FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and the IRS issued proposed regulations on incentive stock options (“ISOs”).  When finalized, these regulations will update the existing regulations to conform to current law, and will replace regulations proposed in 1984.

ISOs provide employees with the ability to acquire employer stock without realizing income when the option is exercised.  If the employee holds the stock a required period, any gains on sale of the stock are capital.  The exercise price for an ISO must be no less than the fair market value of the stock when the option is issued.  An ISO plan must be approved by shareholders, and the amount of ISOs that can be granted to an employee is limited.  The employer does not get a deduction.

In addition to restating the existing rules, the new proposed regulations include updated rules addressing current issues and practices, such as ISOs issued by limited liability companies and other entities that elect corporate tax treatment. 

The proposed regulations will apply 180 days after publication of final regulations.  Taxpayers may rely on these proposed regulations for any ISO granted after June 9, 2003.

The text of the proposed regulations is attached.

Related Documents:

• Statutory Options