Stock option plan amendment not material for sec. 162(m).

• Author: Elinsky, Peter I.

The IRS has ruled in Letter Ruling 9551024 that an amendment to a stock option plan that allows participants to transfer their stock options to family members is not a material modification for Sec. 162(m) purposes. The letter ruling was based on the proposed regulations to Sec.162(m), which have since been finalized in a manner that does not change the result of the ruling.

Letter Ruling 9551024

The company maintains a performance-based compensation plan under which stock options are granted to its executive management. The stock options are not transferable by participants except by will or the laws of descent and distribution, and are exercisable during the participant's lifetime only by the participant. The plan was approved by the company's shareholders before Dec. 20, 1993, in a manner consistent with Securities and Exchange Commission Rule 16b-3.

To facilitate estate planning for participants nearing retirement, the company proposed to amend the plan to permit participants to transfer stock options to any member of the participant's immediate family or to a trust established for the exclusive benefit of one or more members of the participant's immediate family. The transferees will enjoy the same rights as the participant, except they will be unable to transfer the stock options except by will or the laws of descent and distribution. In addition, stock options granted under the plan on or before Jan. 25, 1995 (the prior awards) will be amended in a similar manner. Since the plan's establishment, the requirements of Prop. Regs. Sec. 1.16227(e) (2) (vi) have been satisfied with respect to stock options granted.

The IRS ruled that, because the proposed amendment did not affect the timing or amount of income recognition to the participants, it would not constitute a material modification of the plan within the meaning of Prop. Regs. Sec. 1.16227(h) (3) (ii) (A). Also, the proposed amendment to the terms of the prior awards would not cause the awards to violate the "preestablished performance goal requirement" of Prop. Regs. Sec. 1.162-27(e) (2) (vi).

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