ISO stocks cashed out and escrow payments

[send2inbox]

Had exercised ISO stock 3 times since it was granted in 2013 spread across 4 years.In 2016 the company was acquired and we cashed out. However a portion of it was in escrow to be given to employees in 2 installments. We got first installment in 2016. Form 1099B have 2 entries. 4500 stocks cashed out on 1/2016 and the escrow payment of 4500 stock on 8/2016. Here we only had exercised 4500 stocks in total, so not sure how to deal with this.

Btw the rest of the ISO stocks in 1/2016 was converted to the acquiring company stocks.

[TomYoung]

"Form 1099B have 2 entries. 4500 stocks cashed out on 1/2016 and the escrow payment of 4500 stock on 8/2016. Here we only had exercised 4500 stocks in total, so not sure how to deal with this."

That sentence is not really very clear.  I take it that you owned 4,500 shares, shares acquired via ISO's.  It looks to me like you've received the full amount of proceeds in 2016 so I don't see the problem.  You can enter that at two trades or combine then as one trade, (the IRS's position is that if an installment is "in escrow" then you count that as "proceeds" in the year of sale, even if you receive it in a later year), it doesn't really make a difference   I'd simply enter that 1/2016 trade date with the full amount of proceeds reported.

"Btw the rest of the ISO stocks in 1/2016 was converted to the acquiring company stocks."

That sentence is even more confusing because "ISO stocks" seems to suggest that exercised all your ISO's but previously you said you'd exercised ISO's for 4,500 shares.  I think you are saying that the unexercised ISO's were simply "rebranded" as "acquiring company stock" such that when and if you do exercise the ISO's you'll receive stock in the company that acquired your old company.  If that's correct there should be no income tax reporting required.

Tom Young

[send2inbox]

Thank you for the answer. It has partially helped me understand. Sorry, my question was not clear enough.
On 2013 start up company X granted 4000 stocks distributed over 4 years. This was split 2x resulting in 8000 stocks.
This was exercised 3 times. 2014,2015,2016 resulting in 4500 stocks exercised.
X was acquired by Y in 2016. So 4500 got cashed but a portion of the amount was put in escrow to be distributed in 2 installment. 1st installment we received in 2016.
The rest of 3500 stocks were converted to company Y stocks on acquisition,2016.

On Company Y provided 1099-B, we have 2 entries.
1. 4500 stocks * x = amount1
2. 4500 stocks * y = amount2 - This is escrow 1st installment
So they have totaled it to 9000 stocks, eventhough we had only 4500 stocks. This is where it is confusing. How do we report tax for the second part ?

Also we did not file any AMT in any previous tax year. Would this impact the 2016 tax  calculation ?
Thank you.

[TomYoung]

They are not reporting 9,000 shares, they are reporting two payments against 4,500 shares.  Simply report one sale of 4,500 shares with proceeds of amount1 plus amount 2.

"Also we did not file any AMT in any previous tax year. Would this impact the 2016 tax  calculation ?"

I don't know if you'd have been subject to AMT in 2014, 2015 and now 2016, but if you are saying that you didn't report the "spread" between exercise and FMV in 2014, 2015 and now 2016 as an AMT adjustment item, that's not correct.  You might want to go back to those 2014 and 2015 income tax returns and see if you should have been subject to AMT.  If you're not, then there's no problem.  If you should have been you probably should amend those two years.  The 3,500 shares you acquired as part of the acquisition would also, I'm pretty sure, be considered an "exercise" that also needs to be reported for AMT purposes.

You might be better off dealing with a local professional here.

[send2inbox]

Thank you. How do I report the second installment of escrow to be paid in 2017 which will also be part of 4500 stocks * someamount = total amount ?

[TomYoung]

It depends on the nature of the "escrow" account.

Per the IRS:
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Escrow Account

In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. These sales cannot be reported on the installment method. The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement.

Substantial restriction.   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer.
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If the escrow amount is certain, requiring only the passage of time, you count the escrow amount in the year of sale.

[mnmiller23]

This is a nice explanation of a very similar situation that I'm in.  I received a 2016 1099B reporting the proceeds only from an escrow paid in 2016 for a sale of ISOs that took place in April of 2014.  It was classified as a noncovered security.  My form didn't even reference a cost basis or date acquired...only the sale date and gross proceeds.  I may be interpreting incorrectly, but does this mean that I don't need to enter any information in the income portion of my 2016 taxes for this 1099B?

[TomYoung]

I assume you simply reported the sale of all your stock in April, 2014, rightly or wrongly.  So at this point all the proceeds will be taxed as you have no basis to report.