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By Michael Gray

Old proposed regulation reveals IRS position on wash sales and stock acquired using ISOs.

While digging through some material, I recently found an old IRS proposed regulation that reveals their position about whether the wash sale rules eliminate the availability of the "escape hatch" limit of the excess of the sales price over the option price for a disqualifying disposition of ISO stock. (IRC Section 422(c)(2)(B).)

According to Proposed Regulations Section 1.422A-1(b)(2), the wash sale rule does apply to disallow the limitation. The proposed regulation was issued during 1984.

Occasionally IRS regulations are declared invalid, and this is not a final regulation. However, this proposed regulation clearly states the IRS position. Disregard it at your own risk.

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication 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.

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

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