Employers are increasingly taking advantage of the motivational power of granting stock options as a form of compensation to key executives and employees. Stock options give the employee the right to buy a specific number of shares within a certain period of time at a fixed price. If the employee chooses not to buy the shares, the option can expire unused.

Employers may grant two types of stock options – nonqualified options and incentive stock options.   Non qualified options are not included in income unless the value is readily ascertainable. This usually means that the stock has to be traded on the open market.

Incentive-based options are more complicated tax-wise and are rarer since an employer can take no deduction for them. While an employee may exercise these options without recognizing the income, certain circumstances still create a tax. All income is recognized when the stock is sold.

Finding the value of stock options can be complex. A forensic accountant must usually determine the fair market value of the stock as well as the tax implications of receiving options, exercising them and selling the underlying stock.

Because the opportunity exists for collusion between the employer and employee at a time of divorce, Attorney Irwin M. Pollack has most recently been presenting arguments in court as to whether the true value of options – whether they are vested or unvested –be considered part of the marital estate.  Ultimately, the decision falls on whether they were given as incentive for ongoing employment or reward for past performance.