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Date:   29 Jul 2008
From:   Diana

If a beneficiary exercises an ISO (cashless) after receiving the transferred shares in the same year as the death of the employee, how is that reported? Is it treated like an NQO (reported on the employee’s W-2 for social security and Medicare and 1099-Misc for the beneficiary)?

Thank you.

Answer

Date:   Wed, 06 Aug 2008

Hello Diana,

No.

As long as the employee met the requirements for an ISO at the date of death, the option continues to qualify as an ISO after death, and the holding period requirements and the requirement that the holder should be an employee at the time of exercise or the option is exercised within three months after leaving employment are eliminated. (Internal Revenue Code Section 421(c)(1)(A).)

Employment taxes don’t apply to the exercise of an ISO.

The AMT adjustment will still apply to the exercise.

You can find answers to questions like these in Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs, 2nd Edition. It is available at Employeestockoptionsecrets.com or at Amazon.com.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

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.