IRS, Treasury Post Up ISO Guidance

August 2, 2004 ( - The Internal Revenue Service (IRS) and the US Treasury Department have finalized regulations guiding the exercise, and taxation, of incentive stock options (ISOs).

>The regulations finalize, with modest changes, regulations proposed in 2003 and provide guidance to assist taxpayers in complying with the law in the transfer of stock pursuant to the exercise of ISOs.   Additionally, the final regulations clarify rules regarding employee stock purchase plan (ESPP), sometimes referred to as statutory options.

>ISOs provide employees with the ability to acquire employer stock without realizing income when the option is exercised.  If the employee holds the stock for a required period, any gains on the sale of the stock are capital gains. 

>Under the guidance, the exercise price for an ISO must be no less than the fair market value of the underlying stock on the date the ISO is granted.   Further, if the employee meets the holding period requirements for capital gains treatment on the sale of the stock, the employer is not entitled to a deduction with respect to the ISO.

The final regulations generally will be effective on the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring at least six months after the publication of the final regulations.   The text of the final regulations is available at .