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If a company issues stock warrants to purchase its stock at a low price that is less than the current value of the stock in exchange for a license of technology (which is nonexclusive) from the recipient of the warrants, does the recipient of the warrants have taxable income at issuance of the warrants if the fair market value of the underlying stock exceeds the present value of the license stream? Or does the recipient have taxable income at the time of exercise of the warrants on the difference between the value of
the stock at exercise and the purchase price? Or does the recipient have no taxable income but just a basis equal to the value of the license plus the price paid for the warrants? HELP! (and thank you.)

Man I wish I knew but I dont....

Can someone else help this guy - he posted yesterday with no responses...

BTW - if I had to guess..
I would say the exchange here is not one of a like-kind nature and would therefore be taxable..


Well....I was kind of avoiding it, hoping someone would have a good answer. Seems like that isn't forthcoming, so here goes.

I've got to agree with you, Pete, that it looks taxable to me - not a like-kind exchange and no other obvious reason for it to be tax deferred. I'd call it a barter transaction, which is generally taxable. So I guess that leaves the question of valuation.

Generally, you use the value that is more apparent of the two items bartered. To value the warrants, I'd have to ask if there is a market for the warrants (assuming that the poster is really referring to warrants and not options). If there is a market, the valuation becomes a slam dunk. If not (and I'd have to guess there isn't), as a minimum, I think the warrants would have to be worth the discount between the purchase price with the warrant and the market price of the stock on the day the warrants were issued. There is also probably some value intrinsic in the warrants themselves - somewhat similar to a call option. You can choose to purchase the underlying stock or not, giving you the ability to share in any appreciation without having the full risk of the stock depreciating. This all gets really sticky if the stock isn't publicly traded, either.

To try to value the license side, I'd see if any similar licenses of the technology have been granted for cash, either before or after this barter transaction. If so, they could be an indicator of the value. My guess is that the cost of creating the technology would be a less effective measure of it's value, but I wouldn't ignore it entirely in a valuation analysis. Likewise, the anticipated income stream from the license (as the original poster suggested) could also be a less effective measure of it's value.

A final consideration is that the income from this is likely to be ordinary. I'm guessing (again!) that the technology was developed by the personal efforts of the taxpayer. There's probably no cost basis in the license, so the entire value is going to be taxable income, not just the difference in values. Of course, any ordinary and necessary expenses could be deducted from this income. So, there would be taxable income at the time the exchange occured.

That looks to be about $0.06 worth this time, sorry for the length. Some additional information might help get a better answer. Any other opinions lurking about out there?

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