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Subject:   Section 422(d)
Date:   Mon, 11 Sep 2000
From:   Bala

With regard to Section 422(d), your faq states the the FMV of an ISO grant that is exercisable in a year should not exceed $100,000 for ISO treatment, and the excess will be treated as NQSOs.

Suppose that a company grants 30,000 ISOs on Jan 1, 2000 with a 4 year vesting schedule (25% each year). Let's say that the FMV of the stock is $10 on the date of grant. If the company allows all unvested options to be exercised in 2000, does this mean that only the first 10,000 options will be treated as ISOs and the other 20,000 will be treated as NQSOs?

Note that even though the company ALLOWS exercising the options, the employee vests only 7500 options each year. So, by allowing the possibility to exercise the options (which the employee may not have the means to actually exercise, given the high FMV), is the company inadvertently making the ISO grants turn into NQSOs? Any clarification on this will be appreciated.

Answer

Date:   11 Oct 2000

Hello Bala,

Even though the shares aren't vested, if an early exercise is allowed, more than $100,000 of value will be exercisable in one year and a portion of the options will be non-qualified.

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.