Certified Valuation Analyst (CVA) Practice Exam

Which IRS pronouncement outlines a methodology for valuing certain compensatory stock options?

1. RR 66-245

2. RR 86-70

3. RR 98-34

4. ARM 34

The correct answer is: RR 98-34

The correct answer highlights Revenue Ruling 98-34, which provides specific guidance on the valuation of certain compensatory stock options. This IRS pronouncement establishes a framework for determining the fair market value of stock options, especially those granted as part of employee compensation packages. The methodology outlined includes considerations for factors such as the volatility of the underlying stock, the expected term of the options, and the risk-free interest rate. Revenue Ruling 98-34 is significant because it addresses the complexities associated with valuing stock options, offering clarity on how to apply generally accepted valuation principles in a tax context. This is particularly relevant for businesses and valuation analysts involved in determining compensation for employees in the form of stock options, especially for compliance with tax regulations and financial reporting. The other options, while related to various IRS rulings and methodologies, do not specifically provide the guidance on valuing compensatory stock options as effectively as Revenue Ruling 98-34 does.