gift or not for highly appreciated exercised ISO

Technical topics regarding tax preparation.
#1
Keyad22  
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Taxpayer, single, is currently a CA resident. He has ISO fully exercised back in 2016. The basis is 600K. Currently market value is double digits Millions. It is not a public traded company but the stock has a very active secondary market. The price will be expected to keep going up in at least future years.

If he gifts his stocks to his parents, how much can he gifts out to maximize the lifetime gift and estate exemption 5.45M?
TP thoughts he should use the original basis of 600K to report on gift tax return, which means all the ISO 600K can be gifted within the exemption.

There are several other taxpayers in the same company; they all have a double digit market value exercised ISO with very low basis.
1. One is thinking to gift to his non resident alien parents which can saving CA taxes ( more than 13%) on final disposition.
2. One is thinking move to states without any state income tax and then finally disposed his ISO to avoid CA income tax ( he can definitely retired at 30’s).
3. One thought he should have use his self directed Roth IRA to exercise the ISO. Anyone is professional with this issue?

I also want to know if there are any regulation about secondary stock market, such as transaction dates, basis and proceeds reporting to IRS? If the secondary market buyers are in Europe or Asian, would they receive the reports? How can tax preparer know the information is correctly reported? For example, if taxpayer gift the ISO to his mom in UK, then she sold it to another buyer is France, then the France buyer sold to a buyer in Germany etc. It is possible in the capital market. Who should pay US income tax? I believe IRS will eventually figure out; eventually the last cash realization is in the United States. The ISO is from a US company.

I asked them to review their ISO documents thoroughly first.


Any contribution about related tax planning, pitfalls and what should CPA pay attention etc. are truly appreciated.
 

#2
WEISSEA  
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First the the 2018 lifetime exclusion is $11,180,000, based on inflation adjustments not $5.45M. Second I assume but you don't state that the ISO exercise has satified the holding period( 2 years for grant and more than 1 year from exericse)? Third is the $600K basis is the AMT basis? Fourth how did the ROTH IRA get involed?
 

#3
Keyad22  
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Taxpayer is a single, not married.
I did not add the inflation adjustment and 15K annual exclusion per donee.
Yes. The holding period is satisfied.
As for the basis, I am going to ask my client.

One taxpayer has a self directed ROTH IRA LLC account set up long time ago, sitting there without any investment. His friend told him he should invested through SD ROTH IRA LLC in his ISO or in Angel funds investment for other start-ups.
 

#4
WEISSEA  
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1."Taxpayer is a single, not married."
Beginning with gifts or deaths on or after January 1, 2018, the TCJA doubles the exemption amount to approximately $11.2 million per person, adjusted annually for inflation, or $22.4 million for spouses.
2. If the qualifying disposition ISO is sold by a non CA resident, then not taxable to CA. However, if gifted, then would seem client may miss the AMT tax credit for the AMT tax he paid when exercised in 2016. Not sure AMT credit carrysover to giftee.
3. ROTH IRA purchase of his ISO stock would be a disposition/sale with capital gain to him, which maybe fine if would have been done prior to large appreciation in stock.
4. The seller of the stock reports the capital gain according to the tax laws of the resident country. Note there maybe some FACTA type reporting of any gift over the reporting threshold. Form 3520 is used for large gifts from foreign to US persons. Not sure about US to foreign.
 

#5
Keyad22  
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Oh yeah. Fortunately, I told my client that right amount in the chat. Hew! I don't know why I insisted this amount now! Thanks!

My client just told me the 600K is strike basis (cost basis)

Does exercised ISO will be reported in form 3921?

The total market value of the ISO is more than double of personal exemption. He believes he can transfer all his ISO to his parents since the gift basis is only 600K!!! Do you think it is okay? What does the current market value mean? Does it matter the current value for the property appreciated when gifting?

Thank you very much!

By the way, I am doing payroll tax returns now and find there is no additional FUTA for CA employer for 2018. Good news!
 

#6
sjrcpa  
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Gifts are done at FMV for gift tax purposes. The donee gets the donor's basis for purposes of computing a gain on a later sale.
 

#7
Keyad22  
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Great! Thanks!
 

#8
makbo  
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Keyad22 wrote:Taxpayer, single, is currently a CA resident.
[...]
1. One is thinking to gift to his non resident alien parents which can saving CA taxes ( more than 13%) on final disposition.
2. One is thinking move to states without any state income tax and then finally disposed his ISO to avoid CA income tax ( he can definitely retired at 30’s).

I also want to know if there are any regulation about secondary stock market, such as transaction dates, basis and proceeds reporting to IRS? If the secondary market buyers are in Europe or Asian, would they receive the reports? How can tax preparer know the information is correctly reported?

I have a client (married) who exercised and sold high single digit millions worth of ISOs over recent years, and he asked similar questions: what about moving to Puerto Rico (different tax regime from the rest of U.S.), what about moving to Hong Kong (where spouse originated), and so on. FWIW, in the end he decided that the benefits of continuing to live in CA and paying tax outweighed the benefits of moving to those types of places.

To your questions, first make sure the special holding period for ISOs has been met before giving them, since a gift is treated as a disposition for this test.

As WeissEA mentioned, disposition by gift means the Minimum Tax Credit, if any, will not be used up, and the AMT basis adjustment will not be made.

As to reporting, see Form 1099-B instructions: "A broker or barter exchange must file Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, for each person: For whom the broker has sold (including short sales) stocks, commodities, regulated futures contracts, foreign currency contracts (pursuant to a forward contract or regulated futures contract), forward contracts, debt instruments, options, securities futures contracts, etc., for cash;
A broker is any person who, in the ordinary course of a trade or business, stands ready to effect sales to be made by others. A broker may include a U.S. or foreign person or a governmental unit and any subsidiary agency. "


However, see §1.6045-1(g)(1) for certain foreign persons who are exempt from 1099-B reporting.
 

#9
Keyad22  
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Thank you for all your help! I really like this site. Sometimes I really need support when dealing with clients; sometimes I know I missed this or that, sometimes that word is on the tip of my tongue, I can always get help from here.

Thank you!
 

#10
makbo  
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makbo wrote: disposition by gift means the Minimum Tax Credit, if any, will not be used up, and the AMT basis adjustment will not be made.

I'm second guessing my own comment here about AMT basis of a gift in the hands of the donee. I looked at the code sections for gift basis and for AMT, and didn't see anything directly connecting the two. My initial comment was based on something I read in a Kaye Thomas book (Fairmark) on equity compensation.
 


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