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Strategies & Market Trends : Income Taxes and Record Keeping ( tax ) -- Ignore unavailable to you. Want to Upgrade?

To: Spots who wrote (2229)	7/1/1999 9:33:00 AM
From: Richard Forsythe	Read Replies (1) \| Respond to of 5810

1) Are you sure your options are ISOs, rather than Non-Qualified Stock Options (NQs)? There's a huge difference, and the options agreement will specify which. 99% are NQs these days, especially for non-VP level. 2) ISO options incur AMT "income" when exercised, irrespective of what happens to the stock. Therefore you will AT LEAST have an AMT liability. 3) NQs are regarded as income however they are exercised. IRAs or not, you will need to report the profit as income.

To: Spots who wrote (2229)	7/2/1999 2:35:00 PM
From: Kaye Thomas	Read Replies (1) \| Respond to of 5810

Exercising compensatory options (nonqualified options and incentive stock options, or ISOs) in an IRA would be a wonderful planning technique if it worked. Unfortunately it doesn't work. There are only two ways the IRA can end up with the stock. One is that you transferred the option to the IRA before exercising it, and the other is that you transferred the stock to the IRA after exercising the option. Both have lousy tax consequences. Even if your stock option plan and agreement permit you to do this, you would simply be shooting yourself in the foot. To begin with, you aren't allowed to transfer property other than cash to an IRA except as part of a rollover from a qualified retirement plan or another IRA. Your IRA provider shouldn't permit you to do this, and if they do, you'll have violated the terms of the IRA document. I believe this would result in disqualification of the IRA. If you're transferring the stock after exercising the option, you've got the tax consequences of exercising the option so you haven't accomplished anything (except a disqualifying disposition, if the option was an ISO). If you transferred the option before exercise, you clearly don't have an ISO because an ISO by definition can't be transferred (with limited exceptions involving transfers to spouses and transfers at death). And if you transfer a nonqualified option, you don't shift taxation at exercise. For example, it's possible to gift a nonqualified option to a trust for the benefit of your child. The IRS came out with a couple of rulings on the tax consequences of such a gift last year. When the trust (or your child) exercises the option, the income gets reported on your tax return, not your child's. That's true even though you may have no control over when or whether the option will be exercised because you released dominion and control at the time of the gift. In short, neither your company nor the IRA provider should permit you to proceed with a plan to exercise your compensatory options in an IRA, but if you somehow slip it by them and the IRS finds out, you'll be in a world of hurt. This is an opportunity for me to mention that I'm in the late stages of preparing my first book for publication, on the subject of compensation in stock and options. It will cover stock grants, nonqualified options, ISOs and employee stock purchase plans. I would welcome any questions dealing with these forms of compensation. Kaye Thomas, author Fairmark Press Tax Guide for Investors fairmark.com