TheCorporateCounsel.net

July 10, 2003

I got some great feedback

I got some great feedback to yesterday’s questions posed about Microsoft’s novel underwater option arrangement with JP Morgan from several community members.

Art Meyers of Palmer Dodge notes that the existence of the JP Morgan program raises the possibility that any stock options issued in the future by Microsoft might be taxable at grant under the Section 83 IRS regulations. The analysis is if JP Morgan’s valuation program can be viewed as causing the company’s stock options to be considered “actively traded on an established market” within the meaning of IRS Reg. 1.83-7(a) and (b)(1), then future options (whether immediately exercisable or not) might be taxable upon grant, not exercise.

Furthermore, even if this trading criteria is not met, a future option that is fully vested when issued (or perhaps even an early exercise option) and is freely transferable could be taxable upon grant under IRS Reg. 1.83-7(b)(2). That subsection generally only requires such an option to have a fair market value which can be “measured with reasonable accuracy.”

Let me know if you have anything to add to Art’s reasoning. I will post additional community member thoughts tommorrow.

By the way, Mike O’Sullivan of Munger Tolles provides some detailed background about Microsoft’s plans in his excellent “Corp Law Blog” at http://www.corplawblog.com.