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Date:   Wed, 12 Oct 2005
From:   Ed

If non-qualified stock options are for a small "public" stock that does not trade (illiquid), would you have to use the "market" price, even though you could never sell out at that price (without being responsible for destroying the stock price)?

Thank you,
Edwin

Answer

Date:   Fri, Nov 11, 2005

Hello Edwin,

The company is supposed to determine the market value of the stock in order to determine the amount to be reported as additional wages on your W-2 form and the related withholding. If you disagree with that value, you should document how you determined a different amount. The best way to do this is to hire an appraiser, but that is very expensive and requires the cooperation of the company.

Illiquid stock for companies like the one you describe and non- publicly traded stock is a very tough problem for employees who receive employee stock options. Sometimes employees are better off just walking away from exercising options when the result can be putting themselves in financial distress.

I know. This sucks.

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.