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IRS disregards stock value of EBC on delivery date

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Tax Hot Topics newsletterThe IRS issued a Generic Legal Advice Memorandum (GLAM 2020-004) on whether the stock value of equity-based compensation (EBC) on the date of delivery is taken into account in determining the amount of compensation income includible under Section 83 and the wage amount subject to payroll tax withholding.

In the GLAM, the IRS provided three scenarios where an employee was compensated with nonqualified stock options (NSOs), stock-settled stock appreciation rights (SARs) or stock-settled restricted stock units (RSUs). In all three, the employer stock was publicly traded and the terms of the RSUs provided for payment of the shares on the date of vesting. Several days after the subsequent exercise (NSOs and SARs) or initiation of payment of the equity awards (vesting date of the RSUs in the GLAM fact pattern), the shares of the employer’s common stock were delivered to the employee. In each scenario, the fair market value of the employer’s stock on the delivery date had decreased from the stock’s fair market value on the exercise or payment date.

For the stock options and SARs, the IRS clarified that the stock’s fair market value on the exercise date is used to determine the amount includible in income pursuant to Section 83 and subject to payroll tax withholding. For the RSUs, the fair market value on the date the employer initiates payment of the shares is the amount taken into account for Section 83 and payroll tax withholding purposes. Accordingly, under the specific fact patterns addressed in the AM, the stock’s fair market value on the delivery date is disregarded for federal tax purposes. The GLAM also concluded that these same dates (exercise/payment initiation in the case of the RSUs), and not the delivery date, are controlling for purposes of the timing rules for depositing the employment taxes. 
 
Contacts:
Jeff Martin
Partner
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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