709.

Re: ISO, AMT and transfer
Posted by: vyarovoy, October 10, 2014 01:19AM
Thanks! I am not gifting the portion but accepting a payment from them (around $8k) for their 3000 shares at same price as I paid...

Re: ISO, AMT and transfer
Posted by: jlehrer, October 10, 2014 01:52PM
You would be giving them a partial gift which would be even messier.

The shares are "worth" what the FMV is, ~$30,000. If you give them the shares and they give you $8,000 in return then you have given them a $22k gift.

I do not know how to then go about calculating their cost bases (bases apparently is the correct plural of basis).

-J

Re: ISO, AMT and transfer
Posted by: jlehrer, October 10, 2014 03:14PM
Also, if you sell them the shares then this is a disqualifying disposition wrt AMT and there would be nothing to report under AMT.

-J

Re: ISO, AMT and transfer
Posted by: vyarovoy, October 10, 2014 04:42PM
The disqualification of the transferred shares - will only my relative's portion (3000 shares) be disqualified or my shares too?

Per the page below (Turbotax site), gifts totaling $14,000 per year are not taxable for donor ($28,000 if both spouses are the donor), which will be the case since FMV ($10) - price paid to me ($2.5) = $7.5 * 3,000 = $22,500, and both my wife and I will be the donors ($28,000 limit).

[turbotax.intuit.com]

Re: ISO, AMT and transfer
Posted by: triad, October 10, 2014 06:09PM
The FMV of the stock is the gift, so you cannot subtract your basis.

Re: ISO, AMT and transfer
Posted by: vyarovoy, October 10, 2014 06:19PM
1. He will pay me exactly what I paid for the shares ($2.5*3000), I am gifting him only the diff between what he paid to me and FMV, please correct me if I am wrong.

2. Is such transfer of private company stock considered "a gift of future value", meaning it will NOT qualify for the the $14,000 per year per person gift tax exclusion?

Re: ISO, AMT and transfer
Posted by: triad, October 10, 2014 08:38PM
I missed the part sale/part gift.

Re: ISO, AMT and transfer
Posted by: MadDog, October 10, 2014 10:36PM
As noted above, there is no purpose of a section 83(b) election if these shares are fully vested.

A gift to non-spouses will be a disqualifying disposition of the ISO and the exercise will instead be taxed under section 83, so you will have ordinary income this year. Your income tax basis will then be the FMV at exercise.

Then the gift/sale will not create further gain except to the extent the stock continued to increase in value. The gift measure would be the spread between FMV and the amount paid by the family members.

But your plan converts what would have been an AMT adjustment this year into regular tax (ordinary) income this year, and loss of the potential LTCG treatment for ISOs.

Re: ISO, AMT and transfer
Posted by: vyarovoy, October 10, 2014 10:59PM
Thank you.

1. Will ISO status will be lost only on the transferred shares (3000) or the whole thing (13000 shares)?

2. As I mentioned earlier I am selling the shares to my relative at the same price as I bought it, will I still be taxed on the transfer? There is no gain there for me... I understand it is my relative, not me, who will be responsible for NSO-related gains/taxes, correct?

Re: ISO, AMT and transfer
Posted by: MadDog, October 11, 2014 12:35AM
1 - only on shares gifted

2 - you are taxed at exercise, not at sale, because the disqualifying disposition means it never qualified as an Iso (failed the 2 years from grant and one year from exercise)

Re: ISO, AMT and transfer
Posted by: Kaye Thomas, October 15, 2014 03:25AM
If the shares are worth $10 and you sell them for $3, that's a partial sale, partial gift. The gift part might be in the range of $27,000 or more, so you'd have to file a federal gift tax return but presumably would owe no gift tax.

The amount of tax you'll pay in connection with the exercise of this option depends on various factors but we might reasonably guess it will be somewhere around $25,000. The shares you transfer would be considered a disqualifying disposition but if it's only 30% of the total there's a good chance there would be no added tax cost, though again this depends on various factors. Normally we would expect to see a DQ involving only 30% of the shares to have zero tax impact because any increase in regular income tax is offset by a decrease in AMT.

Kaye Thomas
Fairmark.com

Re: ISO, AMT and transfer
Posted by: vyarovoy, October 15, 2014 06:59PM
Thank you!



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