Recent letter ruling illustrates employee stock purchase plan complexities.

• Author: Bosco, Philip R.
• Position: Brief Article

In Letter Ruling 9626003, the IRS discusses a Sec. 423 stock purchase plan that allows employees to purchase the employers stock through payroll deductions. Under a stock purchase plan, a specified amount is deducted from an employees paycheck and contributed to the plan during an offering period. At the end of the offering period, employee contributions plus interest are used to buy the employers common stock, often at a discount from its fair market value (FMV). Because a portion of the employee contributions plus interest usually will be left over after shares are purchased, the excess is paid to the employee in cash. Likewise, if an employee terminates employment before the end of an offering period, the amounts in the plan are returned.

The Service determined the interest accrued on plan contributions is a payment of interest within the ordinary course of the employers trade or business, regardless of whether it is actually paid to the employee during the year. The IRS reasoned that, based on Regs. Sec. 1.6041-1(c), which provides that income is fixed when it is to be paid in amounts definitely predetermined, interest payments become fixed the moment they accrue because no substantial restriction exists on an employee's right to receive them. Thus, the Service concluded that the interest on the...