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OPINION
Income on Exercise of Stock Options
Respondent determined that petitioners' 2002 return
understated his compensation income by $73,374, an amount
representing the aggregate difference between the option prices
and sales prices of the Fluor stock petitioner acquired and sold
in 2002 pursuant to stock options. Petitioners contend that the
foregoing amount is capital gain because it was realized from the
sale of stock acquired pursuant to incentive stock options.
Generally, the income tax treatment of the grant of an
option to purchase stock in connection with the performance of
services, and the transfer of stock pursuant to the exercise of
such an option, is determined under section 83(a) and the
regulations thereunder. Such stock options are known as
"nonqualified stock options" or "nonstatutory stock options".
The receipt of a nonqualified stock option does not generate
income in the recipient unless the option has a readily
ascertainable fair market value.6 Instead, the recipient's
exercise of the nonqualified option to acquire stock gives rise
to gross income at the time of exercise, equal to the amount by
which the fair market value of the stock at the exercise date
6 Neither party contends that the stock options held by
petitioner had a "readily ascertainable fair market value" at the
time that Fluor granted the options to petitioner. See sec. 83;
sec. 1.83-1(a), Income Tax Regs.; sec. 1.83-7(a), Income Tax
Regs.
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Last modified: May 25, 2011