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jgordosea, Enrolled Agent
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Experience:  I've prepared all types of taxes since 1987.
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My employer has offered to assign to me rights in some technology

Resolved Question:

My employer has offered to assign to me rights in some technology as settlement for unpaid salary. There are no commercially viable rights in existence yet. A patent has been applied for but it is unknown if it will ever be granted. The technology is for a medical device that doesn't exist yet, and after it is developed, it is unknown if FDA would ever allow its sale.

So is the settlement taxable? Can I deduct the loss of unpaid salary?
Submitted: 2 years ago.
Category: Tax
Expert:  jgordosea replied 2 years ago.

Greetings,

 

Individuals only report income as it received and only deduct expenses as they are paid.

This cash basis reporting means that there is not a loss for income items that are not received.

 

For example, a landlord does not report the rent that is due but only the rent collected. So, there is not a deduction or loss for rent not collected; but the rental income that is reported is the rent actually collected.

In the same way, the salary received is all that will be reported and there is not a loss for salary not received and that was not reported as income.

 

Compensation that is paid in property is to be included in income. The current value of the rights granted in lieu of salary is included as salary income subject to income tax.

If there is no current value of the property then this is nonqualified deferred compensation.

These rules are a bit complicated and are explained at http://www.irs.gov/businesses/corporations/article/0,,id=134878,00.html

"Under the economic benefit doctrine, if an individual receives any economic or financial benefit or property as compensation for services, the value of the benefit or property is currently includible in the individual's gross income. More specifically, the doctrine requires an employee to include in current gross income, the value of assets that have been unconditionally and irrevocably transferred as compensation into a fund for the employee's sole benefit, if the employee has a nonforfeitable interest in the fund."

 

Technically the settlement is taxable in the current year and the value of the rights will be included as part of W-2 income if the property is either transferable or not subject to a substantial risk of forfeiture. In that case, the employer is required to include the value of the property in salary and to pay employment taxes in the same manner as a cash payment.

 

Practically there may be little or no value of these rights, as described.

 

Please ask if you need clarification.

Thank you.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3094
Experience: I've prepared all types of taxes since 1987.
jgordosea and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Hello John,

So using the tax law language as you explained it...

Technically, there is no property being acquired in lieu of salary owed. There is only a right being acquired to possibly create some property through a combination of patent rights and FDA approval allowing sale of product. Either of these do stand to cause substantial risk of forfeiture due to a patent not being allowed to grant property rights in the first place, or FDA refusing to allow commercial sale of a product yet to be created based on the patent rights.

Based on this scenario, the proposed settlement in lieu of salary under the "economic benefit doctrine" does not create a taxable event.

Am I correct in my understanding?

Expert:  jgordosea replied 2 years ago.

Hello again,

 

That may very well be the correct interpretation.

Of course, this is a general discussion of the applicable rules and is not an opinion for a client. As such, it can not be used to avoid penalty.

 

There is a responsibility on the company to correctly and completely report the salary and to pay employment tax on compensation. So, the tax practitioner for the company will likely make the final decision on the matter.

 

You do have a correct understanding of the principles; but ultimately it will be the amount that is included in the W-2 that will be taxable to you. That is, there will not be any separate reporting requirement for you on this amount. You will just report the W-2 amounts as determined by the company.

 

Please ask if you need clarification.

Thank you.

 

 

 

 

Customer: replied 2 years ago.

Thank you.

I am uncertain if I will receive an email record of our complete exchange. If so, I am prepared to "Accept Answer."

Expert:  jgordosea replied 2 years ago.

Hello again,

 

Not sure what you will get either; but you can return to the url (and can bookmark) http://www.justanswer.com/tax/6qosv-employer-offered-assign-rights-technology.html

and view again in the future

 

Thank you for the opportunity to be of service.

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jgordosea
jgordosea
Enrolled Agent
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I've prepared all types of taxes since 1987.