Employee Stock Options

Successful businesses will have successful, driven and strong employees.  Often businesses are faced with questions and issues regarding maintaining employees, hiring the right employees and incentivizing employees.  Incentive compensation arrangements are often used by large and small businesses as a means by which to reward employees, as well as a benefit to individuals the business is hoping to hire and maintain.  An incentive compensation plan can have a number of benefits over cash compensation and qualified plans such as:

  • They can be easy to adopt, with low upkeep and administrative costs
  • Employees can defer taxation
  • The plan can allow a key employee to participate and share in corporate growth through direct equity ownership, or grant equity flavored compensation such as phantom stock
  • Incentive compensation plans do not need to meet discrimination requirements, whereas qualified plans may need to meet such requirements

A small business such as an S corporation can use an incentive plan just like a C corporation, but one must be mindful of the S corporation eligibility rules.  The eligibility rules for an S corporation create matters and issues that must be considered when an S corporation implements an incentive compensation plan.  This article has been prepared by a business attorney and tax attorney to provide information regarding stock options available to small businesses when implementing an incentive compensation plan.

Stock Options

Stock options can be used by corporations to compensate certain key employees.  There are two forms of these stock options: 1) Nonqualified Stock Options (NQSOs) and 2) Incentive Stock Options (ISOs).

A Nonqualified Stock Option is an option granted by the corporation to an employee.  The option provides the employee with the right to purchase corporate stock at a specific and designated price through some date established in the future.  Generally, the option will grant an executive or key employee the ability to purchase stock at a price that is below fair market value.  For example, John, a highly trained & key employee of Do It Right, Inc. may receive an option to buy shares at $15/share, when the fair market value of the share is $30/share through a certain date in the future.   After a specific holding period, the option can be exercised, or it may vest in steps or stages in the future.

Options are not taxed at the date they are granted under Section 83 of the Internal Revenue Code, unless there is a readily ascertainable fair market value.  Generally, the treasury regulations would hold that an option not actively traded on a market does not have an ascertainable fair market value unless the value can be determined with reasonable certainty.  Therefore, generally the regulations presume an untraded option would not have a readily ascertainable fair market value.  It also can be relatively safe to assume that S corporation options would rarely have an ascertainable fair market value and therefore, the option would not be taxed until exercised.  When exercised, the difference between the stock’s fair market value and the amount paid by the employee in exercising the option are taxed to the employee as compensation, and the employer is permitted a deduction for compensation.

 

Incentive Stock Options

An incentive stock option plan is similar to a nonqualified stock option in that it is an option purchase stock in the corporation at a future date.  The difference is, the holder of an incentive stock option can receive preferential tax treatment upon exercising the option that is not available to the holder of a nonqualified stock option.  The incentive stock option plan must meet very specific standards.  Under IRC Section 422(b), the option must: 1) be granted to an employee via a plan approved by the shareholders; 2) have an exercise price not less than the stock’s fair market value as of the date of grant; 3) no longer than a 10 year exercise period, and be granted within 10 years; 4) restrictions on transferability; 5) the holder of the option, at the time the option is granted cannot own more than 10% of the combined total voting power of all corporate stock.  The last issue #5, does not apply if the option price is at least 110% of the fair market value of the applicable stock when granted.  When the requirements are met, the holder of the option can exercise the option free of tax!  Yes, the holder postpones the taxable event until the stock received via the option is disposed, sold or exchanged.

John R. McGuire is a tax attorney and business attorney at The McGuire Law Firm.  In addition to his J.D. Mr. McGuire holds an LL.M. in taxation.  Mr. McGuire advises his clients on matters before the IRS, tax planning & issues and business transactions from formation & sale to contractual issues.

Contact The McGuire Law Firm to schedule a free consultation with a business attorney regarding your business matters and issues.

Denver Business Attorney Denver Tax Attorney

Direct Stock Acquisition and Reverse Triangular Merger

There are multiple options to implement the acquisition of a business.  The purchaser or acquirer could purchase the stock of the target corporation, or the assets of the target corporation.  If the stock of the target corporation is to be purchased there are multiple options and variations by which the stock can be acquired.  The article below will discuss some of the common stock acquisitions that are available for a corporation to acquire another.

The Direct Stock Purchase

The direct purchase of stock from the target shareholders may be the simplest structure and means by which to implement a stock acquisition.  Through a direct stock purchase, the acquirer will purchase stock of the target from the shareholders of the target for an agreed upon purchase price or consideration.  When the target is a closely held corporation, the acquirer can work out and negotiate the deal directly with the shareholders of the target corporation.  When the target corporation is a publicly held corporation, the acquirer could purchase stock via the open market, or produce a cash tender offer (or exchange offer) for the purchase of the target corporation’s stock.  A tender offer would be an offer to purchase shares of the corporation for cash, in comparison to an exchange offer, which is an offer to exchange stock, securities or other consideration.  Certain (and different) securities laws must be considered when weighing tender offers versus exchange offers.

Often one or both parties will wish for the transaction to be a tax-free exchange under the Internal Revenue Code.  It is important to note that for the exchange to be considered under Internal Revenue Code Section 368, a tax free exchange of stock would require the consideration paid to the target shareholders consist solely of the voting stock the acquiring corporation, or the parent of the acquiring corporation.  See IRC section 368(a)(1)(B) and related treasury regulations for more information regarding a tax-free exchange.

Reverse Triangular Merger (Indirect Stock Purchase)

 A direct stock purchase may not always be feasible to consummate an acquisition, especially if the target corporation is publicly held.  When publicly held, each shareholder must decide whether to sell their shares via the public market or via the tender or exchange offer.  The odds may be stacked such that one or a few number of shareholders do not wish to sell, or perhaps are even unaware of the offer to dispose of their shares. There is an approach that can legally require the shareholders to sell known as the reverse triangular merger.  The benefit of the reverse triangular merger is that conversion of the shares occurs via operation of law, and is binding on the target corporation’s shareholders.  Thus, the purchaser or acquirer can legally force and guarantee the acquisition of the shares.

The reverse triangular merger would work as follows: Purchasing, Inc. wants to acquire all of the shares of Targeted, Inc., which is publicly held.  Purchasing Inc. and Targeted, Inc. have agreed upon the consideration to be paid and the other terms and conditions.  Purchasing, Inc. would form Subsidiary, Inc. and Subsidiary, Inc. would be merged with Targeted, Inc., with Targeted, Inc. as the survivor.  Via operation of law, the stock of Subsidiary, Inc. is converted to stock of Targeted, Inc. and Purchasing, Inc. as the sole shareholder of Subsidiary, Inc. would receive all of the stock of Targeted, Inc.  The former shareholders of Targeted, Inc. would receive the agreed upon consideration.  Further, Purchasing, Inc. is now the sole shareholder of Targeted, Inc.

The above article has been prepared by John McGuire of The McGuire Law Firm.  John is a tax attorney and business attorney in Denver, Colorado and can be contacted at John@jmtaxlaw.com

Denver Business Attorney Small Business Attorney

 

 

 

Constructive Ownership Within Foreign Corporations

Under the context of controlled foreign corporations, a U.S. shareholder is defined as a U.S. Person who owns or is considered as owning 10% or more of the total combined voting power of all classes of stock entitled to vote of a foreign corporation.  Does this language mean that constructive ownership is considered when determining whether the applicable person is a 10% owner and thus a U.S. shareholder?  The answer is yes!  Stock that is held directly, indirectly and constructively with the meaning of Internal Revenue Code Section 958 is taken into account when determining ownership.

Because of this rule and the application of attribution rules, a U.S. shareholder of shareholders are unable to avoid U.S. shareholder status by distributing stock of a foreign corporation to related parties.  For example, if Corporation 1 spread ownership equally amongst 20 other U.S. affiliates within an affiliated group, and thus each corporation would own 5% of the stock of Corporation 1, U.S. shareholder status could not be avoided for each shareholder because of the attribution rules, and each corporation would be treated as constructively owning the shares.  It can also be important to remember that the attribution rules, attribute the stock on the value of the shares owned and the not the voting power.  For example, assume stock was held by John in a corporation and the stock held was 10% of the votes but 25% of the value.  The value would be considered as owning 25% of the stock held.

What about ownership in a foreign partnership, foreign trust or even a foreign estate?  Do the controlled foreign corporation rules in Subpart F apply to these foreign “entities?”  The answer would be no because a foreign entity must be a corporation to fall within the definition of a controlled foreign corporation, and therefore, Subpart F would not apply as a result of ownership by a United State person.  Thus, we must ask the question, for purposes of a controlled foreign corporation, how is a corporation defined?  One should reference Internal Revenue Code Section 7701(a)(3) per the regulations when determining whether or not a foreign business or entity is in fact a corporation within the definition of the code.  Prior to 1997 a facts and circumstances test applied reviewing continuity of life, centralized management, limited liability and free transferability of assets whereby now, under 7701(a)(3) regulations, there are elective rules for classifying most foreign entities.  These classification matters could be akin to certain options, often referred to as “check the box” regulations.  For more information regarding check the box regulations, see 910 T.M.

You can contact a tax attorney and business attorney at The McGuire Law Firm to discuss your tax & business related matters.  The McGuire Law Firm has offices in Denver, Colorado and Golden, Colorado for your convenience and offers a free consultation to all potential clients.

Denver Business Attorney Denver Tax Attorney

Streamlined OVDP by Denver Tax Attorney

What is the Streamlined Offshore Voluntary Disclosure Program (OVDP)?  Simply put, the Streamlined OVDP is a program established by the IRS that may be considered “shortened” or “simpler” than the normal OVDP, and has a reduced or lesser penalty of 5% in comparison to the OVDP.  Certain criteria must be met to be eligible for the Streamlined OVDP, one of which is that the taxpayer must show the failure to report the assets and income was non-willful.  That being said, the IRS would define non-willful conduct as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of good faith misunderstanding of the requirements of the law.”

If an individual is eligible for the Streamlined OVDP the scope and effect of the streamline procedure is as follows:

The taxpayer must file amended tax returns, including all of the required informational tax returns (8938, 3520, 926 etc.) for each of the three most recent years for which the tax return due date has passed. For example, if it is May 20, 2015 and Joe Taxpayer has filed his 2012, 2013 and 2014 1040 tax returns, but failed to report all gross income due to foreign financial assets (and may have failed to file the FBAR), Joe would amend his 2012, 2013 and 2014 1040s to include the necessary income from the foreign financial accounts.  In addition:

  • The taxpayer must also file FBARs for the most recent 6 years the FBAR was due and should have been filed. FBAR is filed by filing FinCEN Form 114 online, which was previously TD F 90-22.1.
  • The taxpayer must pay the necessary offshore penalty, which is currently 5% for the Streamlined OVDP. The total amount of tax due when including the necessary income in gross income, interest and the streamlined offshore penalty should be remitted when filing the amended tax returns.

 

Now that we know the procedure for the streamlined program, how is the 5% penalty calculated?  The offshore penalty of 5% is calculated by taking 5% of the highest aggregate balance (or value) of the taxpayer’s foreign financial assets that would be subject to the offshore penalty for the years covered by the tax return and FBAR period.  The highest aggregate balance is determined by taking the year-end balances and year-end asset value(s) of the foreign financial assets that would be subject to the offshore penalty for the applicable periods of tax return and FBAR filings.  The highest value for a single year, for the applicable years would then be subject to the penalty.

 

What assets are subject to the 5% offshore penalty?  If a foreign financial asset should have been reported on an FBAR, but was not, the asset is subject to the penalty.  An asset can also be subject to the 5% offshore penalty even if the asset was reported, but gross income from the asset or in respect of the asset was not included in the taxpayer’s gross income.

 

If you have failed to report foreign financial assets and/or income, a tax attorney at The McGuire Law Firm can represent you before the IRS and assist you with your obligations.  This article has been drafted by John McGuire, a tax attorney in Denver, Colorado with The McGuire Law Firm.  Mr. McGuire’s practice focuses primarily on tax matters before the IRS, tax planning & related issues and business transactions.  You can schedule a free consultation with a Denver tax attorney by contacting The McGuire Law Firm.

OVDP Denver Tax Attorney

Form 886 H HOH

If you have claimed a filing status of Head of Household, the IRS may ask you to verify the elements that allow you to claim head of household.  The IRS can send you written notice requesting documents and information that would verify your status.  Form 886 H HOH helps provide the requirements of claiming head of household, and the documents you can provide to verify certain issues and elements of this filing status.

The video below provides additional information regarding this form.

If you have tax questions or tax issues, you can speak with a Denver tax attorney at The McGuire Law Firm by calling 720-833-7705.  As a tax attorney, John McGuire practices before the IRS regarding tax audits, IRS tax debts, tax planning & analysis for businesses & individuals and matters before the United States Tax Court.

Form 8606

Are distributions from a nondeductible IRA, such as a Roth IRA taxable?  IRS Form 8606 can be used to calculate the taxable amount (if any) from a nondeductible IRA.

The Video below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding Form 8606.  You can speak with a tax attorney by contacting The McGuire Law Firm at 720-833-7705.

 

John McGuire is a tax attorney and business attorney in Denver, Colorado.  Mr. McGuire assists clients with tax matters from tax planning and the tax implications of business transactions to tax matters before the IRS such as IRS audits, United States Tax Court cases and IRS debts.

IRS Supporting Document Request

Taxpayers may receive a IRS Supporting Document Request from the Internal Revenue Service requesting supporting documents for certain items, issues or positions taken on a tax return.  Common issues of which the IRS would request a taxpayer support could be IRS Filing Status.  For example, if a taxpayer filed head of household, the IRS may want documentation to verify the dependent and elements that allow a taxpayer to claim head of household.  Furthermore, a common document request by the IRS is to verify children and the related elements that are necessary to claim certain tax credits.

Generally the taxpayer can compile the necessary records and documents, and forward to the Internal Revenue Service via mail and the document request is not necessarily an audit whereby the taxpayer would meet with an examiner.  If the taxpayer after reviewing the necessary requirements and elements realizes they should not have claimed a certain filing status or taken a specific position on the tax return, they can agree with an assessment of tax that would have occurred had the taxpayer not claimed a certain status, dependent, related credit or other issue.

The video below has been prepared a tax attorney at The McGuire Law Firm Denver Tax Attorney to provide additional information regarding the IRS requesting additional documents to support positions taken on a tax return.

John McGuire is a tax attorney in Denver Colorado representing clients before the Internal Revenue Service on matters such as IRS tax audits, IRS tax debts, United States Tax Court Cases and other tax disputes.  Additionally, John works with many small and medium sized businesses from a business start up and business formation, to contractual matters and the eventual sale of a business or business interests.  If you need to speak with a tax attorney or business attorney, you can contact John at John@jmtaxlaw.com

 

What is FinCEN

FinCEN is the Financial Crimes Enforcement Network.  The goal and objective of FinCEN is to monitor financial institutions through regulations that require certain record keeping, record maintenance and reporting.  Because many crimes such as illegal drug trafficking, terrorism and others involve large sums of money and the use of financial institution, FinCEN and other law enforcement agencies feel the record keeping and reporting is invaluable in fighting crime.  John McGuire is a tax attorney with The McGuire Law Firm and has prepared the video below to provide additional information regarding FinCEN.  You can contact The McGuire Law Firm to speak with a tax attorney in Denver, Colorado or Golden, Colorado.

Is a Tax Lien Public Knowledge?

Are tax liens a matter of public record?  If so, why?  The answer is, yes, a tax lien, such as a notice of federal tax lien filed by the Internal Revenue Service is made public.  The reasoning is the same as to why certain debts are made a matter of public record as it provides notice to other creditors that a lien exists, as well as notice to the buyer.  A creditor or buyer must be able to access such information to determine whether to lend money to a debtor or take the proper steps to ensure clean title to an asset is received.  The video below has been prepared by John McGuire, a tax attorney at The McGuire Law Firm.  The McGuire Law Firm has law offices in Golden, Colorado and Denver, Colorado.  Please contact the firm to speak with a tax attorney.

Offshore Voluntary Disclosure Program

What is the Offshore Voluntary Disclosure Program?  Often referred to as the OVDP, this program was created to allow taxpayers with foreign financial accounts and interests to voluntarily disclose their interests for a reduced penalty.  Currently the foreign bank reporting requirements require that taxpayers with foreign financial accounts or interests report these interests when the aggregate amount in the accounts exceeds a certain threshold, which is currently $10,000.  This is often referred to as the FBAR.  When taxpayers fail to report such interests, penalties can be assessed by the Internal Revenue Service.  Thus the OVDP provides a means for taxpayers to be in compliance with the FBAR requirements, and reduce penalties that would apply if they do not voluntarily disclose and are eventually caught by the Internal Revenue Service.  John McGuire is a tax attorney in Denver, Colorado with The McGuire Law Firm and has prepared the video below to provide additional information regarding the Offshore Voluntary Disclosure Program.  You can speak with a tax attorney by contacting The McGuire Law Firm and schedule a consultation.