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Date:   Fri, 3 Dec 1999
From:   Eric

RE: How can a taxpayer avoid postponing the compensation income until restrictions lapse for stock purchased using non-qualified stock options?

The taxpayer may elect under Internal Revenue Code Section 83(b) to report ordinary income amount as of the date of exercise of the option. The election is required even when the income amount is zero and must be made within 30 days after exercising the option!

The election is made by filing a written statement to the internal revenue service office where the taxpayer files his or her income tax return. A copy of the election statement is also attached to the income tax return for the date of exercise, and another copy is given to the employer.

The election may only be revoked with the consent of the Commissioner of the IRS.

Does this mean that I can merely report the exercise to the IRS, under Internal Revenue Code Section 83(b), without having to pay the ordinary tax rate at the time of exercise?

Eric

Answer

Date:   20 Dec 1999

Hello Eric,

Relating to your question about the Section 83(b) election and non-qualified options, ordinary income is reported as if the restrictions did not exist, so you must pay tax relating to the ordinary income for the year of exercise.

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.