Do incentive stock options qualify for 83(b)?
September 15, 2000
Date: 31 Aug 2000
I just read you article ISO Executive Tax and Financial Planning Strategies. I have read similar articles and the information from IRS pub 525 on Stock Options and other equity rewards. The IRS info and articles seemed to point at ISOs being exempt from 83b status.
What are the criteria you are using to discern whether an ISO is legitimately 83b-able?
I previously had received information from accountants that ISOs can be 83b’d,and acted on it in my previous job, but everything I have read lately including an email reply from the IRS says that ISO are definitely not eligible for 83b status!
Please let me know if there are simple criteria, beyond the early exercise clause, that and ISO needs to adhere to in order to pass the 83b muster.
Date: 31 Aug 2000
I have been told that employees with more than 10% of outstanding shares cannot be granted statutory stock options. Is this information accurate and is it applicable to ISO’s? If so, how can a company grant options or stock to such employees, or is there an alternative plan that allows this?
Date: 11 Sept 2000
Your IRS response was half right. (This is about par for informal responses from the IRS. If you want “right” answers, you have to pay for a ruling.)
Section 83 does not apply to ISOs for regular tax purposes, so the election would not apply for regular tax.
However, the exception to Section 83 for ISOs does not apply for AMT. Therefore, the election is effective for AMT. (IRC Section 56(b)(3). Also see instructions for Form 6251, Line 10.)
Employees that own more than 10% of the voting stock of the employer corporation or of its parent or subsidiary corporation are generally not eligible to receive ISOs. (IRC Section 422(b)(6).) There is an exception where these shareholders may receive ISOs provided at the time the option is granted to option price is at least 110% of the fair market value of the stock subject to the option and the option expires 5 years after the option is granted. (IRC Section 422(c)(5).)