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SIX-MONTH '16(b)' FORFEITURE PERIOD STARTS WITH GRANT OF STOCK OPTION
August 02, 2005
When you exercise a "non-statutory" employer stock option (not an "incentive stock option"), you pick up as W-2 wages the amount by which the stock's value exceeds what you pay to excercise the option. This excess is called the "bargain element."
An SEC rule - the "16(b) rule" - formerly required "insiders" to sit on stock for six months subsequent to an option exercise. Tax regulations said that tax on the bargain element was deferred until the six-month 16(b) period expired.
The SEC has since changed the 16(b) rule to start the six-month period when the option is acquired, rather at exercise.
The IRS issued a Revenue Ruling today (Rev. Rul. 2005-48) to conform with the newer SEC rules. Under the new ruling, the 16(b) rule will only defer tax if you exercise an option within six months of the time you received it. The ruling says may even be true even if the stock is still in a "lock-up period" under an agreement with an employer.
The IRS also said it the regulations will change to reflect the new ruling. This ruling conflicts with case law in the 1st Circuit, so it may not apply there, at least until the new regulations are issued.
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Comments
This revenue ruling is just another piece of "chewing gum" and "bailing wire" that holds together the Service's Rube Goldberg-like machinations on the sujbect of employee stock options.
At at time when there are news headlines that KPMG partners may be going to jail for tax shelters that may have cost the Treasury several billions of dollars, the Service is getting away with the incorrect tax treatment on employee stock options that may have cost taxpayers SEVERAL HUNDRED BILLIONS OF DOLLARS [or more] over the last thirty years or so.
Sooner or later, an intellectually challenged financial media are going to figure this out, and I wouldn't be surprised if some government officials don't do some hard time.
Posted by: stockoptionguy | August 4, 2005 7:45 AM