SECTION 3. MODIFICATIONS TO

REV. PROC. 2002–13

1. Under Rev. Proc. 2002–13, a stock option for stock that is not publicly traded

( i.e., an option that is not a Compensatory Stock Option as defined in Rev. Proc. 98–34) is considered properly valued for purposes of §§ 280G and 4999 if such value is determined using any valuation method that is consistent with generally accepted accounting principles (such as FAS 123) and takes into account the factors provided in § 1.280G–1, Q/A-13 of both the 1989 and 2002 proposed regulations. For purposes of the preceding sentence, the safe harbor valuation method provided in section 4 of Rev. Proc. 2002–13 is considered consistent with generally accepted accounting principles and takes into account the factors provided in § 1.280G–1, Q/A-13 of both the 1989 and 2002 proposed regulations. Pending further guidance, a stock option for stock that is publicly traded ( i.e., an option that is a Compensatory Stock Option as defined in Rev. Proc. 98–34) will be considered properly valued if the valuation method satisfies the standard set forth in Rev. Proc. 2002–13 for stock options that are not Compensatory Stock Options. Accordingly, the value of a Compensatory Stock Option will be considered properly determined if such value is determined in accordance with Rev. Proc. 98–34, with the safe harbor valuation method in section 4 of Rev. Proc. 2002–13, or with a valuation method that is consistent with generally accepted accounting principles (such as FAS 123) and that takes into account the factors provided in § 1.280G–1, Q/A-13 of both the 1989 and 2002 proposed regulations. For purposes of §§ 280G and 4999, however, regardless of whether the option is a Compensatory Stock Option, a stock option will not be considered properly valued if the option is valued solely by reference to the spread between the exercise price of the option and the value of the stock at the time of the change in ownership or control or without regard to the other factors provided in § 1.280G–1, Q/A-13 of both the 1989 and 2002 proposed regulations.

2. The Appendix to this revenue procedure provides a valuation table for use under section 4 of Rev. Proc. 2002–13 that supersedes the table provided in the appendix to Rev. Proc. 2002–13. The expanded table includes an additional column for use when the remaining term of the option is 3 months. For purposes of

section 4.04 of Rev. Proc. 2002–13, if the remaining term of the option is less than 12 months, the taxpayer may round down to the 3-month interval.

3. For purposes of determining the term factor under section 4.04 of Rev. Proc. 2002–13, the number of full months may be rounded down to the next lowest 12-month interval.
4. Section 4.02 of Rev. Proc. 2002–13 provides that, for purposes of valuing a stock option using the safe harbor valuation table in section 4 of Rev. Proc. 2002–13, the volatility factor used for stock that is publicly traded on an established securities market (or otherwise) is based on the volatility of the underlying stock used for purposes of FAS 123 and disclosed in the most recent financial statement of the corporation. In order to use the safe harbor in section 4 of Rev. Proc. 2002–13, the volatility factor in section 4.02 must be based on the volatility for the most recent year used for purposes of complying with FAS 123 and disclosed in the most recent financial statements of the corporation.