PORTFOLIO

Statutory Stock Options (Portfolio 381)

Tax Management Portfolio, Statutory Stock Options, No. 381-4th, details the structure of, and the tax rules regarding, incentive stock options and employee stock purchase plans. Both types of plans provide for the deferral of the recognition of taxable income upon receipt of stock pursuant to these plans; however, there are restrictions on how such plans may be designed.

Price: $400 Print

GET MORE WITH THE FULL PORTFOLIO LIBRARY

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive resource including 200+ federal tax Portfolios, practice tools, primary sources and timely news.

FREE TRIAL

DESCRIPTION

Tax Management Portfolio, Statutory Stock Options, No. 381-4th, details the structure of, and the tax rules regarding, incentive stock options and employee stock purchase plans. Both types of plans provide for the deferral of the recognition of taxable income upon receipt of stock pursuant to these plans; however, there are restrictions on how such plans may be designed.
This Portfolio outlines the statutory requirements for establishing an incentive stock option plan and an employee stock purchase plan, including descriptions of plan provisions that are not required. The tax results to the employer and the employee of the establishment and participation in these plans are reviewed. In addition, this Portfolio compares incentive stock options with nonqualified stock options. For an analysis of the rules governing nonqualified stock options, see 383 T.M., Nonstatutory Stock Options.


Buy Statutory Stock Options (Portfolio 381) now


AUTHORS

THOMAS Z. REICHER
Thomas Z. Reicher, Amherst College (B.A. summa cum laude and Phi Beta Kappa, 1970); University of California at Berkeley (M.A. 1973); Stanford University Law School (J.D. 1976); member, California and Connecticut Bars; partner, Cooley LLP.

ROBERT H. (“BUFF”) MILLER
Robert H. (“Buff”) Miller, Williams College (B.A. magna cum laude and Phi Beta Kappa, 1970); Stanford University Law School (J.D. 1974); Stanford University Business School (M.B.A. 1974); former Deputy Tax Legislative Counsel for Regulatory Affairs, U.S. Department of Treasury (1995–1999); member, California and New York Bars; partner, Cooley LLP.

THOMAS S. WELK
Thomas S. Welk, University of Washington (B.A. 1983); Gonzaga University Law School (J.D. cum laude, 1989); New York University School of Law (LL.M., Taxation, 1990); member, California Bar; partner, Cooley LLP.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Overview

B. What Is an Option?

C. Uses of Corporation Stock as a Compensation Device

II. Incentive Stock Options

A. Summary of Tax Treatment

1. Optionee Tax Treatment

a. Grant of an ISO

b. Exercise of an ISO

c. Sales of Shares Acquired upon the Exercise of an ISO

2. Employer Tax Treatment

B. Requirements for ISOs

1. Date of Grant Requirements

a. Employee Status Requirement

b. ISO Plan Requirements

c. Option Agreement Requirements

d. Exercise Price Requirement

2. Post-Grant Requirements

a. Continuous Employment Requirement

b. Relaxation of the Continuous Employment Requirement

c. $100,000 Per Year First Exercisable Limitation

3. Special Rules Relating to ISO Status

a. Assumptions and Substitutions of Options Pursuant to Corporate Reorganizations, Liquidations and Similar Transactions

b. 10% Owners

4. Permitted Plan and ISO Agreement Provisions

C. Taxation to Employee

1. Grant of Option

2. Basis of Option

3. Vesting of Option

4. Transfer, Cancellation or Lapse of Option

5. Exercise of Option

6. Basis of ISO Stock

7. Subsequent Disposition of ISO Stock

a. What Is a Disposition?

b. Disposition After Holding Period Expires

c. Disqualifying Disposition

8. Alternative Minimum Tax Considerations

9. Golden Parachute Tax Considerations (§ § 280G and 4999)

D. Impact on Employer

1. Grant, Assumption or Exercise of Option

2. Disqualifying Dispositions

3. Withholding

4. Reporting Considerations

a. Reporting Obligations

b. IRS Position on Employer's Reporting Responsibilities for Allowance of Compensation Deduction

5. Status of Deduction for Other Purposes

E. Other Methods of Exercise

1. Use of Stock for Option Exercise Price

a. Practical Uses of Stock in ISO Exercise

b. Stock Pyramiding

c. Reload Options

2. Option Subject to a Condition

3. Stock Appreciation Rights

4. Same-Day Sales

F. Death of the ISO Holder

1. Exercise by Estate or Heir

2. Disposition of ISO Stock

G. Modification, Extension or Renewal of ISOs

1. What Is a Modification of an ISO?

2. What Is an Extension or Renewal of an ISO?

3. Option Repricing

4. Mergers and Acquisitions

H. Comparison of ISOs with NSOs

1. Structure of Option Arrangement

2. Taxation of Option Arrangement

a. Grant of Option

b. Exercise of Option

c. Sale of Option Stock

d. Capital Gains Tax Rate

e. Deduction for Employer

f. Overall Tax Effectiveness

I. Securities Law and Stock Exchange Treatment of Stock Options

1. Federal Securities Laws

2. State Securities Laws

3. Stock Exchange Requirements

J. Accounting Treatment of Stock Options

K. International Issues

III. Employee Stock Purchase Plans

A. Overview of Purchase Rights Under Employee Stock Purchase Plans

B. Code Requirements for a § 423 Plan

1. Participation in the § 423 Plan

a. Employees Only

b. Exclusion of Five Percent Owners

c. Permitted Exclusions from Participation

2. Stockholder Approval of the § 423 Plan

3. Same Rights and Privileges but Permitted Limitations on the Extent of Employee Participation

4. $25,000 Annual Accrual Limitation on Grants of Purchase Rights

5. Stated Limit on Number of Shares Purchasable Under a § 423 Plan

6. Purchase Price of the Stock

7. Offering Period

8. Restrictions on Transfer

9. Other Permitted Plan Provisions

C. Taxation to Employee

1. Exercise of Purchase Right

2. Disposition of Acquired Stock

a. Disposition After Holding Period Expires

b. Disqualifying Disposition

3. Implications for Employee's Estate

D. Impact on Employer

1. Employer's Tax Deduction

2. Withholding

3. Reporting and Disclosure

a. Internal Revenue Code

b. ERISA

E. Modification, Extension or Renewal of Purchase Rights

F. Mergers and Acquisitions

G. Securities Law and Stock Exchange Considerations

H. International Issues

I. Accounting Treatment of Stock Purchase Plans


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Sample Equity Incentive Plan

Worksheet 2 Sample Stock Option Agreement

Worksheet 3 Sample Stock Option Grant Notice

Worksheet 4 Sample Notice of Exercise

Worksheet 5 Sample Employee Stock Purchase Plan

Worksheet 6 Sample Employee Stock Purchase Plan Offering

Worksheet 7 Sample Section 6039 Notice Regarding Exercise of Incentive Stock Option

Worksheet 8 Sample Section 6039 Notice Regarding Transfer of Stock Purchased Under Employee Stock Purchase Plan

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Other IRS Releases:

Department of Labor Releases:

Cases:

UNOFFICIAL

Tax Management Portfolios:

Miscellaneous:

Books and Articles:

1959

1990

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007