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Can the gross up in W-2 earnings due to a BK trustee exercise and sale of stock options be exempt federal/state tax?

San Jose, CA |

A BK trustee exercised and sold stock options as part of an asset liquidation. This sale was reported as income on my W-2. Can this gross up in wages be exempt from income tax? I was told by the BK attorney that there would be no tax implications from the BK.

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Attorney answers 3


You should be asking your BK lawyer and your own CPA who's going to to file (and if necessary, defend) your tax return.

Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.


To the extent that forgiven debt that otherwise would be a taxable event is in fact discharged in a bankruptcy there is in fact no tax. Debt discharged in a bankruptcy as opposed to forgiven is not taxable. However, income, like the stock sale, is income. Yes, see a CPA.

This answer is offered for informational purposes only. It is not offered as, and does not constitute, legal advice. Laws vary widely from state to state. You should rely only on the advice given to you during a personal consultation by a local attorney who is thoroughly familiar with state laws and the area of practice in which your concern lies.


I am not sure whether you mean a W-2 or Form 1099 that reports such sales. In either event, income is from whatever source derived and if this amount is being reported to the IRS as such it is taxable income. What may be confusing you is that discharge of indebtedness income via a bankruptcy is excluded from income. So if say you owed $300,000 in debt and after bankruptcy you did not owe this money any longer, such discharge would not be taxable income. In any event, you need to go over the factual details with your tax accountant or a tax attorney when preparing your income tax return. You also need to discuss with him the reduction of basis in assets or other tax attributes that are required under Section 108 of the IRC when there is discharge of indebtedness income.

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Mr. Fromm is licensed to practice law in PA with offices in Philadelphia and Montgomery Counties and services clients in all parts of Pennsylvania. He can be reached at 215-735-2336 or at the email address listed below. He has an AV Preeminent Rating (5.0 out of 5.0) with Martindale-Hubbel, the highest possible rating for legal ability and ethical standards. Also, he has received a 10.0 rating from AVVO and was featured as a 5Star Wealth Manager in the Philadelphia Magazine, November 2009 issue on page 123.
Mr. Fromm is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. Also, there are no recognized legal specialties under Pennsylvania law. Any references to a trust, estate or tax lawyer refer only to the fact that Mr. Fromm limits his practice to these areas of the law. These responses are only in the form of legal education and are intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received.
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