IRS/Treasury Release Proposed ESPP and Incentive Stock Option Regulations

On July 29, the IRS and the Treasury Department released proposed regulations relating to options granted under an IRC Section 423 employee stock purchase plan (ESPP) and under IRC Sections 422 (ISOs) and 421 (taxation of stock transferred under IRC Sections 422 and 423). Most of the proposed regulations appear to be clarifications of treatment of an option due to inconsistent terms, shareholder approval, eligibility, pricing, grant date, and definition of "highly compensated employee." The proposed regulations also inquire whether a correction program for ESPPs is appropriate. The one item of note is in the preamble, where the IRS and Treasury Department state they do not believe they have the authority to allow the exclusion of citizens or residents of a foreign jurisdiction or collectively bargained employees. However, the proposed regulations do allow the exclusion of foreign citizens or foreign residents if the grant of the option is prohibited under the laws of the foreign jurisdiction (or compliance with the laws of the foreign jurisdiction would cause the plan to violate the requirements of Section 423). In addition, the terms of an option granted to a foreign citizen or resident may be less favorable if necessary to comply with the laws of a foreign jurisdiction.

Comments on the proposed requirements are due to the IRS by October 27, 2008, and the changes are set to be effective with grants made on or after January 1, 2010 (see here).