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Date:   Fri, 11 Nov 2005
From:   Sandy

Hello Michael,

I retired about six months ago. Just yesterday, I was told that my ISOs may now be NQSOs because I no longer work for my former employer.

How can I be sure this is correct? If so, is my employer liable for the change in the taxability if they did not inform me of this within 90 days of my retirement?

I have options for about 5,000 shares and was told I had three years to exercise after I retired. I made a cash exercise of 1,200 shares during April, 2005 and had planned to sell some of those shares during 2006, after meeting the holding period requirements. Then I would use the proceeds to exercise more shares.

Thank you,
Sandy

Answer

Date:   Fri, 09 Dec 2005

Hello Sandy,

Again I'm sorry, but you need a lawyer to determine whether you have a cause of action against your employer. You should have received documents explaining the plan when the options were granted, including a recommendation that you seek tax counsel. I think you are fortunate, because in many cases stock options lapse a much shorter time after leaving an employer, often after 90 days after termination.

According to Internal Revenue Code Section 422(a)(2), in order for an option to qualify as an Incentive Stock Option, the holder must have been an employee during the period beginning on the grant date and ending on the day 3 months before the date of exercise. There is the "proof" that the "90-day rule" (actually three months) applies.

It's a shame you didn't consult with a tax advisor when you retired. I think you should still consider seeking advice for your future decisions.

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.