Newsletter Vol. 1, No. 1 September 1997

Since my article, Assignable Stock Options and Related Developments, 37 Tax Management Memorandum 403 (December 23, 1996) was published there have been the following developments:

• The IRS continues to rule that there is no income incurred at the time of the assignment, the optionee, if living, has income when the transferee exercises the option and the transferee, if the transferor is living, has basis in the shares equal to their fair market value at exercise. PLR 9713012 (Dec.20, 1996); PLR 9714102 (April 4, 1997). PLR 9714102 and I)LR 9722022 (Feb.27, 1997) concluded that amendments of plans to permit limited assignability did not have adverse effects under the $1 million deduction limit. PLR 9722022 also ruled on the Company's income tax deduction. However, PLR 9722022 and PLR 9725032 (March 24, 1997) limited their conclusions regarding a completed gift to exercisable options. (There is a 90-day delay before private rulings are released to the public.) The issue here, from a planning viewpoint is that options have their lowest value at grant, because typically the exercise price is the market price at grant. Options are typically also nonexerciseable at grant, which further reduces their value. Thus, the potential gift tax liability or use of the unified credit is at its minimum at the time of grant.
• The IRS ruled in the Travelers case (Ltr 9712033 (Dec.24, 1996)) that nonexerciseable options transferred to a 401(k) plan were deductible for income tax purposes and treated as an addition for 415 purposes based on their value at the time of the contribution (See also the discussion about the Traveler's plan on page 4).
• While it is clear that the executive will have taxable income when the donee exercises the options, the IRS has not clearly ruled on whether the executive's estate or the donee has taxable income at the time of the exercise if the executive has died prior to the exercise.
• TRA '97's estate tax changes leave assignable executive stock options attractive; the increase in the unified credit is effective over 10 years with the exemption (presently, $650,000) amounting only to $1 million by 2006.
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