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Subject:   What constitutes "transferable" stock in ISO AMT calculation?
Date:   Sun, 2 Jan 2000
From:   Steven

This question is in regard to exercising ISOs.

According to IRS Publication 17, for tax year 1999, AMT must be calculated on the exercise of an ISO "when your rights in the aquired stock first become transferable, or when these rights are no longer subject to a substantial risk of forfeiture."

If a 100% vested stock option is exercised in 8/99, but on the back of the stock certificate is a restriction, saying that the shares are subject to a lock-up agreement, and cannot be sold until 1/00, then does AMT need to be calculated in 1999, based on the 8/99 exercise date? Or is it calculated in 2000, based on the expiration of the lock-up agreement?

Thanks.

Answer

Hello Stephen,

In order for an employee to not recognize ordinary income when exercising an incentive stock option, the stock must be both nontransferable and subject to a substantial risk of forfeiture.

A temporary restriction, such as a "lock up" period when employees are prohibited from trading shares after an initial public offering, is generally disregarded. It is not considered a substantial risk of forfeiture.

There is an exception in the Internal Revenue Code. If a sale of stock could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, the stock is considered both subject to a substantial risk of forfeiture and not transferable.

It appears in your case the ordinary income should be reported in 1999.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.