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Subject:   How to determine FMV is company won't provide info
Date:   2 Sept 2000
From:   James

I appreciate all the good information available on your site, and have learned a lot from it.

I have a question concerning the FMV of shares in a non-publicly traded company: You state that "the company should provide the information you need to prepare your income tax returns." How do I figure the FMV when I exercise my options, if the company will not provide this information? Can I consider the price they are currently setting on options granted to new employees as the FMV, in the absence of any other valuation statement from the company?

Thanks,

-James

p.s. I tried taking your advise, and asked the benefits person. She referred the question to the CEO, who offered the following gobbledy-gook: "The market value of the stock today, for tax purposes, for someone who exercises today would have to be determined based on the events which could determine our value. Said differently, someone who exercises now would have to wait a bit to see what the current share value would be." He seems to be claiming that the current value depends on future events; this doesn't seem right to me.

p.p.s. in case it makes any difference: these were originally ISO's granted to me as an employee. I left employment 5 months ago, so if I understand correctly, these have automatically converted to NQSO's.

Answer

Date:   11 Sept 2000

Hello James,

Thanks for writing.

Please try to be reasonable in your expectations for your employer.

The CEO’s real answer is, "I don’t know right now. I’ll get the information for you in time for you to file your income tax returns." Establishing the value as of a date for closely-held stock isn’t easy. For publicly-held stock, you can get trading information that simply isn’t available for closely-held stock.

This may make it hard to plan, but the AMT exposure for closely-held stock doesn’t tend to be nearly as great as after the company goes public.

Your idea of using the option price for new options seems reasonable. The rule is, in order to qualify as an ISO, the option price may not be lower than the fair market value of the stock at the time the option is granted.

Good luck!

Mike Gray

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

For more information about non-qualified stock options, request our free report, Non-Qualified 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.