The Stock Options Book

A required text for the Certified Equity Professional program

9th ed. (February 2008). 416 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.

As the use of stock options has increased, so has the degree of legal, accounting, and regulatory complexity associated with employee option plans. This revised and expanded edition by equity compensation expert Alisa J. Baker presents a straightforward, comprehensive overview of both the big-picture issues and the technical details related to designing and implementing stock option plans. In addition to examining the rules, the book looks at "hot" issues and provides illustrative exhibits, a glossary, a bibliography, and primary source materials, plus a seminal article by Corey Rosen on stock plan design.

"Alisa Baker's new version of The Stock Options Bookshould be on the desk of every stock option professional. She provides the reader with a wealth of technical information and practical advice in a clear and easily accessible format. As an added bonus, she is not afraid to voice her own opinions on controversial issues."
- Robert H. (Buff) Miller, Cooley Godward Kronish LLP

"The Stock Options Book fills a real void in the world of equity compensation by providing a comprehensive and useful reference guide to employee stock options. The Stock Options Book is technical and well researched yet eminently readable. Anyone involved with the design or administration of employee stock option programs, from the inexperienced stock plan administrator to the seasoned compensation professional, will appreciate this useful reference tool."
- Tim Sparks, President, Compensia, Inc.

PDF of the book's comprehensive table of contents
(30K; Adobe Acrobat Reader required).

Contents in Brief
Preface
Introduction
Part I: Overview of Stock Options and Related Plans
Chapter 1: The Basics of Stock Options
Chapter 2: Tax Treatment of Nonstatutory Stock Options
Chapter 3: Tax Treatment of Incentive Stock Options
Chapter 4: Plan Design Considerations
Chapter 5: Employee Stock Purchase Plans
Chapter 6: Trends in Equity Compensation: An Overview
Part II: Technical Issues
Chapter 7: Financing the Purchase of Stock Options
Chapter 8: Overview of Securities Law Issues
Chapter 9: Tax Law Compliance Issues
Chapter 10: Basic Accounting Issues
Chapter 11: Tax Treatment of Options on Death and Divorce
Chapter 12: Post-Termination Option Issues
Part III: Current Issues
Chapter 13: Legislative and Regulatory Initiatives Related to Stock Options: History and Status
Chapter 14: 2007 Hot Topic: Option Backdating
Chapter 15: Recent Cases Affecting Equity Compensation: 2003 Through 2007
Chapter 16: Transferable Options
Chapter 17: Reloads, Evergreens, Repricings, and Exchanges
Chapter 18: Using an Independent Compensation Committee to Validate Equity Compensation
Appendix 1: Designing a Broad-Based Stock Option Plan
Appendix 2: Primary Sources
Glossary
Bibliography
Index

Excerpts

From Chapter 3, "Tax Treatment of Incentive Stock Options" (endnotes omitted)

As described in detail below, the spread on exercise of an ISO is subject to alternative minimum tax (AMT) in the year of exercise. When the stock market bubble popped in 2000, optionees who failed to focus on the effects of the AMT were unpleasantly surprised to see substantial tax bills despite the fact that the value of their stock may have subsequently declined below the exercise date price. The experience of the dot-commers emphasizes the need to respect the special rules for ISOs in regard to AMT and disqualifying dispositions. These rules require careful consideration of potential effects that the AMT rules will have on filing Section 83(b) elections for ISO purposes. It is advisable for many employees who exercise ISOs for restricted stock to file Section 83(b) elections exactly as though they were exercising NSOs. Moreover, the rules will apply to trigger certain planning possibilities as well as pitfalls for optionees who expect to make disqualifying dispositions of their ISO stock in a year other than the year of exercise.

Although the specific application of the AMT is too complex to summarize here, generally AMT is exactly what its name suggests: an alternative to the regular tax system. AMT is imposed on alternative minimum taxable income (AMTI) as computed under Sections 56 through 58 of the Code. To arrive at AMTI, the taxpayer computes regular taxable income (as defined in Section 55(c) of the Code) and then adjusts that amount by any adjustments or "tax preference items" (i.e., items that reflect certain deductions and tax deferral benefits allowed under the regular tax system) taken in the taxable year. The spread on exercise of an ISO has always been treated as a tax preference item.

Under Section 55 of the Code, AMT is computed on the amount of AMTI in excess of the applicable exemption amount ($62,550 for married taxpayers filing jointly, $42,500 for single taxpayers in 2006). If the AMT exceeds the taxpayer’s regular tax in a given year, the taxpayer must pay the AMT amount rather than the regular tax amount. The difference between AMT and regular tax in any year is allowable as a credit against regular tax in future years when no AMT is due pursuant to Section 53 of the Code. Thus, AMT payment essentially serves as a prepayment of regular tax and accordingly offsets any deferral benefit that the taxpayer would otherwise enjoy in a year when AMT exceeds regular tax.

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