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Date:   24 Sep 2007
From:   Jeff

I am a consultant to a privately-held company. For the past four years, I have been receiving non-qualified stock options as part of my compensation. The stock is restricted. Over the last four years, there have been two private offerings, in which the stock was sold at a price higher than my option price.

I would like to exercise the options on October 1.

Can I value the stock at $0 since the stock is restricted, or can I value it at the option price, or must I use today's value, which I have no way of valuing?

Answer

Date:   16 Oct 2007

Hello Jeff,

Most restrictions are disregarded in determining the taxability of the shares received, unless those restrictions will never lapse. However, the value of shares is adjusted to reflect the lack of liquidity of stock that isn't publicly traded and for the lack of control of a minority interest.

Considering the guidelines that have been issued under Internal Revenue Code Section 409A and the final regulations for that section, the company should provide you with the fair market value of the shares. This is also a critical issue for the company, because it gets a tax deduction for the amount you are required to report as taxable income.

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.