SECTION 4. VALUATION SAFE

HARBOR

.01 In general . The safe harbor valuation method provided by this revenue procedure is based on the Black-Scholes model and takes into account, as of the valuation date, the following factors: (1) the volatility of the underlying stock, (2) the exercise price of the option, (3) the value of the stock at the time of the valuation (the “spot price”), and (4) the term of the option on the valuation date. The safe harbor value of the option is calculated as the number of options multiplied by the spot price of the stock multiplied by a valuation factor determined using the factors described above and reflected in the table in the Appendix. Other relevant factors, including risk-free rate of interest and assumptions related to dividend yields are included in the table in the Appendix. To determine the valuation factor, the taxpayer must determine the volatility, spread, and option term factors, as described below. To rely on this revenue procedure, assumptions made for purposes of this revenue procedure and the determination of each factor must be reasonable and consistent with assumptions made with respect to other options valued in connection with the change in ownership or control.

.02 Volatility . The taxpayer must determine whether the volatility of the underlying stock is low, medium, or high. For

2002–8 I.R.B. 549 February 25, 2002

of $24 times 50.8% (the factor in the table in the Appendix for a medium volatility stock with a 20% spread factor and a 60-month term). Corporation A is permitted to use this value as the value of the payment under § 1.280G–1, Q&A–13.