S corporation pass-throughs not self-employment income

Article Abstract:

The Tax Court ruled in a 1997 case that a taxpayer is not allowed to incorporate his S corporation pass-through losses in the computation of his self-employment tax on the ground that S corporation pass-through items are not treated as an element of self-employment income. The taxpayer concluded that he had negative self-employment income after including a partnership loss and the reported profits and losses of his proprietorship as well as his pass-through items. Arguing that such items are not part of self-employment income, the IRS contended that the taxpayer had taxable self-employment income when the S corporation losses were not included. The court sided with the IRS. Although the taxpayer was right in including the proprietorship and partnership items, his inclusion of S corporation pass-through items was rejected. The court held that the silence of the law on these items prove that they were not intended to be included as self-employment earnings.

Taxation, Self-employed persons, Self employed persons, S corporations, Loss deductions

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Gifts of options have no income tax effect

Article Abstract:

Letter Ruling 9713012 provides that an employee's gift of nonqualified compensatory options cannot be considered income. Recognition of income will happen when the options are exercised and the donees will obtain a corresponding step up in basis. In this case, the employer of the taxpayer introduced an incentive scheme which awarded employees nonqualified options to purchase stock. The taxpayer transferred options, both vested and non-vested, to immediate family members and to a trust for their benefit. He did not have beneficial interest or control over the trust while income or principal could not be employed to perform a legal responsibility. The IRS found that Sec 83(a) is not applicable until the option is exercised, when the taxpayer will include the compensatory spread in income.

Employee stock options

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