The division of incentive stock options in a divorce.

The IRS recently released Private Letter Ruling 200519011 (5/13/05) addressing the division of incentive stock options (ISO) in a divorce. The specific case involved a trust arrangement by which the employee spouse (ES) holds the non-employee spouse's (NES) options and conducts transactions only at the NES's direction.

Important provisions of this ruling include:

* The ES's designation of the NES as the beneficiary of the ISOs will not disqualify them under IRC Sec. 422(b)(5).

* The NES will recognize AMT resulting from the exercise of their ISOs and receives the resulting credit.

* Neither the designation of the NES as the beneficiary of the ISOs nor the transfer of stock received from an exercise will be considered a taxable event.

* The transfer of the stock to the NES will not be considered a disposition of stock under IRC Sec. 424(c).

* The NES will report gain or loss on the sale of their stock even if registered in the ES's name.

* Reimbursements between the parties for any withheld taxes will be tax free.

* The NES claims all income tax withholding resulting from the exercise of their options or the sale of their stock.

This information is provided by Leslie O. Dawson, CPA, partner, Glenn & Dawson LLP and chair of CalCPA's Family Law Section.