Discussion:Unexercised nonqualified stock options at merger time

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Discussion Forum Index --> Basic Tax Questions --> Unexercised nonqualified stock options at merger time
Discussion Forum Index --> Tax Questions --> Unexercised nonqualified stock options at merger time

Newarcher (talk|edits) said:

19 February 2008
Here are the facts:

1) 700 shares of XYZ Co. stock options were granted and the employee became fully vested in 2005 at 6.40 per option.


2) The employee never exercised the options but the options had not expired.


3) XYZ company was purchased on February 22, 2007 at $10.00 per share.


4) XYZ company sent the employee a check (less withholding) and included the proceeds from the sale of $2520 in the employee's W-2 wages. The employee did not receive a 1099 for the proceeds.


Is it proper to ignore this transaction with regards to Schedule D. If it is shown as a short term capital gain, then the income is reported twice...once on 1040 line 7 and once on line 13.


The employee is stating that the company told him that the options were never truly exercised, rather the company was compensating him because he had been granted options and therefore the w-2 treatment.


Thanks,

Michael

TexCPA (talk|edits) said:

19 February 2008
look @ the stock agreement before deciding.

WesR (talk|edits) said:

19 February 2008
Hi if the company just cashed him out I without an exercise I would ignore it. bye

Newarcher (talk|edits) said:

19 February 2008
Tex, I have both the original agreement (when the shares were granted) along with the documentation that was given at the time of the cash in. The original agreement was silent with regards to buyback. The documentation given at the time of the merger indicated that the proceeds would be included in the W-2 as wages...which I believe they did. I don't see any treatment possibilities other than ignoring the transaction with respect to the Schedule D that results in the proper taxation.


I was almost okay with that treatment (ignoring Schedule D) until I started thinking that in order to sell the options, they would have had to be exercised and then the stock sold on the same day. But like WesR said, I don't think the shares were ever exercised at all. I will note it in the records.


I believe this would survive and audit and the employer never filed a 1099 for the sale.


Thanks, Michael

Newarcher (talk|edits) said:

3 June 2008
Follow up on this issue, here's a revenue ruling with respect to the transaction that I finally found.


http://www.taxlinks.com/rulings/1973/revrul73-146.htm


It doesn't address the option going on Schedule D in any capacity so I will consider the unexercised stock option to be simple compensation taxable as ordinary income.


Michael

Cotopop (talk|edits) said:

3 June 2008
Your W-2 may also show an entry of $2,520 in box 12 which represents the gain form the sale.(difference between purchase price per share of new company and grant price x 700 shares ) If the company had been still viable,at the time of your voluntary exercise, they would have issued you shares in stock valued at $,2520 less the withholding. Typically most shareholders then immediately (same day ) sell the stock and there are a few dollars of gain /loss because of the brokerage cost to sell and changes in price that day.

As long as you did not get any shares from the new company I think you are Ok. The fact you did not receive a 1099 B is further validation. No 1099 B provided = Schedule D not required

Newarcher (talk|edits) said:

3 June 2008
Thanks Coto, that mirrors the revenue ruling and what other have said. This is for four guys I work with (says a lot that the guys you work with lets you do their taxes) and the company did their stock options 4 different ways. Fun!


Michael

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