Page 80 - Family Law Services

original IRS Temporary Regulations from 1984 that led to these new regulations and a resolution of the
tax treatment if the corporation is redeeming stock from a spouse pursuant to a divorce:

• IRS Temporary Regulation Section 1.1041-1T (c), Q&A-9, and 49 Federal Regulation 34453
(Aug. 31, 1984)

• Two IRS Private Letter Rulings, as follows:

— 9046004

— 9427009

• Seven court cases, as follows:

— Hayes v. Commissioner, 101 T. C. 593 (1993)

— Blatt v. Commissioner, 102 T. C. 77 (1994)

— Arnes v. U. S., 93-1 USTC Section 50,016 (Arnes I)

— Arnes v. U. S., 981 F. 2d 456 [9th Cir. 1992] (Arnes II)

— Arnes v. Commissioner, 102 T. C. 522 (1994) (Arnes III)

— Read v. Commissioner, 114 T. C. 2 (Feb. 2000)

— Craven v. U. S., No. 99-12803 [11th Cir. 619 2000]

Taxation of Stock Options

Nonqualified Options

As stated in IRC Section 83, nonqualified stock options are taxed when granted if the option has a "read-
ily ascertainable fair market value." To have a readily ascertainable fair market value (FMV), the option
must be actively traded on an established market. This, however, is rarely the case. If the nonqualified
stock options do not have a readily ascertainable FMV at the time of granting, they are taxed at the time
of exercise. The excess of the FMV at the time of granting of the stock over the option exercise price is
taxable as ordinary income.

IRC Section 83 states that an option must meet the following requirements to have a readily ascertaina-
ble FMV:

• The option is transferable by the optionee (that is, the holder of the option).

• The option is exercisable immediately, in full, by the optionee.

• The option or the property subject to the option is not subject to any restriction or condition that
has a significant effect on the FMV of the option.

• The FMV of the option privilege is readily ascertainable.

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