Stock Options and Key Employee "Owner" Definition

[Guest joshuaadaniels]

I am trying to determine what constitutes "ownership" under the definition of key employee, particularly with respect to stock options that had been granted but were not vested. I need to determine if this employee was key for Top Heavy Contributions:

This employee had compensation over $220k in each of last 5 years (so he passes the earnings threshold); but , with respect to 5% or 1% ownership:

He had stock options worth > 5% of the company's shares on a fully-diluted basis. These stock options were granted but only vested upon a change of control.

Internal Revenue Code Section 416(g)(4)(H)(i)(1)(B) provides that in determining whether someone is an owner of the corporation for key employee purposes, it is any person who owns (or is considered as owning within the meaning of Section 318 of the Internal Revenue Code), more than 5% of the outstanding stock of the corporation. This provision is referenced to Code Section 318 for determining ownership. Code Section 318(a)(4) provides that if any person has an option to acquire stock, such stock shall be considered as owned by such person.

I have also heard that the stock options needed to be for shares that had already been issued in order to meet this criteria.

Can someone on this board please give some advice?

Thanks

[R. Butler]

It is my understanding that if the option is conditional upon events not related to the passage of time & not within the option-holder's control it is not an option for attribution purposes.