Roy, nice of you to ask, and in fact I DO know of something out there on deferral of option income, but it's kind of a long shot. Before I get long-winded about that, I have one brief comment on the original post (message 716). The writer said:

<<I still believe those options are going to appreciate even more over the next couple years and I do not plan to exercise and sell until needed.>>

There may be good tax reasons to exercise sooner rather than later if the options are going to appreciate even more. Exercising now and holding the stock for a period of time may permit the holder to recognize a smaller amount of ordinary income now and long-term capital gain later. But planning for option exercise is very complicated, and requires extensive investigation of all the relevant facts, so this is just a thought, not a recommendation.

Now to the tax deferral scheme. (All of this assumes the options are nonqualified, in other words, are not incentive stock options, as paqman sort of hints but doesn't exactly say.) The idea works something like this. The company sets up a nonqualified deferred compensation arrangement. An employee who holds an option and wants to take advantage of the arrangement must notify the company at least X months in advance (where X is some magic number, let's say 6) that she is going to exercise her option by exchanging shares she already owns, and when she exercises her option she wants the number of shares that would otherwise be income to be withheld and placed in the deferred compensation arrangement. Within that arrangement, the shares may be held as company shares or reinvested for diversification (although perhaps not directly under the control of the employee/beneficiary).

I won't go into the technical reasons why this is supposed to work, except to say that an important element of the reasoning is based on the logic the IRS used in a revenue ruling explaining the consequences of a pyramid exercise of a nonqualified option. I have seen articles--one of them by a prominent and respected practitioner--indicating that the authors believe the technique works. I evaluated the idea for a client who was not willing to be agressive, and my conclusion was that it was not suitable for that client. Since then, I've seen a notice indicating that someone tried to float this idea by the IRS national office for a private letter ruling, but had to withdraw the request when the IRS reaction turned negative. I think there are some companies out there doing this, but they (or their option holders) are taking some tax risk.

So that's why I called this a long shot. You would have to be willing to take the tax risk; you would have to work for a company that is willing to set up this arrangement; you would have to be in a position to exercise options by turning in previously owned shares--and then you would have to hope the IRS doesn't come calling.

Apart from this wonderful idea, I don't know of any magic here. The main thing people do with options is put a lot of thought into how and when to exercise them, evaluating as many alternatives as possible to minimize or postpone taxes. And sometimes there's just no way to get around paying a whopping pile of tax. But that's a problem I and plenty of other people would love to have . . .

KAT in Chicagoland