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Subject:   Warrants
Date:   Mon, 08 Nov 2004
From:   Dale

My wife received warrants in a divorce settlement. The warrants are for a start-up company that hasn't gone public. We believe her ex-husband received the warrants as part of an incentive plan. What are the tax consequences when she exercises the warrants?

Thanks,

Dale

Answer

Date:   Wed, 24 Nov 2004

Hello Dale,

Based on what you have told me, the warrants will be taxed as non-qualified stock options. Your wife will be taxed on the excess of the fair market value over the option price as ordinary income when she exercises them. Her ex-husband may be subject to employment taxes at that time.

She should confirm the warrants were received relating to her ex- husband's employment.

When to exercise them depends on the facts in the particular situation. If the company says the shares have significant value over the option price, I wouldn't exercise them until the stock is publicly traded so that I could sell it to raise the cash to pay income taxes.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.