|
Posted by derkire on February 10, 2008, 12:44 am
Please log in for more thread options
Consider the following scenario:
1. Company A buys company B.
2. Employees of B hold some vested, but un-exercised incentive stock
options (ISO).
3. As part of the buyout process, these options get exercised and
paid in cash by A.
My question is, should the cash paid be treated as a short term
capital gain or as regular income?
========================================= MODERATOR'S COMMENT:
Ordinary income treatment, flowing to a W-2 form.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by Alan on February 10, 2008, 12:31 pm
Please log in for more thread options
derkire@gmail.com wrote:
> Consider the following scenario:
>
> 1. Company A buys company B.
> 2. Employees of B hold some vested, but un-exercised incentive stock
> options (ISO).
> 3. As part of the buyout process, these options get exercised and
> paid in cash by A.
>
> My question is, should the cash paid be treated as a short term
> capital gain or as regular income?
>
> ========================================= MODERATOR'S COMMENT:
> Ordinary income treatment, flowing to a W-2 form.
>
As the options are being exercised and sold on the same day, the
statutory holding period for favorable treatment has not been
met. As such, this is a disqualifying disposition. The difference
between market value and the exercise price is all compensation
(ordinary income). As the moderator said.. it should be reflected
on a W-2. Even if it is not on a W-2, the gain gets entered on
Line 7 of the tax form.
From a technical point of view... your ordinary gain gets added
to what you paid to arrive at an adjusted cost basis. The
difference between the sales proceeds and this adjusted basis is
your short term capital gain or loss. This can actually happen
if there are commissions and or fees paid as part of the
transaction and market value and sales proceeds are not equal.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by joeu2004 on February 10, 2008, 2:46 pm
Please log in for more thread options On Feb 9, 9:44 pm, derk...@gmail.com wrote:
> 1. Company A buys company B.
> 2. Employees of B hold some vested, but un-exercised incentive
> stock options (ISO).
> 3. As part of the buyout process, these options get exercised
> and paid in cash by A.
> My question is, should the cash paid be treated as a short term
> capital gain or as regular income?
I am suspicious of the description of the circumstances.
Consequently, I would be wary of responders' interpretation
and their answers.
At issue is the statement that options "get exercised and
paid in cash by A" in Step 3.
Do you mean that you were give the choice to exercise
those options, which you did? For an option to be exercised,
__you__ must pay the exercise price. Of course, there is
no way that the company can force that to happen "as part
of the buyout process".
In that case, it is a normal disqualifying disposition, as some
responders have said.
Or do you really mean that the company paid you some
amount of cash (either the exercise price or the FMV) for
the options that your held?
In that case, this is an exchange, not an exercise. But
because it is an exchange for employee compensation (the
employee stock option), I believe the entire cash amount
received should be treated as compensation (i.e. wage
income).
In either case, your company should be the best source
of information for how to treat this transaction. Although the
company might assert that they cannot give "tax advice",
it is standard practice (if not a legal requirement) for them
to provide "tax information" -- that is, general information
about the tax consequences.
Since this regards an employee situation, contact personnel,
not investor services. In fact, the latter is likely to give you
the wrong information -- information about open-market stock
options, not employee stock options, which are treated very
differently, as you may know.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by derkire on February 11, 2008, 12:41 am
Please log in for more thread options Everybody: thanks for the replies, this was very helpful.
Moderator, thanks for the reply.
Joeu2004 brought up an interesting point: The employees were not
offered explicitly to exercise (and then sell) the options per se. In
fact, the transaction may very well have been structured as an
"exchange" of the option for its FMV, which was the takeover share
price minus the option original price.It sounds like this would
(probably) mean the proceeds are treated as ordinary income.
But what if the transaction was indeed structured as an "exercise-then-
sell". Does that make a difference? Would the company have a (self-
interest, tax) reason NOT to structure the transaction as a two-step
process, since this would enable employees to qualify for 28% STCG tax
versus up to 35% ordinary income tax? Why would the company not try to
make the employees happier by doing that?
Alan, I was not angling for the 15% LTCG "favorable treatment", if
that is what you meant. Only the favorable treatment of 28% STCG tax
versus ordinary income tax.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by joeu2004 on February 11, 2008, 2:06 pm
Please log in for more thread options On Feb 10, 9:41 pm, derk...@gmail.com wrote:
> the transaction may very well have been structured as an
> "exchange" of the option for its FMV, which was the takeover
> share price minus the option original price.It sounds like this
> would (probably) mean the proceeds are treated as ordinary
> income.
The key point is: the __entire__ amount received would be
ordinary income, not the difference between the FMV and the
exercise price.
> But what if the transaction was indeed structured as an
> "exercise-then-sell". Does that make a difference?
Yes. As both Alan and I stated, that is the disqualifying
disposition scenario. The ordinary income would be the
difference between the FMV and the exercise price.
> Would the company have a (self-interest, tax) reason NOT
> to structure the transaction as a two-step process
Sure: to facilitate and simplify the acquisition process. As
I explained previously, only you could exercise the stock
option. Moreover, the company cannot force you to exercise
the stock option. Either it would have to present you with a
"use it or lose it" choice, or it could offer some other alternative
of value.
In any case, the company loses some control over the
timeline for completing the acquisition process.
> since this would enable employees to qualify for 28% STCG
> tax versus up to 35% ordinary income tax?
Not so. The only difference is the amount of ordinary income
that would be taxable. With a cashless exercise, you would
receive less, so less than would be taxable <wink>.
> Why would the company not try to make the employees
> happier by doing that?
I question whether it would make employees happier. I
suspect that the exchange for cash resulted in more after-tax
income. Do the math and see for yourself.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
| Similar Threads | Posted | | Stock Options | February 18, 2007, 9:51 pm |
| stock options | April 15, 2006, 2:59 am |
| Statutory Stock Options? How to tell? | February 16, 2008, 12:03 pm |
| Foreign Resident and Stock Options | January 12, 2007, 2:47 am |
| How to handle stock options that were NOT exercised and sold @ a loss? | December 30, 2007, 2:40 pm |
| Exercise stock options 9 years after leaving employer | April 4, 2008, 12:14 am |
| Re: 1099-B Restricted Stock Options sale...Do I need to file a Schedule D? | March 17, 2008, 10:29 pm |
| Is interest paymennt on loan to exercise NQ stock options mdeductible?i | April 25, 2006, 7:49 am |
| Any Way to Avoid Alternative Minimum Tax on Stock Options Exercised in 2008? | July 6, 2008, 8:52 pm |
| Help- corporate purchase | July 19, 2007, 10:32 pm |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap