SECTION 7. DRAFTING

INFORMATION

The principal author of this revenue procedure is Erinn Madden of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in its development. For further information regarding this revenue procedure, contact Ms. Madden at (202) 622– 6060 (not a toll-free call).

this purpose, a low volatility stock has an annual standard deviation of 30 percent or less. A medium volatility stock has an annual standard deviation greater than 30 percent but less than 70 percent. A high volatility stock has an annual standard deviation of 70 percent or greater. If the stock is publicly traded on an established securities market (or otherwise), the expected volatility of the underlying stock used for purposes of volatility under this revenue procedure must be the volatility used for purposes of complying with FAS 123 and disclosed in the most recent financial statements of the corporation. If the stock is not publicly traded on an established securities market or otherwise, but the stock is required to be registered under the Securities Exchange Act of 1934, the volatility for such stock is assumed to be the same as the volatility for a comparable corporation that is publicly traded. For this purpose, whether a corporation is considered comparable is determined by comparing relevant characteristics such as industry, corporate size, earnings, market capitalization, and debt-equity structure. If the stock is not publicly traded and the corporation is not required to register under the Securities Exchange Act of 1934, the taxpayer must assume medium volatility. If the stock is not required to be registered under the Securities Exchange Act of 1934, but the corporation voluntarily registers its stock and its stock is publicly traded, the corporation must use the volatility of the underlying stock.

.03 Spread between exercise price and spot price . The factor based on the spread between the exercise price and the spot price is calculated by dividing the spot price by the exercise price and subtracting

1. If the stock is not publicly traded, the determination of the spot price for this

purpose must be reasonable and consistent with the price, if any, otherwise determined for the stock in connection with the transaction giving rise to the change in control under § 280G(b)(2)(A). For purposes of determining the factor based on spread between the exercise price and the spot price under the table in the Appendix, the resulting percentage may be rounded down to the next lowest interval. If this factor exceeds 220%, this safe harbor valuation method cannot be used to value the stock option.

.04 Maximum term of the option . The term of the option is the number of full months between the date of the valuation and the latest date on which the option will expire. For purposes of determining the term factor under the table, the number of full months may be rounded down to the next lowest six-month interval. If the term of the option exceeds 10 years (120 months), then this safe harbor valuation method cannot be used to value the stock option.

.05 Example . Corporation A undergoes a change in ownership or control within the meaning of § 280G(b)(2). Contingent on the change in ownership or control, Employee E, a disqualified individual, vests in 100 stock options in Corporation A stock, each of which has a remaining term of 60 months after vesting. The volatility for Corporation A is 50%. Therefore, the stock has medium volatility. At the time of the change in ownership or control, the value of the stock is $24 (the spot price). The exercise price under each of Employee E’s options is $20. Therefore, the factor based on spread is 20% (24/20 - 1). The value of the options under the safe harbor valuation method described in section 4 of this revenue procedure is $1,219.20 computed as follows: 100 options times the spot price

Appendix

Term (months) 12 24 36 48 60 72 84 96 108 120 Volatility Spread Factor* Low 200% 67.3% 67.9% 68.4% 69.0% 69.5% 69.9% 70.3% 70.7% 71.0% 71.2% 180% 65.0% 65.7% 66.4% 67.1% 67.7% 68.3% 68.8% 69.3% 69.6% 69.9%

160% 62.4% 63.3% 64.1% 65.0% 65.8% 66.5% 67.1% 67.7% 68.1% 68.5% 140% 59.4% 60.4% 61.5% 62.5% 63.5% 64.4% 65.1% 65.8% 66.4% 66.9% 120% 55.8% 57.1% 58.4% 59.7% 60.9% 62.0% 62.9% 63.7% 64.5% 65.1%

100% 51.5% 53.2% 54.8% 56.4% 57.9% 59.1% 60.3% 61.3% 62.2% 63.0%

February 25, 2002 550 2002–8 I.R.B.

Term (months) 12 24 36 48 60 72 84 96 108 120 Volatility Spread Factor* Low 80% 46.3% 48.5% 50.6% 52.6% 54.3% 55.9% 57.3% 58.5% 59.6% 60.5% 60% 40.0% 42.9% 45.6% 48.0% 50.1% 52.0% 53.7% 55.2% 56.5% 57.6% 40% 32.3% 36.3% 39.7% 42.6% 45.2% 47.4% 49.4% 51.2% 52.7% 54.1% 20% 23.3% 28.5% 32.7% 36.2% 39.3% 41.9% 44.3% 46.4% 48.2% 49.9% 0% 13.6% 19.9% 24.7% 28.8% 32.3% 35.4% 38.1% 40.5% 42.7% 44.7% -20% 5.4% 11.2% 16.1% 20.4% 24.2% 27.6% 30.6% 33.4% 35.9% 38.1% -40% 0.9% 4.1% 7.9% 11.6% 15.2% 18.5% 21.7% 24.6% 27.3% 29.9% -60% 0.0% 0.6% 2.0% 4.0% 6.4% 9.0% 11.6% 14.3% 16.8% 19.3%

Medium 200% 67.4% 68.6% 69.9% 71.1% 72.2% 73.1% 73.9% 74.5% 75.0% 75.4% 180% 65.2% 66.7% 68.2% 69.6% 70.9% 71.9% 72.8% 73.5% 74.1% 74.6% 160% 62.7% 64.5% 66.3% 68.0% 69.4% 70.6% 71.6% 72.5% 73.2% 73.7% 140% 59.8% 62.0% 64.2% 66.1% 67.7% 69.1% 70.3% 71.2% 72.0% 72.7% 120% 56.4% 59.2% 61.7% 63.9% 65.8% 67.4% 68.8% 69.9% 70.8% 71.6%

100% 52.5% 55.9% 58.9% 61.5% 63.7% 65.5% 67.0% 68.3% 69.4% 70.3%

80% 47.9% 52.2% 55.7% 58.7% 61.2% 63.2% 65.0% 66.5% 67.7% 68.8%

60% 42.6% 47.8% 52.0% 55.4% 58.3% 60.6% 62.7% 64.3% 65.8% 67.0%

40% 36.3% 42.7% 47.6% 51.6% 54.8% 57.6% 59.9% 61.8% 63.5% 64.9%

20% 29.1% 36.8% 42.5% 47.0% 50.8% 53.9% 56.5% 58.8% 60.7% 62.3%

0% 21.2% 30.0% 36.4% 41.6% 45.8% 49.4% 52.4% 55.0% 57.2% 59.1%

-20% 13.0% 22.2% 29.2% 34.9% 39.7% 43.7% 47.2% 50.2% 52.8% 55.0%

-40% 5.7% 13.8% 20.8% 26.8% 32.0% 36.4% 40.4% 43.8% 46.8% 49.5%

-60% 1.2% 5.9% 11.4% 16.9% 22.1% 26.7% 31.0% 34.8% 38.3% 41.4%

High 200% 68.1% 70.7% 73.1% 75.0% 76.6% 77.8% 78.8% 79.5% 80.0% 80.4%

180% 66.1% 69.1% 71.7% 73.9% 75.6% 77.0% 78.1% 78.9% 79.5% 79.9%

160% 63.8% 67.3% 70.3% 72.7% 74.6% 76.1% 77.3% 78.2% 78.9% 79.4%

140% 61.3% 65.3% 68.6% 71.3% 73.4% 75.1% 76.4% 77.4% 78.2% 78.8%

120% 58.3% 63.0% 66.8% 69.7% 72.1% 73.9% 75.4% 76.6% 77.4% 78.1%

100% 55.0% 60.4% 64.6% 67.9% 70.6% 72.6% 74.3% 75.6% 76.6% 77.3% 80% 51.1% 57.4% 62.2% 65.9% 68.8% 71.1% 73.0% 74.4% 75.6% 76.5% 60% 46.6% 54.0% 59.4% 63.5% 66.8% 69.4% 71.4% 73.1% 74.4% 75.4%

40% 41.4% 50.0% 56.1% 60.7% 64.4% 67.3% 69.6% 71.5% 73.0% 74.2% 20% 35.4% 45.3% 52.1% 57.4% 61.5% 64.8% 67.4% 69.6% 71.3% 72.7% 0% 28.5% 39.6% 47.4% 53.3% 57.9% 61.6% 64.7% 67.1% 69.1% 70.8% -20% 20.8% 32.9% 41.5% 48.1% 53.4% 57.6% 61.1% 64.0% 66.4% 68.3% -40% 12.7% 24.8% 34.0% 41.4% 47.3% 52.2% 56.3% 59.7% 62.5% 64.8%

-60% 5.2% 15.2% 24.3% 32.1% 38.8% 44.4% 49.1% 53.2% 56.6% 59.5%

*Strike Price/Exercise Price - 1 or (S/X-1)

2002–8 I.R.B. 551 February 25, 2002