Question

Jim is a lawyer who works for GT Law Firm in Dallas, Texas. Jim lives in Frisco, Texas which is 25 miles from his office in Dallas. Jim does not like Frisco and ankdecides it would be best to move to Fort Worth, Texas and commute the 109 miles to the firm in Dallas. Jim incurs $2,500 of moving expenses. After moving to Fort Worth, the partners in the law firm take notice of Jim’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,Jim exercises the options when the stock price is $125 per share. Three years after that, Jim 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 Jim entitled to? What are the tax consequences of the transactions related to the stock options?

Answer 1

How much of a deduction for moving expenses is Jim entitled to?

IRC 217 allows a limited deduction for moving expenses for employees & self-employed people. They must meet the Distance & Time requirements. Time requirements for an EE that dies, becomes disabled, or involuntarily terminated after 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 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 deduction, your new work location must be a sufficient distance from your old home & you must been working shortly after you arrive.

Jim's moving expenses are non-deductible personal expenditures because the move is not employment-related & 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 & Distance requirements are not a factor in his case because other basic conditions were not met.

What are tax consequences of transactions related to stock options?

In regards of 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 option's exercise date. It also states that an employee must be employed by issuing company on grant date & 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 option price on the exercise date is an adjustment for purpose of alternative minimum tax. When employee sells the optioned stock, a LTCG is recognised & employer does not receive a compensation deduction. If the requirement are not met, the option is treated as a non-qualified stock option.

Jim held stock for the required period & he was still employed by GT Law Firm on the grant date and within three months before the exercise date, all of requirements for an ISO have been met. Jim will not have to recognize income on the granny / exercise date. Jim paid $105 per share even they were $120 per share. Jim has a long term capital gain of $15 per share.Jim 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.