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• Looking back...
• Thank you!
• The extended tax season is drawing to a close.
• Limited availability until November 6.
• Stock Options Converted to Purchase Contract.
• Courts develop a new "reasonable compensation" test for C corporations.
• IRS says most tool reimbursements to auto mechanics are taxable wages.
• Non-qualified options vesting because of a merger may be subject to golden parachute tax.
• IRS attacks "Son of BOSS" tax shelters.
• Visit our new articles.
• Subscribe to Michael Gray, CPA's Tax and Business Insight

Looking back...

Last weekend the Prospect High Class of 1970 celebrated its 30th anniversary reunion. This was a significant event for me because my wife Janet, my brother Stephen and I were all members of that graduating class. We were also part of the committee to organize the reunion.

One lesson of this type of event is the importance of keeping in touch. We have lost contact with many of our classmates since our twentieth-year reunion and, so far, we haven't been able to locate them. We are hoping that, using email, we can have more consistent contact with our classmates. A volunteer, Jodi Powell Newell, from the class of 1971 is maintaining a web site for the classes of 1969 through 1971 - the first four Prospect High graduating classes.

Some of our classmates brought photographs dating back to elementary school. Many of the members of our high school class had been in first grade elementary school classes with my brother and myself. Some of those people came to the reunion. We have known these people for over 40 years! Those relationships can be significant over a lifetime, since you often spend more time with your classmates than with your brothers and sisters during those school years.

This group of people were split up and reunited through the creation of new schools in the Moreland Elementary and Campbell High School districts.

Those of us who have been able to continue this long relationship were very fortunate. Some of our parents (like mine) have lived in the same place for over 40 years, making the continuing contact possible. My sisters weren't so lucky. We moved when they were teenagers - a very traumatic experience for them.

In our mobile society, we really should strive to be aware of the impact of our decisions to relocate on our children. Sometimes, you do what's necessary. Sometimes you have other choices that can have quite different consequences.

Here's another interesting note, despite our rising prices for housing, many of our classmates who left the area for some time have returned. Those home roots can call to you.

I hope you and your children (and grandchildren...) are so fortunate in building these lasting relationships. When you get right down to it, having good relationships with family and friends may be the greatest value in our lives.

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Thank you!

During the past month, Glen Kolze referred David Shan.

Thanks for your confidence in us. Welcome to our new clients!

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The extended tax season is drawing to a close. Late filers, get your information in now!

The extended due date for calendar year corporations is September 15, 2000. The extended due date for individuals is October 16, 2000. 'Nuff said!

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Limited availability until November 6.

Janet and I will leave for a European tour October 21 and return November 5. Before October 21, I'll be finishing extended income tax returns. This means my availability for consulting will be limited until we return. If you have an issue you need to deal with soon, you should make an appointment now! (And of course, after November 5, there won't be much year left...)

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Stock Options Converted to Purchase Contract.

Any modification of an employee stock agreement should be reviewed carefully for tax consequences. In FSA 200029013, the IRS national office found that changes made to an employee stock option agreement converted the contract to a stock purchase contract. As a result, the transaction was "closed" before the employees exercised their options, accelerating income to the employees for the excess of the fair market value of the stock over the contract price.

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Courts develop a new "reasonable compensation" test for C corporations.

A longstanding issue for closely held corporations is whether amounts paid to shareholders are non-deductible dividends or deductible compensation. In a recent string of cases, the Tax Court has developed a new approach to the problem, called the "reasonable investor" approach. The question the court asks is, "Would an unrelated, reasonable investor accept this arrangement." In most cases, an unrelated investor would expect some return on investment. (In high tech businesses, the return is the increase in value of the stock, mostly attributable to research and development creating valuable intellectual property rights.) According to this analysis, most corporations should be paying at least some dividends for a reasonable return on the original capital investment, aside from the salaries paid to owner-employees. If you have a C corporation, you should discuss this issue with your tax advisor. (See Normandie Metal Fabricators, Inc., TC Memo 2000-102 (3/27/00) and Rapco, Inc., 96-1 USTC ¶ 50,297 (2nd Cir., 1996).)

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IRS says most tool reimbursements to auto mechanics are taxable wages.

The IRS recently issued an Industry Specialization Paper for the Motor Vehicle Industry indicating that most reimbursements to auto mechanics for tool usage fail the requirements of an accountable plan, and so are taxable as wages. The old ruling that taxpayers are relying on to exclude this income, Rev Rul 68-624, is obsolete because it doesn't deal with Internal Revenue Code Section 62(c), which requires reimbursements to be made under an accountable plan to be tax free.

Some commenters have questioned the IRS's conclusions in this ISP and a similar Chief Counsel Advice 199921003. We may see litigation on this issue in the future.

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Non-qualified options that vest because of a merger may be subject to golden parachute tax.

The IRS recently issued Private Letter Ruling 200032017, dealing with the issue of payments (of income from exercise) relating to non-qualified options after a merger being subject to an excise tax as "golden parachute payments." According to the ruling, payments relating to options that were vested before the merger would not be subject to the tax. Payments relating to options for which the vesting is accelerated as a result of the merger may be subject to the tax, but the amount subject to the tax may be reduced because it was substantially certain the options would have vested without the merger.

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IRS attacks "Son of BOSS" tax shelters.

The IRS has been aggressively attacking a tax shelter arrangement for corporations called the Bond and Option Sales Strategy. Now it has indicated it will also attack a similar arrangement for individuals, called "Son of BOSS." (Notice 2000-44.)

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.