Stock options qualify for Sec. 83(i) deferral

Tax Hot Topics newsletter The IRS held in PLR 202042010 that transferability restrictions and an employer’s right to repurchase imposed in connection with stock options subject to a Section 83(i) deferral election did not cause the program to fail to meet the requirements for such deferral.

The taxpayer in the PLR is a privately held corporation that maintains two stock-option plans adopted before Jan. 1, 2018. It intended to allow qualified employees to make a Section 83(i) election to defer income tax on gain realized when the stock options were exercised. The election was required to be executed before the stock options were exercised. It restricted the employee’s ability to transfer the stock and gave the taxpayer the unilateral right to repurchase the stock at fair market value before the transferability restrictions lapsed. The transferability restrictions applied until five years from the date the option was exercised, the first date that the stock becomes readily traded on an established securities market as defined under Section 83(i), the date the employee becomes an excluded employee under Section 83(i) or the exercise of the repurchase right by the taxpayer, whichever came first.

For purposes of Section 83(i), “qualified stock” does not include stock that an employee may sell to the corporation, or receive cash in lieu of stock from the corporation, when the employee’s rights in the stock first become transferable or are not subject to a substantial risk of forfeiture. The taxpayer requested rulings from the IRS that the transferability restrictions and repurchase rights would not cause the stock to run afoul of this limitation, and that stock is not considered transferable under Section 83(i) until the earliest date specified under the transferability restrictions.

The IRS held that, although Section 83(i) and its legislative history make clear that qualified stock cannot be transferrable from an employee to an employer, a corporation’s unilateral repurchase right does not make qualified stock transferable for purposes of Section 83(i). It also held that the stock is not considered transferable under Section 83(i) until the transferability restrictions lapse.

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

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