No constructive receipt of income to employees when an employer offers to repurchase compensatory stock options.

• Author: Bell, Lorraine
• Position: Brief Article

In a ruling that may have considerable utility in corporate acquisitions, the IRS has held for the first time that an offer to buy out compensatory stock options for cash will not result in constructive receipt for the option holder who declines the offer. In Letter Ruling 9422048, an employer company issued stock options that allowed a participant to purchase shares of its common stock. The company proposed to modify the terms of the options. Certain participants, however, could make a one-time election to receive cash equal to the option's fair market value in lieu of accepting the modification. The Service concluded that if the participants elected to modify their options, their alternative right to receive cash would not cause them to recognize the amount of cash that they could have otherwise received in their gross incomes under the rules of Sec. 451.

Regs. Sec. 1.451-2 generally states that income is "constructively received" when made available to a taxpayer, unless the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Rev. Rul. 80-300 has interpreted this rule in a non-qualified deferred compensation setting involving stock appreciation rights (SARs). Under that ruling, exercise of the SARs would have resulted in the loss of...