Tax News

CCH (cch.taxgroup.com) reports:

  An individual made a valid Code Sec. 83(b) election following the exercise of incentive stock options (ISOs), could not claim a "claim of right" deduction when nonvested shares were forfeited and could not claim alternative minimum tax (AMT) capital losses as an alternative tax net operating loss (ATNOL). Because the purpose of a Code Sec. 83(b) election is to realize income on assets that otherwise would not be included in income under Code Sec. 83(a) due to a substantial risk of forfeiture, the mere fact that an asset is subject to a substantial risk of forfeiture is no justification either for excluding it from the definition of "property", or for invalidating an otherwise valid Code Sec. 83(b) election. Further, there was no merit in the taxpayer's argument that depositing the nonvested shares into an escrow account did not satisfy Reg. § 1.83-3(e). The taxpayer did not provide any evidence to show that the escrow account used by his employer was inadequate to protect his shares from the employer's creditors.

  Further, the taxpayer was not entitled to a "claim of right" deduction under Code Sec. 1341 with respect to the forfeited, nonvested shares that were subject to a valid Code Sec. 83(b) election. Code Sec. 83(b)(1) specifically disallows any deduction with respect to forfeiture of nonvested shares subject to a valid deduction, and Reg. §1.1341(a)(1) only permits deductions allowable under other provisions of the Internal Revenue Code.

  Finally, the taxpayer's AMT capital losses were subject to the limitations on capital loss deductions in Code Secs. 172(d) and 1211(b); consequently, they were not deductible as ATNOL under Code Sec. 56(d)(2)(A)(i). Under Code Sec. 172, net capital losses are excluded from the computation of ATNOL; the taxpayer could only claim them as direct adjustments to AMT income, subject to other limitations.

  Affirming the Tax Court, 127 TC 184, Dec. 56,670.

A.J. Kadillak, CA-9, 2008-2 USTC ¶50,462

Other References:

 
Code Sec. 55

  CCH Reference - 2008FED ¶5101.14

 
Code Sec. 56

  CCH Reference - 2008FED ¶5210.57

  CCH Reference - 2008FED ¶5210.63

 
Code Sec. 83

  CCH Reference - 2008FED ¶6390.465

  CCH Reference - 2008FED ¶6390.77

 
Code Sec. 1341

  CCH Reference - 2008FED ¶31,882.227

  Tax Research Consultant

  CCH Reference - TRC COMPEN: 27,108.05
CCH Reference - TRC FILEIND: 30,156.10
CCH Reference - TRC FILEIND: 30,204