How Are Restricted Stock Units Taxed?

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

Employers often issue incentive stock to employees to promote retention and performance. Restricted Stock Units or “RSUs” are one of many ways to do so. Unlike similarly named restricted stock, an RSU does not initially provide the recipient with any ownership in the corporation. Rather, they are a contractual obligation of the employer to issue stock to the holder of the RSU once the RSU vests. It is only upon the issuance of stock that the RSU holder is taxed. Therefore, a Section 83(b) election is not possible or necessary for RSUs, unlike restricted stock.

Once an RSU vests, the corporation issues stock to the RSU holder. That results in compensation income equal to the fair market value of the issued stock at the time of issuance. The corporation receives a corresponding deduction. Like other compensation income, the issuance of stock is subject to withholding of income and FICA taxes.

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Federal Income Tax Update: Part 4

Keith, a white man with brown hair, wears wire-rimmed glasses, a white shirt and black jacket.By Keith A. Wood

I. Termination of S Corporation Status was Inadvertent where Shares were Owned by an IRA.

In PLR 202319003, the IRS again demonstrated its willingness to grant amnesty to inadvertent S corporation terminations. The IRS waived an S termination where shares were issued to an IRA.  The corporation elected to be an S corporation, but the election was invalid because one of its shareholders was an IRA. Apparently, when the S election was filed, the officers of the S corporation and the owner of the IRA did not know an IRA is not an eligible S corporation shareholder.

After the corporation learned the IRA was an ineligible shareholder, the stock was transferred from the IRA to its owner. The IRS waived the inadvertent termination and permitted the S corporation’s status as of its original incorporation date. However, as a condition of the favorable PLR, for all open years in which the S corporation had positive income, the IRA owner had to be treated as the shareholder for all purposes.  Also, for any open years in which the corporation had a net loss, the IRA had to be treated as the owner of the stock.

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Recharacterizing Gain on the Sale of Depreciable Property Between Related Parties

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

Section 1239 provides gain on the sale or exchange of certain depreciable property between related taxpayers is taxed at ordinary income rates rather than the more typical capital gain or unrecaptured 1250 gain rates. Section 1239 applies to property that, in the hands of the transferee, is subject to depreciation under Section 167. It includes depreciable real property as well as depreciable intangibles. Section 1239 discourages related taxpayers from taking advantage of the tax arbitrage between depreciation deductions that can offset ordinary income and more favorable capital gains rates that might otherwise be available on the sale of such depreciable property. Without Section 1239, related taxpayers might continuously sell or exchange depreciable property to repeatedly depreciate the property. Section 1239 removes that tax arbitrage strategy.

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Changes to R&D Deductions and Credits

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

The Tax Cuts and Jobs Act of 2017 made changes effective in 2022 for the R&D deduction under Section 174 as well as the interaction between that deduction and the R&D credit under Section 41, as provided in Section 280C. Although the changes generally reduce the deduction in the first year by requiring capitalization and amortization over 5 years, they also reduce certain limits on the Section 41 credit.

For years prior to 2022, Section 174 provided a deduction for qualifying R&D expenses. Section 41 provided a credit based on qualifying R&D expenses. However, because both the deduction and the credit arise from the same activities, Section 280C(c) provides a limit on either the credit or the deduction so taxpayers are not double dipping tax benefits from the same R&D expenses.

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Federal Income Tax Update: Part 3

Recent Cases Involving the Mailbox Rule, Time Limits for Filing Tax Court Petitions, and Equitable Tolling for Late Filed Petitions

Keith, a white man with brown hair, wears wire-rimmed glasses, a white shirt and black jacket.By Keith A. Wood

Over the last few months, the Fourth Circuit Court of Appeals and Tax Court have issued several interesting decisions involving the common law mailbox rule and the limitations on the Tax Court’s jurisdiction to review and consider late filed petitions. In its recent decision in Culp, the Third Circuit Court of Appeals ruled the Section 6213(a) deadline for filing a tax court petition is procedural rather than jurisdictional.  Therefore, matters of equity may toll the due date for filing a Tax Court petition. Read more

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A Message from the Tax Section Chair

Bob, a white man with brown hair and wire glasses, wears a blue tie, white shirt, and black suit. He is smiling.By Robert Gallagher

Greetings to the NCBA Tax Section! I would like to welcome everyone to a new year of section membership and activities. On behalf of myself and the Tax Council officers (Reed Hollander – Vice Chair; Chris Hannum – Treasurer; and Stacey Brady – Secretary), we look forward to seeing and working with you over the next year.

Reed and I were in Cary last week for the NCBA’s annual Leadership Orientation, where we met some of the officers of the other sections and heard about their plans for the year. I have already heard from Patti Ramseur, the new NCBA President, whose focus is going to include professionalism and especially the importance of civility within the profession. This is an area where the Tax Section can and in fact already does set a good example. I do not know how to quantify civility, but it is my belief that tax practice among the private bar tends to be more collaborative than many other areas of law. Although some of us occasionally find ourselves in opposition to a counterparty or the government, my experience is that our practitioners are able to part as friends, or at least as respected colleagues, at the end of the day.

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Timing of Deductions Under Section 461

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

Taxpayers primarily focus on the ability to take a deduction. Another consideration, however, is the timing of the deduction. Section 461 provides the rules for when a deduction can be taken based on both the timing regime the taxpayer has elected and the facts and circumstances surrounding the deduction.

Most taxpayers use the cash method. For cash method taxpayers, pursuant to Treas. Reg. Sec. 1.461-1(a)(1), “amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid.” That means cash method taxpayers can generally take a deduction in the year in which the expense is paid.

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Statute of Limitations on Assessments

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

Generally, Section 6501(a) prohibits the IRS from auditing a tax return and assessing additional tax after three years from the filing date. Thus, the IRS has only those three years to initiate and conclude an audit and assess additional tax. In some circumstances, however, the statute of limitations extends for longer periods. Moreover, the filing date is not always the starting point for applying the statute of limitations.

Section 6501(b)(1) provides when a tax return is filed before the due date, the return is treated as if it were filed on the due date in applying the statute of limitations. Additionally, Section 6501(b)(2) provides certain employment and withholding tax returns filed before April 15 of the year following the tax year to which they apply are treated as filed on April 15 of such year.

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Federal Income Tax Update: Part 2

Keith, a white man with brown hair, wears wire-rimmed glasses, a white shirt and black jacket.By Keith A. Wood

I. Audit Statistics: What Are Your Chances of Being Audited?

The 2022 Internal Revenue Service Data Book contains audit statistics for years 2012 through 2020, as of the fiscal year ended September 30, 2022 (FY 2022). For tax years 2018 and earlier, the statute of limitations for audits had generally expired as of September 30, 2022. However, for 2019 and 2020 returns, the statute of limitations has yet to expire, so additional returns of those years may be audited.

For 2012 through 2018, audit rates dropped significantly. For example, individual tax returns had an audit rate of 0.8% for 2012 returns versus 0.3% for 2018. In addition, for individuals with income between $1 million and $5 million, the audit rate dropped from 4.9% for 2012 returns to 1.2% for 2018 returns.

The overall audit rate for C corporations dropped from 1.3% for 2012 returns to 0.5% for 2018 returns. For partnerships and S corporations, the audit rate for 2012 returns was 0.3% and 0.4%, respectively, compared to 0.1% and 0.1% for 2018 returns.

In FY 2022, 21.4% of audits were field audits. The others were correspondence audits.

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The Statute of Collections

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

Section 6501 provides the statute of limitations for the IRS to assess additional tax. Equally important is Section 6502, which provides the statute of collections (sometimes referred to as the collection statute expiration date or “CSED”). The statute of collections generally provides the IRS must collect a tax within 10 years of assessment.

The CSED permits a tax to be collected by levy or a court proceeding only if the levy is made or the proceeding had begun before the CSED. Section 6502(b) provides the date on which a levy is made is the date the notice of seizure is provided to the taxpayer as required by Section 6335(a).  As to a seizure that is made by court order, the proceeding begins upon the filing of the IRS’s suit against the taxpayer. The statute of collections does not expire after the proceeding is concluded until the tax is satisfied or the judgment becomes unenforceable. Thus, the CSED cannot be used to defeat the IRS’s right to collect a judgment entered by a court.

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