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Date:   Fri, 30 Jul 2010
From:   Merrick

Mike,

Are non-qualified stock options eligible for a basis adjustment after a death? Is the "built-in" income for the options subject to both estate tax and income tax?

Any feedback or help here would be greatly appreciated.

Answer

Date:   13 Aug 2010

Hello Merrick,

Yes. Non-qualified stock options are reported on the decedent’s estate tax return at the fair market value of the option stock less the option price. (Revenue ruling 53-196.) IRS guidance for gifts of non-qualified stock options indicates that other valuation methods, such as the Black-Scholes model, may be appropriate. (Revenue Procedure 98-34.)

There is no basis adjustment for the amount reported on the decedent’s estate tax return because that amount is considered income with respect of a decedent. (IRC Section 691(c).)

Since the income is taxed twice, Congress enacted an imperfect offset by allowing a tax deduction for estate tax (and generation skipping tax) attributable to accrued income. (IRC Section 691(c)(3).)

Good luck!

Mike Gray

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.