A recent Chief Counsel advice (CCA 201519031) provides guidance on disqualifying dispositions
of incentive stock options (ISOs) in reorganizations.
Both the taxpayer and the IRS agreed that these were disqualifying dispositions
. But the IRS also determined that the value of the taxpayer's exercisable MGC shares exceeded the $100,000 limit The taxpayer asserted that the $100,000 limitation is only applied to shares that were not subject to a subsequent disqualifying disposition
In addition, there will be no income tax withholding on such disqualifying dispositions
or on gains from exercising ESPP options with an exercise price between 85 percent and 100 percent of fair market value.
In this case, an optionee essentially swaps remitted shares for an equal number of acquired shares, so that the tax basis and holding period (for purposes other than disqualifying dispositions
) of the remitted shares are carried over to an equal number of acquired shares.(6) The optionee then holds additional acquired shares with a basis equal to zero or cash paid (if any) at exercise, and a holding period that begins on transfer.(7)
Federal income tax withholding would not be required on disqualifying dispositions
or when compensation is recognized in connection with an employee stock purchase plan discount.
The IRS will scrutinize such compensation to ensure proper income recognition on vesting and on disqualifying dispositions
* If the stock drops substantially, e.g., more than one-third, consider disqualifying dispositions
prior to the tax year-end.
421(b) for disqualifying dispositions
of incentive stock options (ISOs).
71-52, but until it changed that ruling, it was extending payroll and withholding exemptions to ISOs and disqualifying dispositions
of statutory option stocks.
The FSA did not address disqualifying dispositions
of ESPP shares; presumably, it would argue that Sun Microsystems would also govern such dispositions.
These cases held that, when the exercise of a stock option gives rise to a compensation deduction to the employer corporation for income tax purposes (as with NSOs or disqualifying dispositions
of ISOs), the same deduction should also be allowed for E&P purposes.