Stuart A. Bronstein wrote:

- quote -

Out of 2,350,000 Google responses to "phantom stock taxes", this
one might answer your query:

http://www.finance.cch.com/text/c40s10d470.asp

"When in doubt, Google."

Bill

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Seth wrote:

- quote -

Question: WHY did you "give" the employee stock to begin
with? Was it compensation for services? a bonus? If so,
taxable at inception. The so called options would be a
separate event.

ChEAr$,
Harlan Lunsford, EA n LA

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Stuart A. Bronstein wrote:
- quote -

Ah SO! Veddy cleah now.

So if I do the accounting work to set up a new company short
on cash, and get "paid" in phantom stock to be issued at
some future date, I'm really being given an IOU for my
services. IOW, I'm getting a note receivable and there
must be some value for that "note" (phantom note?) and that
value is taxable because it is for my services.

ChEAr$,
Harlan Lunsford, EA n LA

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Stuart A. Bronstein wrote:

- quote -

Some time ago when I was working and playing in Silicon
Valley (Santa Clara, CA) Phantom Stock and SARs (Stock
Appreciation Rights) were popular methods of executive
compensation.

From memory:
The company issues the employee virtual shares of stock
valued at the then market price of the real stock. The
grant comes with restrictions and there is a vesting date.
If and when the grant vests, the market price is compared to
the grant price and any increase is paid to the employee as
taxable compensation subject to tax withholdings.

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Harlan Lunsford <hnslunsford[at]bellsouth.net> wrote:

- quote -

I guess I should have done this in the first place, but
wikipedia is not the first thing I think of when I want
information that is really authoritative. Here's what they
have to say -

"Phantom stock is essentially a cash bonus plan, although
some plans pay out the benefits in the form of shares.
Phantom stock provides a cash or stock bonus based on the
value of a stated number of shares, to be paid out at the
end of a specified period of time. Phantom stock is favored
by closely held or family owned companies who want to
incentivize management and other employees without granting
them equity. Phantom stock grants align employees' motives
with owners' motives (i.e. profit growth, increased stock
prices) without granting employees an actual ownership stake
in the company. Phantom stock can, but usually does not, pay
dividends. When the payout is made, it is taxed as ordinary
income to the employee and is deductible to the employer.
Generally, phantom plans require the employ to become
vested, either through seniority or meeting a performance
target. Normally, phantom stock is taxable upon vesting,
even if not paid out. Use of a "rabii trust" that subjects
the payout to significant risk, such as the company not
being able to pay creditors, may solve this problem. Phantom
stock accounting is straightforward. These plans are treated
in the same way as deferred cash compensation. As the amount
of the liability changes each year, an entry is made for the
amount accrued. A decline in value would reduce the
liability. These entries are not contingent on vesting.
Phantom stock payouts are taxable to the employee as
ordinary income and deductible to the company. However, they
are also subject to complex rules governing deferred
compensation that, if not properly followed, can lead to
penalty taxes."

Stu

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Harlan Lunsford <hnslunsford[at]bellsouth.net> wrote:

- quote -

The way I understand it, phantom stock is an agreement that
at some point in the future the company will find someone to
buy it out. At that time the person will be give (and taxed
on) a certain amount of stock, which will immediately be
bought away from him.

To me it looks a lot like stock options, but the CPA claims
that it is not taxable when set up, only when the actual
stock is given and then sold. That doesn't make any sense
to me unless the promise to grant the stock before sale of
the business is not at all enforceable.

Or maybe it's not taxable because pegging it to a future
sale that is not currently contemplated, is too speculative
to value.

I'd just like to find out more about it, but haven't been
able to find any information in the normal sources.

Stu

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That leads me to an interesting hypothetical idea (which may
fall to "form over substance").

I have a company, whose stock is worth something. I give an
employee 10,000 shares, taking back an option to buy them
for $1/share; 2000 options expire each year for the next 5.
Clearly, the market value of what I give him is under
$10,000, and that value is taxable.

Over the next 5 years, I decide he's been a good and
valuable employee, so even though the stock is worth
$50/share, I let the options expire without exercising them.
Now he owns the stock free and clear.

On my side, there's no expense for letting the option expire
unexercised; there would be a capital loss for the price I
paid for it, only I didn't. On his side, there's capital
gain for the option expiring, but that's based on the amount
he received for the option, and he didn't.

So apparently (though I expect some of you to shoot this
down) by some advance planning, I get to reward him free of
taxes.

Seth

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:

- quote -

Yeah, that was my reaction too - it's either taxable when
received, or it's so uncertain that it may never happen. In
either case there are apparently better options.

Stu

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Stuart A. Bronstein wrote:

- quote -

I may have heard the term before, but the definition of
"phantom" stock just doesn't come to me right now.

Does it wear a mask?
Is the corporation chartered by the Republic of Bengalla?
Is a lithograph of the Skull Cave imprinted thereon?
Where is Diana?

Seriously, what the heck is it?

ChEAr$,
Harlan Lunsford, EA n LA

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Someone is proposing that one of my clients accept phantom
stock in a company as compensation for future services. He
claims that there will be no tax effect now, and in fact
none at all until the corporation is later sold at the
phantom stock kicks in.

Does anyone know about this stuff? To me it seems an awful
lot like an option, which would have some market value when
given, and thus would be taxable income at that time.

Stu

Moderator:
I had such offers when I was a consultant. Never accepted
a single one. Sounded to much like buying a pig-in-poke to
me. It also sounds like 1099 income taxable in the current
year.

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