An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Cheryl Metrejean
Georgia Southern University

Claire Nash
Christian Brothers University

Abstract: Employers use many forms of compensation to reward employees. One type of property that corporate employers often use is company stock or stock options. When a stock option is exercised, employees exchange the option and additional consideration for stock. Employees typically exchange the option and cash, but another type of consideration that can be used is indebtedness from the employee to the employer.

This paper examines complications created when indebtedness issued to exercise stock options is later modified. For example, the debt is partially or completely forgiven, the interest rate is reduced, or the debt is changed from recourse to nonrecourse debt. The IRS has issued guidance in Rev. Rul. 2004-37 to help determine the tax consequences of such modifications. The basic provisions affecting the transfers of nonqualified stock options and guidance previously available are reviewed. This is followed by a discussion of the compensation recognition required by Rev. Rul. 2004-37.

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