stock gift from employer and subsequent sale

Employer gifts stock in private company to employee in 1994. Employee sells stock back to employer in 2006. Employer gives 1099-misc to employee for $3000. This smells like employee compensation. Should employee file substitute w-2? Employee is still employed by employer. Help.

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Reply to
Rhickey
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Seems to me that if it was compensation (probably was), it was compensation in 1994. Stu

Reply to
Stuart A. Bronstein

Smells fishy, yes.

Are you sure the 1099 was in connection with said stock sale? I would guess the "gift" was worth the 3000 on the

1099 and that's how they chose to handle it. If so, you'll need to explain with the tax return (paper filed of course) what happened and place the transaction on schedule d, short term of course. ChEAr$$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

It was compensation in 1994, at then fair market value. If the sale price in 2006 was at fair market value, it's long term capital gain (loss). If it was above fair market value, the excess is employee compensation. Seth

Reply to
Seth Breidbart

Except in extremely weird circumstances, there is no such thing as a gift from an employer to an employee. The grant of stock to the employee was compensation for services rendered, and should have been recognized as such by the employee for the year in which the stock was not subject to any substantial limitations on transfer or any substantial risk of forfeiture. The amount to be included as ordinary compensation income would have been the FMV of the stock as of the date that it was no longer subject to a substantial risk of forfeiture or substantial limitations on transfer. See Code Sec. 83. As a result, when the employee sold the stock back to the employer in 2006, the employee would have had long term capital gain or loss to the extent that the amount realized on the sale exceeded or was less than the amount that the employee originally included in income. Further, that gain/loss would not have been a compensation transaction, and the employer should not have issued a Form

1099-MISC to the employee in 2006. Instead, the employer should have included on the appropriate Form W2 the amount that the employee was required to initially include in income as ordinary compensation income as a result of the grant of the stock. The employer should also have withheld FICA, FUTA, and income tax with respect to that amount. Insofar as what the employee should do now, assuming that none of the foregoing was done as it should have been, that is a more interesting question which should be given some thought and some research. Essentially, at this point the statute of limitations has run on the original failure to include, assuming the stock should have been included prior to 2000, unless the return for that year was never filed, or was fraudulent (a slight possibility). In that case, the IRS would be unable to assess a deficiency for the year in which the income should have been included. However, under some variant of the tax benefit rule, the IRS might be able to argue that, since the employee never included the value of the stock in income as ordinary compensation, the employee had no basis in that stock, and that the entire amount realized should be treated as gain. With respect to the Form 1099-MISC, I am inclined to say that the employee should ask the employer to withdraw the form, and failing that, should include a statement on Form 8275, Disclosure Statement, to the effect that the form was improperly issued because it represents the gain realized on the sale of employer stock back to the employer during 2006, which was a capital asset transaction, and not ordinary compensation for services rendered for 2006. Of course, the problem there is that you've already told the IRS where the second shoe dropped, and they are likely to go looking to see where the first shoe dropped (i.e., they'll review past returns to see if they can identify when the stock was included in income as compensation). They are therefore much more likely to audit assert a deficiency as mentioned above.
Reply to
Shyster1040

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