7555 / Is the special tax treatment for incentive stock options available if an incentive stock option and a stock appreciation right are granted together?
(1) The SAR will expire no later than the expiration of the underlying ISO.(2) The SAR may be for no more than 100 percent of the spread (i.e., the difference between the exercise price of the underlying option and the market price of the stock subject to the underlying option at the time the SAR is exercised).
(3) The SAR is transferable only when the underlying ISO is transferable, and under the same conditions.
(4) The SAR may be exercised only when the underlying ISO is eligible to be exercised.
(5) The SAR may be exercised only when there is a positive spread (i.e., when the market price of the stock subject to the option exceeds the exercise price of the option).
The SAR could be paid in either cash or property or a combination thereof, so long as any amounts paid are includable in income under IRC Section 83.1
When the IRS issued final ISO regulations in August 2004, however, it removed the previous rules, apparently without comment. It is unclear whether the pre-existing rules are still valid.