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GiftLaw Note:
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PRIVATE RULING 9349004
DATE: June 8, 1993
This replies to your ruling request dated February 2, 1993, submitted on behalf of Taxpayer, concerning the application of section 83 of the Internal Revenue Code and section 1.83-7 of the Income Tax Regulations, and the gift and estate tax provisions of the Code, to the proposed transfer of non-statutory options to a trust. Your ruling requests concerning the estate and gift tax provisions of the Code will be the subject of a separate correspondence.
The information submitted indicates that Corporation has adopted a stock option plan (the "Plan") pursuant to which options to purchase shares of stock may be awarded to directors, officers and employees of Corporation and its subsidiaries. Taxpayer proposes to create a trust for the benefit of his descendants (the "Trust"), and to transfer to the Trust the stock options issued to him pursuant to the Plan. Each option shall be exercisable at such time or times, and subject to such restrictions and limitations, including, but not limited to, any restrictions or limitations relating to a minimum term of employment with Corporation or a subsidiary as are determined by the Board of Directors. Also, it is specifically provided in section 6(h) of the Plan, as amended effective on a, that the options granted under the Plan may not be transferred other than to a trust.
Section 83(a) of the Code provides that if, in connection with the performance of services, property is transferred to any person other than the person for whom the services are performed, the excess of (1) the fair market value of the property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having a beneficial interest in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount, if any, paid for the property, will be included in the gross income of the person who performed the services in the first taxable year in which the rights of the person having the beneficial interest in the property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable.
Pursuant to section 83(h) of the Code, there is allowed a deduction under section 162, to the person for whom were performed the services in connection with which the property was transferred, an amount equal to the amount included under section 83 in the gross income of the person who performed the services. The deduction will be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed the services. Section 1.83-6(a)(3) of the regulations provides an exception to the rule of section 83(h) concerning what taxable year the service recipient is allowed the deduction. There, it is provided that, if the property is substantially vested upon transfer, the deduction will be allowed in accordance with the service recipient's method of accounting.
According to section 83(e)(3) of the Code, section 83 does not apply to the transfer of an option without a readily ascertainable fair market value.
Section 1.83-7(a) of the regulations provides, in part, that if there is granted to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services, an option to which section 421 (relating generally to certain qualified and other options) does not apply, section 83(a) shall apply to the grant if the option has a readily ascertainable fair market value at the time the option is granted. If section 83(a) does not apply to the grant of the option because it does not have a readily ascertainable fair market value at the time of grant, section 83 will apply at the time the option is exercised or otherwise disposed of, even though the fair market value of the option may have become readily ascertainable before such time. If the option is exercised, section 83(a) applies to the transfer of property pursuant to the exercise, and the employee or independent contractor realizes compensation upon the transfer at the time and in the amount determined under section 83(a). If the option is sold or otherwise disposed of in an arm's length transaction, section 83(a) applies to the transfer of money or other property received in the same manner as section 83 would apply to the transfer of property pursuant to the exercise of an option. See section 1.83-7(b) of the regulations for the tests to be applied in determining whether an option has a readily ascertainable fair market value.
In this case, the options do not have a readily ascertainable fair market value at the date of grant. See section 1.83-7(b)(2) of the regulations. Also, because the transfer of them to the trust will not be pursuant to an arm's length transaction, they will not be considered to be disposed of under section 1.83-7(a) of the regulations. Accordingly, section 83(a) of the Code will apply when the options are exercised and stock is transferred to the trust.
Based strictly on the information submitted, we rule as follows:
1. The transfer of the options received from the Plan will not cause the receipt of income or gain to the Taxpayer.
2. If the trustee of the Trust exercises the options, Taxpayer (or, if Taxpayer is not then living, Taxpayer's estate) will be in receipt of taxable income under section 83(a) of the Code, and Corporation will be entitled to a deduction under section 83(h), as amplified by section 1.83-6(a)(3) of the regulations.
3. If the trustee of the Trust exercises the options, the basis of the stock to the Trust will be the exercise price of the options plus the amount of gain included in Taxpayer's gross income (or Taxpayer's estate) under section 83(a) of the Code.
No opinion is expressed as to the Federal tax consequences of the transaction described above under any other provision of the Code.
This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.
CHARLES T. DELIEE
Assistant Chief, Branch 4
Office of the Associate
Chief Counsel
(Employee Benefits and Exempt Organizations)
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