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Treatment of stock options
Continued from page 2
Example 2: Assume the same facts as Example 1, except Mr. Smith sold the stock on March 15, 2000, when the FMV of the stock was $60 per share.

We determine the amount of income treated as wages from a California source as follows:

FMV of stock, date of exercise: $1,500,000 (30,000 shares @ $50 per share)

Less: Option price, date of grant: $300,000 (30,000 shares @ $10 per share)

Equal: Wage income, California source $1,200,000

We characterize the increase in the FMV of the stock from the exercise price of $50 to the sale price of $60 as capital gain income.

The capital gain income has a source in Florida, Mr. Smith's state of residence when he sold the stock.

FMV of stock, date of sale: 
$1,800,000 (30,000 shares @ $60 per share)

Less: FMV of stock, date of exercise: $1,500,000 (30,000 shares @ $50 per share)

Capital gain, Florida source: $300,000

Incentive Stock Option
Alternative Minimum Tax Adjustment

For federal and California AMT, the taxpayer must include, as an adjustment in figuring alternative taxable income, the amount by which the FMV of the stock exceeds the option price in the year the stock is substantially vested (the taxpayer's rights in the stock are transferable or no longer subject to substantial risk of forfeiture).

We require no adjustment if the taxpayer disposes of the stock in the same year of exercise. (Note: Please see IRS Publication 525, Taxable and Nontaxable Income, for additional information concerning substantially vested property.)

Ask the Advocate
picture of Debbie Newcomb Taxpayer Advocate
Debbie Newcomb
Taxpayer Advocate

Q: I am a certified public accountant authorized to practice before the Internal Revenue Service. The IRS provides my clients certain privileges of confidentiality when it comes to the tax advice I provide them. Does California offer something similar?

A: Yes. California's Taxpayers' Bill of Rights does protect communications about certain tax advice between taxpayers and their federally authorized tax practitioners (Tax practitioners authorized to practice before the IRS). Last year California added section 21028 to the Taxpayer Bill of Rights section of the California Revenue and Taxation Code to expand the types of communications protected (Assembly Bill 1016, enacted into law in September 2000). Here are its key points:

. The law is effective for communications made on or after January 1, 2000 and will remain in effect until January 1, 2005, unless a later statute changes the termination date.

Continued on page 5

New head of household website debuts
Continued from page 1 questions you should ask your clients who file head of household.

For information on how to schedule a head of household workshop in your area, contact our Head of Household Program at (916) 845-6870 or email us at

We will again provide workshops on the head of household filing requirements. Workshops include a head of household program overview, an explanation of the qualification criteria, and a discussion about important

July/August 2001

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