Date:   Mon, 26 Jul 2004
From:   Ben

I have been with a private company for 5 years. 4 years ago, I exercised $8,000 of options in a cashless exercise (on loan from the company at 7% interest). Those options have since suffered a 1000:1 reverse split! Now that I’m leaving the company (tomorrow!), I owe roughly $11,000 to pay off the loan for shares that are worth pennies.

My questions are:

1. Is there any way I can get out of paying this money?!!
2. Are there any tax breaks I could get (company is still private).

Thanks!
Ben

Answer

Date:   Fri, 30 Jul 2004

Hello Ben,

1. The note is a valid obligation. You do take a risk when you buy stock. If you could persuade the company to forgive the note, it will be taxable income to you.
2. Look into having the company redeem your stock or making a private sale to another employee. Then you can claim a capital loss (limited to capital gains plus $3,000).

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.