Are NQSOs eligible for a basis adjustment after a death?
September 26, 2011
Date: Fri, 30 Jul 2010
Are non-qualified stock options eligible for a basis adjustment after a death? Is the “built-in” income for the options subject to both estate tax and income tax?
Any feedback or help here would be greatly appreciated.
Date: 13 Aug 2010
Yes. Non-qualified stock options are reported on the decedent’s estate tax return at the fair market value of the option stock less the option price. (Revenue ruling 53-196.) IRS guidance for gifts of non-qualified stock options indicates that other valuation methods, such as the Black-Scholes model, may be appropriate. (Revenue Procedure 98-34.)
There is no basis adjustment for the amount reported on the decedent’s estate tax return because that amount is considered income with respect of a decedent. (IRC Section 691(c).)
Since the income is taxed twice, Congress enacted an imperfect offset by allowing a tax deduction for estate tax (and generation skipping tax) attributable to accrued income. (IRC Section 691(c)(3).)