Is there a tax benefit from investing options in an LLP/LLC?

February 13, 2004

Subject:   NQSO FAQ
Date:   Thu, 08 Jan 2004
From:   B.


Assuming a person’s option agreement allows transfer, is there any tax benefit derived from investing in an LLP/LLC with vested NQSOs?

Thanks in Advance,


Date:   Mon, 02 Feb 2004

Hello B.,

The IRS has issued temporary and proposed regulations (T.D. 9067) to the effect that a transfer of compensatory stock options to related persons (including a partnership in which the employee is a member) is not considered to be an arm’s length transaction. The ordinary income at exercise will not be shifted to the partnership or LLC, and a sale of the option to the entity does not avoid having future appreciation before exercise taxed to the employee. The IRS also requires that such transactions be disclosed as listed “tax shelter” transactions. If you are considering such a transaction I recommend that you consult with a tax attorney. You might have trouble finding a tax return preparer who is willing to be associated with a return including such a transaction.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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