Rev. Rul. 2014-18 - Stock option, stock appreciation right exempt from section 457A 

June 10: The IRS today released an advance copy of Rev. Rul. 2014-18 which concludes provides that a nonstatutory stock option or a stock appreciation right (each, a stock right) granted by a nonqualified entity for purposes of section 457A is treated as exempt from section 457A, provided that:
  • The stock right is exempt from section 409A; and
  • The stock appreciation right, at all times by its terms, must be settled, and is settled, in service recipient stock for purposes of section 409A.

Rev. Rul. 2014-18 [PDF 19 KB] amplifies prior IRS guidance in Notice 2009-8.

Background

A foreign corporation (that is a nonqualified entity for purposes of section 457A(b)) is identified as the “service recipient.”


The “service provider” is a U.S. limited liability company that is treated as a partnership for U.S. income tax purposes, and its income is allocated to persons subject to U.S. income tax.


The “service provider” and the “service recipient” are not at any time treated as a single employer under section 414(b) or (c).


As incentive compensation for the “service provider,” the “service recipient” grants to the “service provider” a nonstatutory stock option and a stock appreciation right (i.e., a stock right):


  • Each right is granted with respect to a fixed number of common shares of the “service recipient” and that qualify as “service recipient” stock.
  • Each stock right has an exercise price per share that is not less than the fair market value of a common share on the date of grant.
  • The stock rights do not include any feature for the deferral of compensation and otherwise comply with the requirements of Reg. section 1.409A-1(b)(5)(i)(A) or (B), as applicable.
  • The terms of the stock appreciation right at all times provide that it must be settled in “service recipient” stock, and the stock appreciation right is settled in service recipient stock.
  • The “service provider” has the same redemption rights with respect to common shares acquired upon exercise of the stock rights as other shareholders have with respect to their common shares of “service recipient.”

The question posed in the revenue ruling is whether the stock option or stock appreciation right is a nonqualified deferred compensation plan subject to tax treatment under section 457A.

Rev. Rul. 2014-18

The IRS ruled that neither the nonstatutory stock option nor the stock-settled stock appreciation right granted to the “service provider” is a nonqualified deferred compensation plan subject to taxation under section 457A.


Rev. Rul. 2014-18 explains that although stock appreciation rights are generally subject to section 457A, a stock appreciation right that—at all times by its terms— must be settled, and is settled, in service recipient stock is functionally identical in all material respects to a nonstatutory stock option to purchase service recipient stock with a net exercise feature. Thus, the stock transfer under such an arrangement, like the stock transfer pursuant to the exercise of a nonstatutory stock option, is taxable under section 83.


The IRS further explained that a nonstatutory stock option exempt from section 409A is exempt from section 457A. In addition, a stock appreciation right exempt from section 409A that at all times by its terms must be settled, and is settled, in service recipient stock is exempt from section 457A. A stock appreciation right that may be or is settled other than in service recipient stock is not exempt from section 457A, regardless of whether the stock appreciation right is a nonqualified deferred compensation plan for purposes of section 409A.


Applying these principles, the IRS concluded in the revenue ruling that neither stock right with respect to common shares granted to the “service provider” is a nonqualified deferred compensation plan for purposes of section 457A(a) because each is either a nonstatutory stock option that meets the requirements of Reg. section 1.409A-1(b)(5)(i)(A) or a stock appreciation right that meets the requirements of Reg. section 1.409A-1(b)(5)(i)(B) and at all times by its terms must be settled, and is settled, in service recipient stock.


Accordingly, the stock rights granted to the “service provider” are exempt from section 457A.




©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

Share this

Share this

Subscribe

Current and future KPMG clients may subscribe to TaxNewsFlash email alerts.


Email your contact information.

Other TaxNewsFlash publications

TaxNewsFlash-United States by year