IRS rules INDOPCO does not require employee bonuses be capitalized.

• Author: Young, Barbara J.
• Position: Brief Article

The employer in Letter Ruling (TAM) 9527005 underwent a leveraged buyout (LBO). As a result of the LBO, employees were forced to exercise outstanding incentive stock options (ISOs). Because the employees' ISO stock was immediately cashed out as part of the LBO, they suffered "disqualifying dispositions" of their stock, causing them to be taxed on the option spread as ordinary income rather than as capital gains (which would have been the case had they held their stock for one to two years after exercise of the option). Consequently, the employer gave bonuses to affected employees to cover any extra taxes. On audit, an IRS field agent took the position that the employer had to capitalize the bonus payments because they were related to the LBO. The agent relied on INDOPCO, 112 Sup. Ct. 1039 (1992), in which the Supreme Court held that professional fees incurred as...