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IRS Final Regulations: Statutory Options The IRS has just released new final regulations (click here for the Federal Register) relative to incentive stock options. While these new regulations do not differ substantially from the proposed regulations issued last year, there are a few things worthy of comment: The new final regulations provide that an ISO plan must specify a separate maximum aggregate number of shares available for issuance pursuant to the exercise of incentive stock options if the plan also allows other equity incentive awards. Many existing plans simply state the total number of shares available for grant under the respective plan and do not state a separate number for incentive stock options.  Under the new regulations, these provisions are not sufficient.  This will no doubt require changes to many existing ISO plans. Good thing there is a transitional rule for options granted prior to the end of this year! The new final regulations clearly indicate that Section 83 does NOT apply to a transaction to which Section 421 applies. Thus, for example, no valid Code 83(b) election (except for AMT purposes) may be made with respect to restricted stock received upon exercise of an ISO. Thus, companies may want to reconsider their approach if they are using "reverse vesting" with incentive stock options. The new final regulations provide that an offer to change the terms of an option will not constitute a modification of an option IF and only if the offer to change remains outstanding for less than 30 days. The new final regulations provide that any inadvertent modification of an option will not be treated as a modification of an option if the inadvertent modification is reversed by the earlier of the date the option is exercised or the last day of the calendar year during which the inadvertent modification occurred. The new regulations are generally effective as of August 3, 2004.   Please feel free to contact any member of MMMs Financial Services Group if you have questions about this legislation.     T. Daniel Brannan (404) 504-7727 dbrannan@mmmlaw.com David M. Calhoun (404) 504-7613 dcalhoun@mmmlaw.com Larry W. Shackelford (404) 504-7651 lshackelford@mmmlaw.com Bruce H. Wynn (404) 504-7694 bwynn@mmmlaw.com