I posted this a couple of days ago but am taking the liberty of trying again as I didn't get any replies. Can anyone help or give me some pointers? Thanks.In 1998 my employer was bought by a larger company. The stock options we held were bought out and we received some money then, and some was held in escrow for one year (subject to some conditions). We received the second part of the money in 1999. I treated this as a simple Installment Sale as I knew how much the second installment would be. Both qualified as long term capital gains.Some additional money was also put in escrow as an expenses fund. What was left was shared pro-rata among the original stock option holders in 1999. I received a 1099-B describing the extra money as 'Acquisition Proceeds'. How should this extra money be taxed???Is the new money LONG term capital gains as the original money was?How do I include it on my 1040?Any help you can give would be gratefully appreciated.
<<I posted this a couple of days ago but am taking the liberty of trying again as I didn't get any replies. Can anyone help or give me some pointers? Thanks.>>Since I'm working backwards, I don't know if this was answered or not. But I'll take your word for it. <<In 1998 my employer was bought by a larger company. The stock options we held were bought out and we received some money then, and some was held in escrow for one year (subject to some conditions).>>You use the term "stock options" loosely, it appears. I don't know exactly what you have. Which makes it difficult to know how it might be treated for tax purposes. As you should know, stock "options" could include any number of things, ISOs, NQs, etc. So what I would first suggest is that you visit the Fairmark Tax Site (http://www.fairmark.com) and try to determine what you really have. Kaye Thomas also has message folders that you might want to use to post your question.<< We received the second part of the money in 1999. I treated this as a simple Installment Sale as I knew how much the second installment would be. Both qualified as long term capital gains.>>I can only assume that you knew what you were doing, and you did it correctly. But, did you know that stock traded on a recognized stock exchange are not available for installment sale treatment? Just one of the points and pitfalls of using installment sales. I don't know if YOUR stock is traded or not...just thought I point this out. <<Some additional money was also put in escrow as an expenses fund. What was left was shared pro-rata among the original stock option holders in 1999. I received a 1099-B describing the extra money as 'Acquisition Proceeds'. How should this extra money be taxed???>>No clue. If it applies to the original sale, it would appear to be an additional payment. Since you have already used up your basis in the prior installment sale, this additional payment would have no basis, and would all be taxable. That's my best GUESS. <<Is the new money LONG term capital gains as the original money was?>>Again, I would GUESS long term...since it was tied to the original sale. <<How do I include it on my 1040?>>I would GUESS on Schedule D. Isn't your new company helping you out with this transaction? I guess my first questions would be directed to THEM. Sorry I can't be more definite. TMF TaxesRoy
Roy, thanks for your ideas.The options in question were ISO options for a (non-traded) start-up company, which were completely bought out when the company was sold. I assumed the extra money from the Escrow Expense Fund was fully taxable, but I am unsure how to include it on the Schedule D because it has zero cost basis and wasn't really bought or sold, just distributed.The new company have referred me to the distribution agent who is very good at errrrm, being evasive!Thankyou for your help, I'll keep trying.
I hate to come in late, but there are several ways the ISOs could have been "bought out" and most of those end up giving you ordinary income, rather than LTCG. How authoritative was the conclusion that the ISOs gave you capital gain when Oldcorp was acquired by Newcorp and the options were bought out?LoTax
Hi LoTaxThe ISO's were definitely LTCG, all the conditions had been met etc. etc. Done and dusted.I'm sorry, I should have been clearer from the start, my question really regarded the EXTRA money that came as a result of an Expense Fund that wasn't completely depleted, and therefore was distributed to the original shareholders at the time of the second part of the Installment Sale (1999). I do not know how to include this extra money in this year's return.
js -- The additional money is just additional gain from the original sale. It still goes on Schedule D... the transaction date is the date of the original sale, and you can just 'footnote' or 'asterisk' that the money represents additional proceeds from an earlier sale. The only problem you might have is if you had any tax basis in the ISOs (normally, you don't). This goes back to the question of whether LTCG treatment was appropriate.... Under Section 421 of the Internal Revenue Code, you have a 'disqualifying disposition' unless you hold the STOCK (NOT the ISO) for 'a year and a day' after exercising the ISO. So if the acquiring company bought your ISOs, you can't have LTCG. Now, let's say that the acquiring company bought your stock, and you had held the stock for more than one year before then -- so LTCG treatment is correct. This also means that you have some tax basis in those shares... the amount of the ISO exercise price. When you do an installment sale, you have to allocate your tax basis across the TOTAL amount you are going to receive for the stock. So on the original Schedule D, you would have been required to pro rate your basis and only apply a portion to the payment you received (in 1998, I presume). Then, when you report the additional amount in 1999, you get to use the rest of your basis (assuming that the 1999 payment is the last one you could receive). You might ask, "How can I allocate my basis if I don't know how much I'm going to get from the escrow?" The answer is that in general, you have to assume that you'll get everything in the escrow that is coming to you. In other words, you assume that there won't be any claims against the escrow that reduce the amount you are entitled to get. Your next question might be, "Why should I assume that? That means I get to use LESS of my tax basis against the amount I received in 1998... so my 1998 gain is bigger and if there are any claims at all, in 1999 I'm using 'too much' basis against the 1999 income." That's all very true, but that's the way the IRS wrote the rules. It might be a good idea for you to talk to a professional and get some actual advice based on a complete picture of the facts... Fool on!Barbara
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