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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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