IRS ruled that upside should be considered current income
Not quite sure what you are referring to here. Gain on exercise for executives is always* ordinary income -it's compensation.
The 409A rules prohibit option grants that are made below FMV at grant, so the IRS I suppose could go after a grant and say it was made below FMV even though it was made at the current stock price. 409A violations produce a penalty tax. (409A was a stupid law originally passed to prevent deferral of income - in practice it has become a full-employment act for compensation lawyers).
Peter
* (except for ISO's that are exercised and held, but then the AMT essentially turns it into ordinary income anyhow)
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