Hospital Stock and Taxes?

Posted on May 1, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Q: I am a hospital employee. What are the ways that I can acquire stock in my public company without current cash activity; i.e.; taxes; any thoughts?

For example, at this time I do know it is important that any loans be subject to full recourse liability.

I also understand that if the loan is secured by the stock on a non-recourse basis, the transaction may be treated as if it were a grant of an option, and thus there would be no transfer of property until the loan is paid.

Thanks for your help. 

Dr. William Henry Biggerstaff

Costa Mesa, CA  

Filed under: "Ask-an-Advisor", Accounting, Taxation |

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One Response

  1. Executive-Post, on May 1, 2008 at 10:35 AM said:

    Doctor Biggerstaff,

    The rationale for treatment as an option is that if the property drops in value below the amount of the debt, the employee will not pay the debt and walk away from the property, as he would an option. Thus, until the note is paid, no transfer has occurred.

    This could negate the effect of a Section 83(b) election, as described below.

    The IRC §83(B) Election

    Example:

    IRC §83(b) allows an employee who receives employer stock on a tax-deferred basis to be taxed immediately in the year the stock is transferred, regardless of the presence of a substantial risk of forfeiture. If the employee makes such an election, any subsequent appreciation is not taxable as compensation.

    For example, in 2000, a newly founded and highly promising emerging healthcare organization [EHO] grants restricted stock worth $10,000 to a senior executive conditioned upon her remaining with the company for the next five years. In the year 2005 – when the stock vests – it is worth $100,000. The executive has no immediate intention to sell the stock. If she makes an §83(b) election on transfer, the executive will recognize $10,000 of ordinary income for that year, and the subsequent $90,000 of appreciation will be subject to the lower capital-gains rate only if and when she sells the stock. If the executive does not elect to use §83(b), she would not recognize any income for 2000, but in 2005 she would recognize ordinary income in the full amount of $100,000.

    Example:

    The following example demonstrates how the use of employer loans, in connection with a Section 83(b) election, can be used to great advantage to an employee.

    The employer lends the employee the cash necessary to meet the income tax liability of a $10,000 grant at 30%, or $3,000. The employee gives the EHO employer a promissory note for $3,000, bearing interest at 8%. Thus, the employee can acquires $100,000 worth of employer stock ownership after five years with no out-of-pocket cost at the date of the grant and an interest cost of approximately $1,300, payable over five years.

    Of course, in lieu of making a loan to the employee, the employer can simply agree to give the employee, as a bonus, sufficient cash to cover the tax liability. This is obviously more costly to the employer, as it results in the employee acquiring stock at no out-of-pocket cost.

    LaVerne L. Dotson; JD, CPA

    Related Information Sources:
    Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
    Financial Planning: http://www.jbpub.com/catalog/0763745790
    Risk Management: http://www.jbpub.com/catalog/9780763733421
    Healthcare Organizations: http://www.HealthcareFinancials.com
    Administrative Terms: http://www.HealthDictionarySeries.com

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