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, ___ F. Supp. ___ (N.D. Cal. 2004). See
Chapter 11 of the Guide for a discussion of the taxation of property received from your 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 11 of the Guide for a discussion
of the taxation of property (including stock) received from an employer.
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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, ___ F. Supp. ___ (N.D. Cal. 2004). See
Chapter 11 of the Guide for a discussion of the taxation of property received from your 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 11 of the Guide for a discussion
of the taxation of property (including stock) received from an employer.
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The author intends that this website provide accurate and authoritative information on the subject matter
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
Key Tax Developments Affecting Retirees
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