Current News | Be Judicious When You Accept Stock in Lieu of Compensation
Under IRC Sec. 83(a), gross income includes the value of property received in connection with the performance of services less the amount paid (if any) at the time rights to the property are not subject to a substantial risk of forfeiture or transferable.
Taxpayer exercised a grant of nonstatutory stock options from his employer that was not a publicly traded entity, but whose shares were traded in an over-the-counter market. The value on the exercise date was determined to be $750K and the taxpayer’s option price was $5.5K. Taxpayer was unable to sell his shares before the company declared bankruptcy several months after the options were granted and exercised. The Tax Court denied taxpayer’s claim that the stock was worthless on the exercise date because it regarded the market maker, who determined the stock’s FMV, as reliable in light of their status as a member of NASD and NASDAQ, and the company’s subsequent bankruptcy was not a foreseeable event on the exercise date. Taxpayer was entitled to a worthless stock deduction the following year (limited to $3,000) and a $747K capital loss carryover. Patrick Sheedy , TC Memo 2012-69 (Tax Ct.).