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Strategies & Market Trends : Income Taxes and Record Keeping ( tax ) -- Ignore unavailable to you. Want to Upgrade?

To: Ira Player who wrote (2228)	6/30/1999 11:19:00 PM
From: Spots	Read Replies (2) \| Respond to of 5810

Ok, while speculating, try this one: I (hypothetically) have incentive stock options (ISOs) from my company which are deep in the money. I also have a self-directed IRA at a broker who will execute ISOs, that is, the broker will issue a check to the company along with an option exercise form duly executed and receive the stock back into a brokerage account. Now, I generate a cash balance in the IRA sufficient to exercise the ISO, and the broker executes it with IRA funds and receives the stock issued into the IRA. What are my arguments to the IRS? Well, one argument is that ultimately I have converted long-term gain (which if held long enough the ISO would generate -- a qualified ISO, BTW) into ordinary income which the IRA will ultimately generate. This sounds pretty good. The IRS might even buy it. Here's one big advantage (if the IRS buys it): Suppose I have a number of different ISOs, deep in the money, and if I exercise them I have to come up with the cash for the option price, which will cost me capital gains to liquidate positions to raise that kind of money. Alternatively, I could exercise one or two ISOs, sell them, then use the proceeds to buy up the rest (say they're near expiration to make this strategy reasonable). This will cost ordinary income on the ISOs sold, generally speaking. Neither of these are very palatable, BUT if the IRA buy works, THEN I can buy a couple of ISOs into the IRA, liquidate them without tax consequences, then use those proceeds to buy up more, and so on, till they're all bought up. Tax is deferred, but still I've converted (potential) long term gains into (for sure) ordinary income, including the original cost. I wonder if the IRS would buy that. Any opinions? Spots

To: Ira Player who wrote (2228)	7/2/1999 2:14:00 PM
From: Kaye Thomas	Read Replies (1) \| Respond to of 5810

My previous message responded to the "normal" question of loss disallowance when there's a sale in a taxable account and a purchase in an IRA. Ira Player (great name, that) raises the reverse question: if the wash sale rule applies in that situation, then you should be able to apply it in reverse, selling a loser in an IRA and buying it in a taxable account with an increased basis. One possible response of the IRS to this situation would be to say that it isn't the wash sale rule, but rather the related party sale rule that applies (see my previous message). In that case, you don't get to deduct the loss on a subsequent sale (although you can use the disallowed loss to reduce a gain if the stock recovers). In this way, the related party rule is worse than the wash sale rule. More likely though, the IRS would simply point out that IRAs never deduct losses, so the amount of the disallowed loss is zero and there's nothing to add to your basis. I find it hard to believe that a court would side with the taxpayer in an attempt to move basis from an IRA to a taxable account. Kaye Thomas, author Fairmark Press Tax Guide for Investors fairmark.com