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36 Tax Executive 357 (1983-1984)
Tax Consequences of Exercising an Incentive Stock Option with Stock of the Granting Corporation

handle is hein.journals/taxexe36 and id is 368 raw text is: FEDERAL

Tax Consequences of Exercising
An Incentive Stock Option with
Stock of the Granting Corporation
By NORMAN J. MISHER*

OVERVIEW
The Economic Recovery Tax Act of
1981 reestablished a form of statutory
stock option called an Incentive Stock
Option (ISO).' In general, under an
ISO (i) there are no tax consequences
to the employee upon the grant or the
exercise of the option; 2 (ii) the em-
ployee is taxed at capital gains rates
when the stock acquired upon the ex-
ercise of the option is sold after a spec-
ified holding period; and (iii) there
is no deduction available to the em-
ployer.
The ISO rules are to be contrasted
with the tax    treatment governing
nonstatutory stock options under
which there is generally no tax at the
time of the grant, but the employee
realizes ordinary income equal to the
spread between the option price and
* Mr. Misher is associated with the New
York office of Roberts & Holland.

the market value of the stock on the
date of exercise (assuming the stock
is not subject to a substantial risk of
forfeiture or is transferable). In ad-
dition, the employer is allowed a de-
duction corresponding to the amount
the employee is required to include in
his income.
A stock option that otherwise qual-
ifies as an ISO may contain provisions
not required by the tax laws for ISO
treatment without adversely affecting
its status as an ISO. From the stand-
point of a corporate executive, one of
the most significant of these permis-
sible ISO provisions is one authoriz-
ing the exercise of an ISO with previ-
ously acquired stock of the corporation
granting the option.3
This article examines the tax impli-
cations of exercising an ISO with pre-
viously acquired stock of the granting
corporation, with particular emphasis
THE TAX EXECUTIVE July 1984  357

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