Statutory Stock Options details the structure of and the tax rules regarding incentive stock options and employee stock purchase plans. This Portfolio, written by Thomas Z. Reicher, Esq., partner; Robert H. Miller, Esq., partner; and Thomas S. Welk, Esq.—all from the law firm Cooley Godward Kronish LLP—outlines the statutory requirements for establishing an incentive stock option (ISO) plan and an employee stock purchase plan, including descriptions of plan provisions that are not required. This Portfolio also  

• Examines the qualification requirements for the two types of employee stock options
• Reviews the tax results to the employer and the employee of the establishment of and participation in these plans, including tax deductions, withholding, reporting, and disclosure; and issues regarding IRC and ERISA
• Compares incentive stock options with nonqualified stock options
• Details the granting of and exercise of an ISO and what to do in the case of the death of the ISO holder
• Defines the Employee Stock Purchase Plan, provides an overview of purchase rights under the plan, identifies Code requirements for a §423 plan, and more! 

Statutory Stock Options allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

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

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

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Statutes:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Other IRS Releases:

Department of Labor Releases:

Cases:

UNOFFICIAL

Tax Management Portfolios:

Miscellaneous:

Books and Articles:

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