1 Sec. Tax'n Newsl. 1 (1981-1982)

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- V.1No.1, FallI19OI
Published by the Section of Taxation, American Bar Association

New Tax Law Requires Immediate Attention

Taxpayers should be prepared to give early attention
to the effects of the Economic Recovery Tax Act of
1981. Changes in the tax law contained in the 1981 Act
may require prompt revisions of documents such as
wills, trusts, and deferred compensation plans. They
may also require taxpayer elections and filing of
amended returns to take advantage of the 1981 Act's
retroactive application. Some of the important areas
to which taxpayers should give early attention are
highlighted below.
Incentive Stock Options
The 1981 Act introduces the incentive stock op-
tion with respect to which taxpayers are accorded
favorable tax treatment similar to that previously
1981 Act: ALI-ABA and ABA
Courses and Publication
The 1981 Act is the subject of four, detailed pro-
grams co-sponsored by the Section and ALI-ABA.
The first program took place on October 9 in
Philadelphia and was carried by television satellite to
more than 60 cities. The other 3 programs, co-
sponsored with ALI-ABA by the Section of Real Prop-
erty, Probate and Trust Law and the Section of Taxa-
tion, were scheduled for October 4-6 (Las Vegas), Oc-
tober 22-24 (New Orleans) and November 19-21
(Washington, D.C.). Attendance at the Las Vegas pro-
gram exceeded 450 registrants. Even greater participa-
tion is expected in New Orleans and Washington.
The sessions are being co-chaired by Bernard M.
(Bobby) Shapiro, National Director of Tax Policy,
Price Waterhouse &    Co., and by Mark L.
McConaghy, Chief of Staff, Joint Committee on Tax-
ation, U.S. Congress.
In  addition, in  collaboration  with  authors
designated by the substantive committees of the Sec-
tion, the Committee on Continuing Legal Education
supervised the preparation of a paperback book for
publication by ALI-ABA summarizing and explaining
the 1981 Act.
For more information, contact Donald M. McClay,
Director, Courses of Study, ALI-ABA, 4025 Chestnut
St., Philadelphia, PA 19104; 215/243-1630.

allowed taxpayers for restricted and qualified stock
options. Thus, employees will pay no tax when they
receive shares of stock on exercise of these options and
will be taxed at capital gains rates when they sell their
shares, while employers will receive no tax deductions
in connection with the options or the shares.
The new rules apply to options granted on or after
January 1, 1976, and exercised on or after January 1,
1981, or outstanding on such date. This allows for
substantial retroactive application. For the rules to ap-
ply to an option granted in the retroactive (pre-
January 1, 1981) period, however, the employer cor-
poration must elect this application pursuant to a
Treasury directive.
For the retroactive period, there are special dollar
limitations of both an annual and a cumulative nature.
For each calendar year in the period, the total value of
shares of employer stock for which an employee may
be granted incentive stock options may not exceed
$50,000. For the entire period, the total value of these
shares may not exceed $200,000. It should be noted
that there is a $100,000 annual limit that applies begin-
ning in calendar year 1981. Value in all cases is deter-
mined at the time the options are granted.
Employers will want to consider carefully the extent
to which they should sacrifice compensation tax
deductions applicable to stock transferred under non-
qualified stock options so that their employees may be
favorably taxed. In addition, careful planning will be
required in many cases to utilize the $50,000 and
$200,000 retroactive limits in the most advantageous
There is also a special clean-up provision under
the 1981 Act. This provision allows employers a period
of a year after enactment of the Act to modify options
granted on or after January 1, 1976, and outstanding
on the date of enactment, to cure defects preventing
the options from qualifying as incentive stock options.
These modifications, which are also permitted to be
made to underlying option plans, will not result in the
issuance of new options. Thus, where shares under old
options have appreciated in value, it may make sense
to use this clean-up rule, rather than to grant new op-
tions at higher exercise prices.
(See New Tax Law continued on page 5)

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