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Discussion Forum Index --> Advanced Tax Questions --> Stock options, Divorce, and confusing rules
Discussion Forum Index --> Tax Questions --> Stock options, Divorce, and confusing rules
Taxman415 (talk|edits) said:
| 29 June 2009
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| The taxpayer works for a company where he acquires stock options. When his divorce was final his wife was awarded half of the shares acquired during the marriage. Since the company has to hold the shares in the taxpayers name until exercised he is responsible for her shares. Not understanding the way the tax code works, he did his own math and calculations, sold some shares and gave half the proceeds to ex-spouse. He added that amount to the alimony figure when the tax return was being prepared. IRS audited the return based on the alimony not matching. Rev Rul 2004-60 explains that the employer was to pay the ex-spouse directly and issue out the 1099-Misc to her and at the same time adjust taxpayers W-2 to not tax on the amount going to the ex-spouse. So all in all taxpayers bottom line really should comes out the same the way with his calculation and the IRS. But the problem is resolving the situation. We have requested a corrected W-2 but haven't received a response yet. I can understand the Employers concern because they didn't pay the ex-spouse directly as the Code explains. The IRS has disallowed it as Alimony and is asking for $$$$$. Has anyone found their way out of a situation like this?
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Kevinh5 (talk|edits) said:
| 29 June 2009
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| yes, pay the tax. It's not alimony. It's a property settlement.
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Taxman415 (talk|edits) said:
| 29 June 2009
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| We understand it doesn't fall under alimony. The issue is that the employer was the one that should have paid directly to the ex-spouse and reduced his taxable wages whereas the taxpayer/employee paid it to her. Whether it would have been alimony to come off of the income or the correct way of the employer paying and issuing out a reduced W-2, the taxable income comes out the same.
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Kevinh5 (talk|edits) said:
| 29 June 2009
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| I would think that this was a legal question: his attorney would have given him advice on how to handle this directly with his employer. Or should have. Unless he used a Turbo Tax style divorce-in-a-box kit to handle that part of his life too.
in other words, I think he is SOL and a few thousand dollars wiser
hey, at least you get to charge to amend his CAL return!
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Kevinh5 (talk|edits) said:
| 29 June 2009
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| he could call his attorney-in-a-box divorce kit people to see if they have E&O coverage
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Riley2 (talk|edits) said:
| 30 June 2009
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| Taxman, were these nonqualified options or ISO's?
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Riley2 (talk|edits) said:
| 1 July 2009
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| Revenue Ruling 2004-60 would not really apply to an ISO.
I see no way to transfer the tax effects of an ISO to a spouse or ex-spouse. My answer would change if this were a nonqualified option.
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Taxman415 (talk|edits) said:
| 1 July 2009
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| My understanding of the diff with the ISO and the Nonqual may be confused in this case. How would you see it if it were Nonqual?
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Taxman415 (talk|edits) said:
| 1 July 2009
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| OK my mistake. I it is a nonqual. I had the definitions confused. There was payroll taxes taken from the exercised stock sales. From my understanding that would make it nonqualified options.
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Riley2 (talk|edits) said:
| 2 July 2009
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| Yes, that is correct. These options are nonqualified.
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Harry Boscoe (talk|edits) said:
| 2 July 2009
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| For ISOs, under IRC Section 424(c)(4) here's what Uncle Sam offers when the options change hands between spouses pursuant to the dissolution of a marital covenant or not:
(4) Transfers between spouses or incident to divorce
In the case of any transfer described in subsection (a) of section 1041 -
(A) such transfer shall not be treated as a disposition for purposes of this part, and
(B) the same tax treatment under this part with respect to the transferred property
shall apply to the transferee as would have applied to the transferor.
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Harry Boscoe (talk|edits) said:
| 2 July 2009
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| OK, Trillium, how does one *make* that double space *go away*? Are there things that this software will not let us have the way we want it?
I
want
to
indent consecutive lines of text. Can I?
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Trillium (talk|edits) said:
| 2 July 2009
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| Is this what you're trying to do?
(4) Transfers between spouses or incident to divorce. In the case of any transfer described in subsection (a) of section 1041 -
- (A) such transfer shall not be treated as a disposition for purposes of this part, and
- (B) the same tax treatment under this part with respect to the transferred property shall apply to the transferee as would have applied to the transferor.
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Harry Boscoe (talk|edits) said:
| 2 July 2009
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| OP writes: "Since the company has to hold the shares in the taxpayers name until exercised..." I don't get it. Are these the options, and what requires the company to keep them in the employee's name when he has to fork over half of them to achieve his marital dissolution?
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Taxman415 (talk|edits) said:
| 2 July 2009
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| Yes they are stock options and I'm not sure why the company can't let the non-employee spouse hold the stocks, that was just the rules that have been set up.
Yes Trillium section 1041 is exactly what we are trying to apply here. Money has already been sent in to the IRS and State return is still in limbo at the moment in hopes of finding a solution that would take the incorrect liability off the taxpayer.
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Trillium (talk|edits) said:
| 2 July 2009
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| Taxman, my post was to Harry, with regard to his formatting question in the post just before mine. Sorry to get off topic to your question, but I guess I'd thought that your issues had been addressed by Riley's post, above, referring to Rev. Rul. 2004-60 for NQSOs, and the other posts before that.
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Taxman415 (talk|edits) said:
| 2 July 2009
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| Not really. I'm still in limbo of what the best action is from this point. Do an amended return showing income going out to ex-spouse with nominee the income out on a 1099-misc, Taxpayer advocate to deal with an unusual issue, another idea, or just lay down the guns and walk.
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