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Previous employee misreported stock disposition

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rhildebra

Junior Member
I left my previous job in 2010, and transferred company stock from the employer sponsored account to my personal brokerage account.

Stock that I had not owned long enough to qualify as long term capital was reported to the IRS as sold and a gain reported to the IRS as ordinary income on my W-2. However, the stock was not sold and remains in my personal account.

What is the best way to get this resolved? If there is a form I could use with my return, that would be preferable to trying to wind my way through the burueacracy of my old employer to get a corrected W-2, but any experience or help is appreciated.
 


rhildebra

Junior Member
It wasn't an exercise of stock options. These were actual shares of stock that were granted to employees and deposited into a company sponsored brokerage account.

It works like this:

As a part of the employee compensation, each employee would be awarded a certain number of shares of stock. Lets use 100 shares as an example. On the day that the stock is actually granted, shares will automatically be sold to cover federal and state income taxes, as well as OASDI and medicare. Let's assume it took 40 shares to cover this amount, leaving 60 shares in the employee's company sponsored brokerage account.

So we now have 100 shares worth of ordinary income, 40 shares sold to cover withholding, and 60 shares in the employee's account with a basis of the sales price on the day it was granted. All is ok so far.


Now - when i left the company - I transferred all of my shares from the company sponsored brokerage account to my personal brokerage account. No stocks were sold, just 60 shares transferred to another account.

Since the 60 shares had not been held for a year, they were viewed as not being a long term capital investment (which is correct). However, the company for some reason ASSUMED that I had sold them at some ASSUMED price, and reported a gain as ordinary income on my W-2, when there had in fact been no sale nor gain. So now my W-2 is overstating my income.This is what I need to fix.

I'm looking for the best way to solve this with the least amount of hassle. Since I no longer work in the same city as my former employer, and they have a huge bureaucracy to wade through, i'm hoping there is a simpler solution (such as a form attached to my return) to get this done.

Thanks for all help.
 

tranquility

Senior Member
How unusual. You are given 100 shares of company stock with a unit of value on a certain day. You get 100 units of ordinary income for that. You then sell (or the company sells giving you cash for the resulting sale) 40 shares to pay the withholding. There is no capital gains because the basis and the amount realized are the same.

I'm wondering why the company is doing this? Why the stock switchy-switchy rather than just giving you the 60 shares and 40 units of cash. There seems no tax advantage for the extra hassle.

Still, you will have to get the W-2 changed. There will be no special form or explanation which will help you correct this just on your tax return. I still have a tingling in the back of my head the legal issues are not all out here and you may have some extra income, but, from your description you seem correct and you need a corrected W-2.
 

LdiJ

Senior Member
How unusual. You are given 100 shares of company stock with a unit of value on a certain day. You get 100 units of ordinary income for that. You then sell (or the company sells giving you cash for the resulting sale) 40 shares to pay the withholding. There is no capital gains because the basis and the amount realized are the same.

I'm wondering why the company is doing this? Why the stock switchy-switchy rather than just giving you the 60 shares and 40 units of cash. There seems no tax advantage for the extra hassle.

Still, you will have to get the W-2 changed. There will be no special form or explanation which will help you correct this just on your tax return. I still have a tingling in the back of my head the legal issues are not all out here and you may have some extra income, but, from your description you seem correct and you need a corrected W-2.
I agree. I cannot see any other way to do it other than making an income adjustment on line 21, and that would trigger at least an audit by mail, and would require an explanation of why he didn't get a corrected W2.

That would only be a viable option if the employer refuses to correct the W2.
 

rhildebra

Junior Member
I'm sure whatever advantage there is to doing it this way is all the company's. Even if there isn't a tax advantage there may be a cash flow or other accounting reason to do it this way. In fact I would bet lunch on that.

I guess I will have to go through the battle the hard way.

Oh Bother.
 

tranquility

Senior Member
There does not seem to be a company advantage in much of this at all. It seems to artificially dilute the company stock. Maybe an insider advantage to short the stock. As to the cash flow, a qualified option plan would give a present deduction and not have a need to come up with cash. I just don't get why they are doing things this way.

Does anyone have an idea?
 

LdiJ

Senior Member
There does not seem to be a company advantage in much of this at all. It seems to artificially dilute the company stock. Maybe an insider advantage to short the stock. As to the cash flow, a qualified option plan would give a present deduction and not have a need to come up with cash. I just don't get why they are doing things this way.

Does anyone have an idea?
I have actually seen similar initial transactions. The company awards stock to the employee and then cashes out some of the stock to cover the taxes. The stock that is cashed out is sold on the open market, therefore the company isn't incurring any cash expense in the transaction, and it ensures that the taxes are covered.

What completely baffles me is the company treating the transfer of the stock as compensation to the employee a second time, when the employee transferred the stock from the employer's stock account into a stock account belonging to the employee. That makes absolutely no sense.

UNLESS...the intitial transaction was for the value of stock options only, and the second transaction was for the exercise of the options completing the transfer of ownership to the employee. However, if that is the case its still very wierd, because if the employee never exercises the options there should be no tax liability for the employee.

The financial accounting rules for stock and stock options on the employer end are complex. I am wondering if somehow this is a smaller employer who is misunderstanding the financial accounting rules and/or trying to meld the financial acounting rules with the tax rules for the employees without truly understanding what they are doing.
 

rhildebra

Junior Member
Actually -
I believe they have just made a mistake. They may well have accidentally treated the stock transfer as a stock sale. This would have caused the result in my W-2 that I have. I will check the price they assumed as my "sale" price and see if it matches up to the day of the stock transfer. Sombody in payroll probably selected the wrong button to click.

I was hoping someone might know of a quicker and easier way to solve this than trying to take on the bureaucracy of a large company.

Beleive me, this is not a small company. It's one of the biggest and the method described is how they do it. Maybe by doing it this way, the sponsored brokerage firm handles all of the transaction details and the company avoids the cost of administering the program.
 

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