True stories: tax season tales from the TaxTalk listserve.

• Author: Williams, Leonard W.
• Position: California tax - Tax treatment of stock options

The TaxTalk listserve has just successfully completed its sixth filing season, proving yet again an invaluable reource for those who take the time to post their queries.

The first two stories here hail from the annals of a longtime CPA.

The first tale confirms the old adage that the only dumb question is the question you don't ask: A married couple was sitting in the CPA's office when the seemingly innocent question "Getting a divorce?" appeared in the tax organizer. The CPA put forth the query.

The wife replied, "Yes." While the stunned husband replied, "What divorce?"

Suddenly the CPA understood why his clients had been speaking to him, but not to each other.

The temperature in the room dropped 20 degrees, and the husband got up and walked out.

The CPA wisely bumped up the fee in anticipation of the barrage of questions that would follow, but those questions never materialized. The fee was paid, but he never saw the woman again. Although he did read about her high-profile wedding to Mr. Megabucks, and subsequent divorce a year later.

Better to Pay the Tax

The second story may illustrate why we wind up with some of the elected officials we get (that's a non-partisan comment).

The client showed up and said he'd made a move to save a large amount on his taxes. When asked what it was, he said that he'd cashed in a bunch of certificates of deposit and taken the penalties for early withdrawal.

When asked, why, he replied that the penalties would lower his taxes.

The next question was what had he done with the money.

The client replied that he'd put the money into a passbook savings account at a lower interest rate, which would lower his taxes even more.

Far too many people have a hard time grasping the fact that taxes in this country aren't 100 percent of income and that one is always better off to have made the money--and pay the tax--than not having made the money in the first place.

Exercising Stock Options After Leaving California

A fairly common situation arises when taxpayers terminate their California employment and move out of California. Then, after the move, they exercise some nonqualified stock options from the prior employer. The question is whether or not the income resulting from the exercise of those options is taxable in California.

An example in Professor Kitty Wright's 2003 Income Tax Manual cites a virtually identical situation. It concluded that the income resulting from the exercise of the taxpayer's non-statutory stock...