Get ready -- client received advice from an attorney...
Subchapter S (volume appx $15MM in sales) a few years ago began issuing stock options to whom they considered valuable employees. Some of these people have left - some haven't, and some continue to receive more options. The option has a strike price equal to the valuation as of previous year end, and the valuation (considered FMV) is adjusted annually.
Example: 2003 FMV $1.75 2004 FMV $2.50 2005 FMV $3.00 and 2006 FMV $3.65.
According to GAAP, the corporation recognizes a liability for unexercised options, assuming a theoretical probability that all options would be exercised. The expense related to this liability, of course, is not allowed as a deduction for tax purposes. Falls into the "recognized but not realized" category.
Lawyer tells corporation that both the employees and the corporation would have been better off if corporation had forced the employees to REDEEM the options in 2006, pay the employees the difference between $3.65 and their strike price, put this amount on the employees' W-2, and withheld FIT and FICA on the amount.
Today we (the corporate CFO and myself) asked the lawyer why this would be true. His response was that section 409 is so vague that the big national accounting firms, the nationwide tax prep firms, the AICPA, and people inside the IRS cannot interpret the section consistently and are confused.
Okay, go ahead and get your laugh over with.
Now answer if you will: in spite of how ridiculous this may sound, is the lawyer right about redeeming the options prematurely??
Subchapter S (volume appx $15MM in sales) a few years ago began issuing stock options to whom they considered valuable employees. Some of these people have left - some haven't, and some continue to receive more options. The option has a strike price equal to the valuation as of previous year end, and the valuation (considered FMV) is adjusted annually.
Example: 2003 FMV $1.75 2004 FMV $2.50 2005 FMV $3.00 and 2006 FMV $3.65.
According to GAAP, the corporation recognizes a liability for unexercised options, assuming a theoretical probability that all options would be exercised. The expense related to this liability, of course, is not allowed as a deduction for tax purposes. Falls into the "recognized but not realized" category.
Lawyer tells corporation that both the employees and the corporation would have been better off if corporation had forced the employees to REDEEM the options in 2006, pay the employees the difference between $3.65 and their strike price, put this amount on the employees' W-2, and withheld FIT and FICA on the amount.
Today we (the corporate CFO and myself) asked the lawyer why this would be true. His response was that section 409 is so vague that the big national accounting firms, the nationwide tax prep firms, the AICPA, and people inside the IRS cannot interpret the section consistently and are confused.
Okay, go ahead and get your laugh over with.
Now answer if you will: in spite of how ridiculous this may sound, is the lawyer right about redeeming the options prematurely??