Written Assignment # 3 Frank is a lawyer who works for GT Law Firm in Dallas, Te
ID: 1175161 • Letter: W
Question
Written Assignment # 3 Frank is a lawyer who works for GT Law Firm in Dallas, Texas. Frank lives in Frisco, Texas which is 25 miles from his office in Dallas. Frank does not like Frisco and decides it would be best to move to Stephenville, Texas and commute the 109 miles to the firm in Dallas. Frank incurs $2,500 of moving expenses. After moving to Stephenville, the partners in the law firm take notice of Frank's dedication and give him 100 stock options as part of his compensation. The value of the firm's stock is $100 per share and the option exercise price is $105. Two years after receiving the options, Frank exercises the options when the stock price is $125 per share. Three years after that, Frank sells the stock for $120 per share and then leaves the firm to start his own firm. How much (if any) of a deduction for moving expenses is Frank entitled to? What are the tax consequences of the transactions related to the stock options?Explanation / Answer
Solution:
How much (if any) of a deduction for moving expenses is Frank entitled to?
IRC 217 allows a limited deduction for moving expenses for employees and self-employed people. They must meet the Distance and Time requirements. Time requirements for an EE that dies, becomes disabled, or involuntarily terminated after the move will be excused. Moving expenses paid by employer are excluded from EE's gross income as long as they are deductible under IRC 217. If expenses are non-deductible and paid by the ER, than they must be included in the EE’s wages. Federal tax laws allow you to deduct your moving expenses if your relocation relates to starting a new job or a transfer to a new location your present employer. To qualify for the deduction, your new work location must be a sufficient distance from your old home and you must been working shortly after you arrive.
Frank's moving expenses are non-deductible personal expenditures because the move is not employment-related and he is not moving to look for a new job or on account of his present job. Furthermore, he moved further away from his tax home on his own free will; having nothing to do with his job. The Time and Distance requirements are not a factor in his case because other basic conditions were not met.
What are the tax consequences of the transactions related to the stock options?
In regards of the employee requirements; IRC 422 states that an employee must not dispose of the stock within two years of the option’s grant date nor within one year after the option's exercise date. It also states that an employee must be employed by the issuing company on the grant date and continue such employment until within three months before the exercise date. If the requirements have been met, then there will be no tax consequences on grant date or the exercise date. The excess FMV over the option price on the exercise date is an adjustment for purpose of the alternative minimum tax. When the employee sells the optioned stock, a LTCG is recognised and the employer does not receive a compensation deduction. If the requirement are not met, the option is treated as a non-qualified stock option.
Frank held the stock for the required period (at least two years form the grant date and one year from the exercise date) and he was still employed by GT Law Firm on the grant date and within three months before the exercise date, all of the requirements for an ISO have been met. Frank will not have to recognize income on the granny or the exercise date. Frank paid $105 per share (exercise price) even they were $120 per share. Frank has a long term capital gain of $15 per share ($120 sale price - $105 exercise price).Frank will recognize a $1,500 LTCG on the sale date. GT Law Firm is not entitled to a compensation deduction in any year since the transaction was a qualified ISO.
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