Deferral of stock option gains

[Guest jfsinger]

I'd like for some to weigh in on this issue. Thanks.

The Dorsey & Whitney Summary of new legislation purports that, although not disallowed by 409A, the deferral of stock option gains is now "impractical" because the deferral election would need to be made in the year prior to the year in which the award of the option or grant is made. It would seem to me, though, that one would "earn" the income of an option in the year in which it becomes vested, and that an election to defer could be made in the year prior to vesting. What am I missing?

Have any heard of this from other advisors? Do you differ in your interpretation?

Here's the link to the Dorsey article:

http://www.dorsey.com/publications/legal_d...pubid=172644603

Thanks,

Joe

[mbozek]

It would be helpful if you would describe what you mean by earning the income of the opton in the year in which it beocmes vested.

[TCWalker]

That was the inital reaction by a few firms, now it appears they are backing away from that position. Time will tell.

[Guest jfsinger]

It would be helpful if you would describe what you mean by earning the income of the opton in the year in which it beocmes vested.

It would seem that a stock option would be earned not in the year the option was granted, but rather in the year it becomes vested. Therefore, an election to defer the grant, it would seem, would need to be made in the year prior to vesting, not in the year prior to grant.

An option taxed under sec. 83 is not taxable until exercise, of course. But, there's no opportunity for income or a taxable event until it is vested.

Is my logic reasonable?

[mbozek]

How would a section 83b election apply to nonvested property subject to taxation under 409A?

[Guest jfsinger]

How would a section 83b election apply to nonvested property subject to taxation under 409A?

The conference report specifically exlcudes property taxed under Section 83, i.e. restricted stock. Therefore, an 83b election is not effected by 409A.

[mbozek]

Where does it exclude all section 83 arrangements? I thought there is an exemption for NQSO with an exercise price that is not less than the FMV of the underlying stock on the date of the grant. Deeply discounted options are not exempt from 409A.

[Alf]

Some versions of the initial legislation specifically regulated/prevented these swaps, but those provisions were not carried into the bill that passes. From that, we can assume that they are still as viable as before (until we know more about 409A), although I understand that the IRS has never approved of them.

[mbozek]

The conf. report P 524 contains the language quoted above. Also 409A taxes all deferrals of comp that are not expressly exempted and there is no exemption for NQ stock options under IRC 83 althouth there is an exemption in the conf report for ISOs and options granted under a 423 plan. My question relates to whether making a section 83b election removes the NQSO from the restrictions of 409A because taxation is no longer deferred and any future increase in value will be taxed as capital gains.

[GBurns]

mbozek

What link do you use to get to the Conf. Report that you quote? The Report on the W&M website does not have the same things on the pages that you have referenced at various times.

[mbozek]

[/u]http://waysandmeans.house.gov/Links.asp?section=1559[/u] posted by TC walker on Oct 7 at 3:54pm under topic "HR 4520 is out of conference, headed to vote "

Conf rpt also linked to the American Benefit Counsel site posted by Katherine on Oct 27 4:01pm under the topic HR 4520 and grandfathered provisions.