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In general, the tax treatment with respect to 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 regula-
tions thereunder.6
Under section 83(a), a taxpayer who receives an option in
connection with the performance of services has compensation
income in the year in which the option is granted to the taxpayer
if the option has a readily ascertainable fair market value at
the time of grant. Sec. 1.83-7(a), Income Tax Regs. If the
option does not have a readily ascertainable fair market value at
the time of grant, the exercise of the option gives rise to
compensation income in the year of exercise.7 Such compensation
income is equal to the amount by which the fair market value of
the stock on the date (exercise date) of the exercise of the
option pursuant to which the stock was transferred to the tax-
payer exceeds the price (option price) that the taxpayer paid to
acquire the stock under the option.8 Sec. 83(a); sec. 1.83-7(a),
Income Tax Regs.
6Svoboda v. Commissioner, T.C. Memo. 2006-235.
7There is no dispute between the parties that none of the
options granted to Ms. Kim pursuant to the Fannie Mae ESPP had a
“readily ascertainable fair market value” at the time of grant.
8Svoboda v. Commissioner, supra.
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