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By Michael Gray

Valuation disputes.

I have been receiving a number of questions about whether employees can dispute their employer's valuation of the stock received relating to exercising employee stock options.

The valuation of stock, especially when is not publicly traded, is a complex issue. An entire industry has grown up around determining the value of businesses.

When you are going to report inconsistently with amounts on your W-2, you need sound reasoning and documentation for arriving at a different amount. When the amounts are significant, it is best to prepare for litigation by getting a professional opinion by a qualified business appraiser. The investment in an appraisal can be substantial, and it is difficult for appraisers to compute a value unless the company's accounting department cooperates by providing information.

The courts have become much better informed about valuation over the years, and have a lot of case law to refer to. You should prepare to substantiate your position in court when you claim a different value from that provided by your employer.

The good news is case law favors valuation adjustments or discounts to minority shareholders of privately-held stock for lack of control and lack of marketability.

The employer has a conflict of interest in valuation. It is in the employer's best interest to represent high stock value to venture capitalists and investors, and also to qualify for bigger tax deductions based on a high value. Employees may state this conflict of interest makes the representation of value by the employer invalid.

Bear in mind this may not improve your popularity at work and promote favorable future employment references. When the alternative is bankruptcy, you may have little choice but to go ahead with the dispute.

There just isn't time to have a valuation done for 2000 before the filing deadline. What can you do?

You can make a "best guess" value, disclose it and file the return. Then file an amended return when the valuation is done. Most tax return preparers won't follow this approach, but you can try it for a self-prepared return.

You can file a return based on the employer-provided information. Then file an amended return when the valuation is done. Most tax return preparers will follow this approach. If you are the taxpayer, you may have an issue with being able to pay the tax with the return or having to deal with the collections department for the tax authorities while valuation is being prepared.

Good luck!

Audio tapes of telephone conference available

If would like information about getting an audio tape of my "Secrets of Tax Planning For Employee Stock Options" telephone conference, please write to Dawn Gray at mgray@stockoptionadvisors.com

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication 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.

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

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