Tax Planning for Retirees

Receipt of Property or Options from Employer

Using a Nonrecourse Note to Pay for Property Transferred from an Employer. – Unrestricted property (e.g., unrestricted stock) is generally taxable upon its receipt from an employer – unless the property is an option without a readily ascertainable value (or a “qualified” stock option). The tax law will generally treat property as an option if a taxpayer obtains the property by giving his or her employer a nonrecourse note. A note is nonrecourse if it is secured by the property and the taxpayer is not liable for any amount in excess of the property’s value – i.e., the taxpayer has no risk of loss (as in an option).

However, a federal district court has concluded that property received from an employer is not an option merely because the taxpayer pays for the property with funds borrowed from a third party under a nonrecourse note. Miller v. United States, 345 F. Supp. 2d 1046 (N.D. Cal. 2004). See Chapter 10 of the treatise for a discussion of the taxation of property received from an employer.

Exchanges or Amendments of Nonqualified Stock Options. – Generally, stock options granted by an employer are not taxable when received if they do not have a readily ascertainable value (or they are “qualified” stock options). If the options are nonqualified, they are not taxable until exercised or transferred to a third party – even if their value becomes readily ascertainable after receipt.

The IRS has now also ruled that the exchange of a nonqualified stock option without a readily ascertainable value for a new nonqualified stock option (also without a readily ascertainable value) is not taxable at the time of the exchange. Rather, the new option is not taxable until exercised or transferred – even if its value becomes readily ascertainable after receipt. (Ltr. Rul. 200418017.) In fact, such options do not become taxable before their exercise or disposition even if their value becomes readily ascertainable earlier due to a plan amendment allowing
their transfer to a third party. (Ltr. Rul. 200414007.) See Chapter 10 of the treatise for a discussion of the taxation of property (including stock) received from an employer.