Tax Myths and Facts-July 2016

TAX MYTHS
AND FACTS
Andrew Schwartz, Computershare

© Computershare. Inc.2
Disclaimer
The following presentation and the views expressed by the presenter are not
intended to provide legal, tax, accounting or other professional advice. The
information contained in this presentation is general in nature and based on
authorities that are subject to change. Applicability to specific situations should
be determined through consultation with your legal and/or tax advisor.

Agenda
› Reasons for complexity of taxation
› NQ and ISO options
› Restricted stock awards & units
› Employee stock purchase plans
› Tax reporting
› Audience questions

Reasons for tax complexity
› Internal Revenue Code favors long-term employee investment
› ESPPs are called “options”
› Processes modernized after IRC sections finalized
› Ordinary income and capital gain/loss, often the same day
› IRS failure to acknowledge participant confusion

Myth: Income from disqualifying dispositions is always the FMV of the
stock on exercise date, less the exercise price
ISOs
Fact: The income from disqualifying dispositions will depend on the sale
price of the underlying shares
- Example: ISO grant price $15, FMV at exercise $40
- 1) If stock sold at $40 or greater, DDT income is $25
- 2) If stock sold between $15 and $40, DDT income is (sales price – grant price)
- 3) If stock sold for less than $15, no DDT income
› Not subject to Federal or FICA withholding
› Not the same calculation as ESPPs!
Source: IRC§422(c)(2)(B), 421(a)(1)

Myth: A Form 3921 for an ISO exercise is due when the shares are
transferred or sold
ISOs
Fact: A Form 3921 is due for the year when the ISO is exercised
› Responsibility of issuer
› Form contains information necessary to calculate either a qualifying or
disqualifying disposition
› Some companies may not track dispositions after exercise
- Participant would calculate any ordinary income and add as “other income” on
Form 1040
› Not the same deadline as for ESPPs!
Source: IRC §6039(a)(1)

Myth: By transferring an non-qualified option to someone else, a
participant can avoid recognizing income
NQs
Fact: The income and withholding taxes are credited to the employee
› The option was earned by the employee, so the taxes apply to the employee
› Not the same treatment as beneficiary exercises upon death
Source: Rev. Rul. 67-267

Myth: A participant who makes an 83(b) election and does not end up
vesting in the stock can get a refund or deduction for loss
Restricted stock
Fact: Taxes paid under an 83(b) election are not refundable, no
deduction for loss
› 83(b) election within 30 days of the grant
› No longer have to include a copy with return
› Recognize income based on value of stock at grant date
› Pay associated withholding taxes
› Same rule applies if value of stock at vesting is less than value at grant date
Source: IRC §83(b)(1)(B), Treas. Reg §1.83-2(b)(2) (no income deduction for unvested)

Myth: The income recognition date is the same for restricted stock
awards and restricted stock units
Restricted stock
Fact: Restricted stock is taxable at vesting, units at delivery
› Restricted stock becomes transferred to the employee on vesting date
› Units must first be converted into stock, delivery date is when the property is
taxable
› FICA taxable at vesting, income taxes at delivery
› May be possible to defer payment of FICA taxes
› Industry practice seems to like vesting date
Source: IRC §83, 451

Myth: Directors who vest in stock have income reported on Form W-2
and withholding can be elected
Restricted stock
Fact: Income is reported on Form 1099-MISC and no withholding is
allowed
› Directors should make estimated federal and state tax payments
Source: 2016 Instructions for Form 1099-MISC, p.1

Myth: Employees who are “retirement eligible” are liable for all taxes
on unvested restricted stock units once they reach that date
Restricted stock units
Fact: FICA taxes are usually due at retirement eligibility date, income
taxes at delivery
› Applies when there is a non-forfeitable right to receive the award
› Difficulties with paying taxes using share withholding
- Circular calculation
› Restricted stock – all taxes due at retirement eligibility date
- No longer “substantial risk of forfeiture”
› May be possible to defer payment of FICA taxes
Source: IRC Sections 83, 451

Myth: Dividends on unvested restricted stock, or dividend equivalents,
are reported on Form 1099-DIV
Restricted stock
Fact: Dividends on unvested stock are reported as compensation on
Form W-2 or 1099-MISC
› Exception: If restricted stock awards were elected to be taxed under 83(b),
dividends reported on Form 1099-DIV
› No 83(b) elections allowed on RSUs
Source: IRS Publication 525 (2015), p.14 (dividends received on restricted stock)
Rev. Proc. 2012-29 (Section 83(b) election format)

Myth: Tax withholding over $100,000 for any one day can be paid the
day after settlement of the shares sold for taxes
Restricted stock
Fact: Tax withholding over $100,000 is due the following business day
› IRS Field Directive
› Exception: Cashless exercises of stock options
› Source: IRS Chief Counsel Memorandum, March 14, 2003, Field Directive on Assertion of the Penalty for Failure to
Deposit Employment Taxes
› https://www.irs.gov/Businesses/Assertion-of-the-Penalty-for-Failure-to-Deposit-Employment-Taxes

Myth: Shares withheld for taxes never have to be reported by the
company on Form 1099-B
Share Withholding
Fact: The company may have to report the value of shares withheld
› RSAs vs. RSUs
› “Regularly redeems its own stock”
› Tendering shares for taxes vs. share withholding
Source: Treasury Reg. §1.6045-1(a)(1)

Myth: Revenue Procedure 2002-50 can exempt all employee equity
plans from 1099-B reporting
1099-B Exemption
Fact: Only applies in specific circumstances
› Stock options
› FMV = Sales Price
› Broker fees
› Instructions on how to report sale
Source: Revenue Procedure 2002-50
https://www.irs.gov/pub/irs-drop/rp-02-50.pdf

W-8BEN and W-9 issues
Myth: U.S. persons living overseas complete a W-8BEN form to certify
their tax status
Fact: U.S. persons always complete a W-9, which remains valid
indefinitely
Source: Form W-9 (Rev. December 2014)
Myth: Form W-8BEN remains valid indefinitely
Fact: Form W-8BEN is only valid until December 31, 3 years after the
year of certification, or until the individual moves
Source: Instructions for Form W-8BEN (Rev. February 2014)

W-8BEN and W-9 issues
Myth: Non-U.S. persons working in the U.S. complete a W-8BEN based
on their citizenship
Fact: Non-U.S. citizens who have a green card in the U.S. complete a W-
9 using their Social Security numbers
Myth: Non-U.S. persons working outside the U.S. complete a W-9 based
on the head office location or where the stock is traded
Fact: Non-U.S. citizens who work outside of the U.S. complete a W-
8BEN
Source: Instructions for the Requester of Forms W–8BEN, W–8BEN–E, W–8ECI, W–8EXP, and W–8IMY (Rev. July 2014)

Myth: Options exercised by beneficiaries are not subject to any tax
withholding
Death issues
Fact: It depends whether the options are exercised in the year of death
› In the calendar year of death:
- FICA (Social Security and Medicare withholding)
- Reported on decedent’s final W-2
- No other withholding
› After the calendar year of death:
- No withholding applies
› Income attributed to beneficiary
› 1099-MISC
Source: 2016 General Instructions for Form W-2, Deceased Employee’s Wages, p.8

Myth: No income is recognized upon death of an ESPP participant
Death issues
Fact: ESPP shares are considered disposed of at death in a qualifying
disposition
› Lesser of:
- (FMV at death – discounted purchase price)* # of shares in the lot, or
- (Price at beginning of offering period * discount %)* # of shares in the lot
But not less than zero
› No withholding
› Qualifying income reported on final W-2
Source: IRC§ 421(c), 423 (c), 424 (c), Treas. Reg §1.423-2(k)(2)

Myth: Form 3922 is always mailed based on the year the shares were
purchased
ESPPs
Fact: “First transfer of legal title” will differ depending on admin system
› ESPP administered by broker
- Shares created from reserve, first transfer = purchase date
- Open market purchases, first transfer = sale date or third-party transfer
› ESPP administered by transfer agent
- Shares held in common stock positions along with others
- First transfer = sale date or transfer to a broker
› 6039 regulations contemplate legends on certificates
- Process obsolete
- Dematerialization
Source: Treas. Reg. §1.6039-1

Myth: Qualifying disposition income does not have to be tracked or
reported by the company
ESPPs
Fact: Qualifying disposition income should be reported on Form W-2 in
the year of disposition
› No withholding applies
› Not deductible as compensation expense on the company’s tax return
› May require annual surveys of employees to determine when shares sold
› Terminated employees have to be added back to payroll
Source: IRC §423(c)

Myth: If a corporate action occurs, just adjust the purchase price
based on the cost basis allocation information
ESPPs
Fact: Aside from the purchase price, the FMVs at the beginning and end
of the offering period also have to be adjusted.
Example:
FMV at beginning of offering period $40
FMV at end of offering period $50
Discount: 15% with look-back
Purchase price $34
After 2:1 stock split:
FMV at beginning of offering period $20
FMV at end of offering period $25
Purchase price $17
for every lot purchased in the plan
Source: IRC §307(a), 305(a) (non-taxable distributions)

Spin-off example
ESPPs
Before: Old Co.
BUY 1/2/X1 10 shares @ $50 $ 500
BUY 2/1/X1 20 shares @ $40 $ 800
BUY 6/1/X1 20 shares @ $10 $ 200
50 shares $1500
Issuer declares spin-off of New Co., 1 share of New Co. per 2 shares of Old Co. Record
date 3/20/X3, payable date 4/15/X3. 60% of basis allocated to Old Co., 40% to New Co.
After: Old Co. After: New Co.
BUY 1/2/X1 10 shares @ $30 $ 300 1/2/X1 5 shares @ $40 $ 200
BUY 2/1/X1 20 shares @ $24 $ 480 2/1/X1 10 shares @ $32 $ 320
BUY 6/1/X1 20 shares @ $ 6 $ 120 6/1/X1 10 shares @ $ 8 $ 80
50 shares $ 900 25 shares $ 600
$1500
Source: IRC §307(a), 305(a) (non-taxable distributions)

Reporting example
Fact: It is confusing, and very easy to overpay taxes!
› IRS mandated cost basis reporting
› Special rules for employee equity awards
› Only cash paid is reported on 1099-B as cost basis
- Actual cost basis = cash paid + income recognized
› No indicator on front of Form 1099-B alerting employee
Source: IRC §6045A
Myth: Reporting equity compensation on a personal tax return is
straightforward

© Computershare. Inc.
Nonqualified Stock Option Example
Exercise/Sale Date: February 15, 2015
Quantity: 100 options for shares in ABC Co.
FMV on exercise date: $37/share
Exercise Price: $30/share
Fees & commissions: $50
25

2015 Tax Reporting
› W-2
- $700 Federal Earnings 100*($37 - $30)
- Fed/Soc Security/Medicare/State withholding
› 1099-B
- $3,650 net sale proceeds
- $3,000 reported cost basis ($3,700 actual cost basis)
- $50 capital loss ($3,650 - $3,700)
Nonqualified stock option
26

2015 1099-B
27
A
100 shares ABC Company
02/15/2015 2/15/2015
3,650 3,000
X
X
X

2015 1099-B Instructions
Box 1e. Shows the cost or other basis of securities sold. If the securities
were acquired through the exercise of a non-compensatory option granted
or acquired on or after January 1, 2014, the basis has been adjusted to
reflect your option premium. If the securities were acquired through the
exercise of a non-compensatory option granted or acquired before January
1, 2014, your broker is permitted, but not required, to adjust the basis to
reflect your option premium.
If box 5 is checked, box 1e may be blank. See the Instructions
for Form 8949, Instructions for Schedule D, or Pub. 550 for details.
28

Form 8949
29

Form 1040, Schedule D
30

Q & A

Contact information
Andrew Schwartz, CPA, CEP
Senior Manager, US Plan Managers
(201) 680-3340
andrew.schwartz@computershare.com

Tax Myths and Facts-July 2016

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