Employer Provided Nonstatutory Stock Options

[rfk]

Need help with the following:

Facts -

UBS Financial Services Inc. is the Provider of statement info; no 1099-B
W-2, Code V
Titled: "Advice of Vesting"

Details of Vesting:
Grant Information - Has Grant Date, Benefit Plan, Vest Date
FMV - $9,211.05 (Code V Amount)
Total Vesting Cost - $0
Taxable Income is $9,211.05

Had monies withheld - FUT, SIT, FICA, etc.
Value of Shares Withheld for Tax - $4033.01

Question is whether this definitely needs a Schedule D, and if so, what the components are for the Schedule D? I am looking at Pub 525 (2010), Page 11, and I see potential for doing a Schedule D, but not sure I am on the right path. Is there a sale of stock or just vesting? It is confusing.

Please advise the appropriate way this should be looked at; I want to do the right thing.

Thanks for your help in advance.

rfk

[Gary2]

With non-statutory options, the value that the employee receives is treated as ordinary compensation as soon as the options vest and the value can be determined. Since it's compensation, the employer must withhold taxes (included FICA). Standard practice is for the employer to cover the withholding by keeping back some shares and selling them, and that's what seems to have happened here. So it should be reported on Schedule D.

The sale price is $4033.01, and there don't seem to be any brokerage fees. It's not clear how many shares were exercised and sold. The basis in the entire set of options is the $9211.05, so strictly speaking you need to do the math to calculate the per share basis, and then the basis for the sale. Often, but not always, the per-share price for determining the taxable income is the same as the per-share price for the sale, so the Sch. D will zero out. However, sometimes they won't actually sell the shares for a day or two, or they sell on the market (as opposed to having a buyer who agrees to the day's FMV), so there could be a small gain or loss.

[rfk]

Reviewing it more

Hi Gary,

Thanks for the info. These are Restricted Stock Shares

After reviewing the info more, 790 shares were available for vesting and 346 shares were used to withhold for taxes. What went into the account was 444 shares.

So the total compensation was $9,211.05 and Value of shares withheld for tax was $4,033.01

I did call the IRS and the person stated that no reporting was necessary since there was no sale, but is this thinking correct for sure? What about the Withheld shares value used for taxes - were they sold? It is a not sure thing.

rfk

[Kram BergGold]

Depends

If there is no gain or loss the brokerage is not required to issue a 1099-B for these stock option sales.
If you are sure there is no 1099-B then you are not required to report. The assumption is there is no gainor loss.

[Burke]

Hi Gary,

Thanks for the info. These are Restricted Stock SharesAfter reviewing the info more, 790 shares were available for vesting and 346 shares were used to withhold for taxes. What went into the account was 444 shares. I did call the IRS and the person stated that no reporting was necessary since there was no sale, but is this thinking correct for sure? What about the Withheld shares value used for taxes - were they sold? It is a not sure thing. rfk

From the info you have, it is possible no shares were sold on the open market. Just redeposited back into company treasury stock at a value equal to the withholding credited on his W-2. The company would have had to send actual cash to the IRS on its 941 when it reported the withholding however. The transaction would not have generated any gain or loss to the employee/taxpayer. Not until he sells the other 444 shares.

[Gary2]

Hi Gary,

Thanks for the info. These are Restricted Stock Shares

After reviewing the info more, 790 shares were available for vesting and 346 shares were used to withhold for taxes. What went into the account was 444 shares.

So the total compensation was $9,211.05 and Value of shares withheld for tax was $4,033.01

I did call the IRS and the person stated that no reporting was necessary since there was no sale, but is this thinking correct for sure? What about the Withheld shares value used for taxes - were they sold? It is a not sure thing.

My reading of the instructions for the W-2 is that these are not properly reported as box 12 Code V (since technically they're not stock options), but there's no harm done and it does give the employee grounds for relying on the ordinary income amount having been added into the box 1 total.

The basis works out to about $11.66 per share (more precisely, 11.6596). Multiplying by the 346 shares held back gives $4034.22, or a net loss of about a dollar. I'm not sure why the numbers aren't coming out evenly - perhaps a small transaction fee, but not worth worrying about.

I'd report it on the Sch. D for three reasons (even if it came out to a net 0): First, since these things generate multiple pieces of paperwork from the company and/or broker, I'm not 100% sure that there is no 1099-B. Second, even if there is no 1099-B, and even if, as Burke said, the stock just went back into the corporate treasury, it's still technically a sale. Third, having that information in the Schedule D means that the tax return by itself has enough information to reconstruct the basis when the remaining 444 shares are sold several years from now, even if the W-2 and all the other supporting documents are lost. All you'll need is the purchase date (and knowledge that it came from a restricted stock plan) to match a future stock sale against this particular line on Sch. D.

Edit: A fourth reason: It's just easier than trying to treat it as a special case, especially when teaching less experienced preparers.

[JohnH]

I was about to take exception to reporting it under my general rule of "don't give them anything not required". But then I read your post all the way to the end, and what you say makes lots of sense. I may start making an exception to my general rule in this situation.

[Gary2]

If there is no gain or loss the brokerage is not required to issue a 1099-B for these stock option sales.
If you are sure there is no 1099-B then you are not required to report. The assumption is there is no gainor loss.

I don't think it's because there's no gain or loss, but rather because of an exception for employee stock plans. See Rev. Proc. 2002-50 (on page 173). Although this, too, refers specifically to stock option plans and not restricted stock plans, the more I think about it, the more it makes sense for the IRS to use the same procedures (including that confusing Code V) for restricted stock as they do for non-statutory options. (Restricted stock plans are inherently non-statutory, and follow the same rules for when the income is reported, and how much.)

In particular, the exception that allows the broker to skip the 1099-B also applies if there's a loss due to commissions being charged. (See the second example at the end of the above cited Rev. Proc.)

[joanmcq]

You'll have to ask the client if he sold the rest of the shares. RSUs shouldn't be coded 'V' (although nice employers will provide the info in box 14), and the cost is generally zero, so the basis=the compensation. Some of the shares were definitely sold/withheld to pay FICA, so the question is if he sold the rest of 'em. Most clients wouldn't know a 1099-B if it jumped out and bit them, but they do know if they got a check.

And if they were sold, the CP2000 will follow in a year or so.

[Burke]

Doesn't the "restricted" stock option terminolgy mean that the employee can't sell them for a specified amt of time? I have one like this. Options are granted -- can't be sold for 2 years. This process was a hot topic right after the financial debacle, and Wall St mess.

[joanmcq]

Isn't that the difference between the grant date and the vest date? If the options are vested, doesn't that mean they are now free to be sold and therefore included in income?

[Gary2]

Let's not confuse options with RSAs or RSUs.

I've never heard of any ability to ever sell employee stock options, either before or after vesting. They're not the same as publicly traded options. At most, they might be transferred due to divorce or death. Vesting with respect to an employee stock option doesn't imply the right to sell the option, it implies the right to exercise the option. Usually the stock that an employee gets from exercising such an option is unrestricted, but there could be exceptions.

Because employee stock option plans are always restricted, it's unusual to see them referred to as restricted stock options. They're generally either ESPPs (Employee Stock Purchase Plans), ISOs (Incentive Stock Option plans), or NQSOs (Non-Qualified Stock Option plans). Restricted Stock Awards and Restricted Stock Units (RSAs and RSUs) don't involve options (though they may look like it).

ESPPs and ISOs are the qualified plans, and they have the tax advantage that you don't pay taxes until you sell the underlying stock (except for AMT issues). NQSOs, RSAs, and RSUs are all non-qualifying, meaning in general that the taxable event occurs at vesting (ignoring 83(b) elections for RSAs, and ignoring situations where you can't assign a value at vesting time).

Fidelity has a good discussion of various plans: https://scs.fidelity.com/webxpress/h...tml#stockplans .