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Date:   Thu, 3 Apr 2003
From:   Baoliang

Hi Michael,

I found your articles very helpful, thanks.

I have some questions regarding my NQSO from my ex-company. Here is my situation:

1. I exercised the NQSO on Dec. 6, 2002. It was not transferable at that time, since the company had not yet gone public. The fair market value was $14, and the exercise exercise price was $2.30 when I exercised the shares.
2. The company went public on Dec. 11, 2002. There was a restriction on my exercised stock -- it could only be sold after March 10, 2003. Its market price on that day was $10.30.
3. The company has filed form 1099 MISC for the income of ($14-$2.30) X the number of shares exercised.

My questions:

1. In which year should I pay tax on the compensation element related to the exercise of the NQSO, 2002 or 2003?
2. If I can defer the tax to 2003, what should I do about the IRS form 1099 MISC the company filed in 2002?

Thanks for your help!
Baoliang

Answer

Date:   Fri, 9 May 2003

Hello Shelley,

See our article, "'Lock out' does not defer tax on income". It appears you should report the income reported on Form 1099 MISC on your 2002 income tax return. The only reason for deferring reporting the income on the stock is if it was not vested on the date of exercise and you didn't make a Section 83(b) election at that time.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified 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.