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Executive Stock Transaction
February 25, 2004
Treasury and IRS Shut Down
Aggressive Executive Stock Transaction
Today, the Treasury Department and the IRS issued a revenue ruling that would
shut down an aggressive transaction involving the exercise of stock options
by corporate insiders using debt financing provided by the corporation.
In these transactions, typically the corporate insider will exercise options
he or she holds by giving the company a promissory note. If the value of the
stock later falls below the face amount of the note, the company may agree
to reduce the insider's debt. Certain individuals have claimed that this debt
reduction does not result in taxable income.
Revenue Ruling 2004-37 provides that reduction of debt in these circumstances
does result in taxable income to the insider. By forgiving part of the purchase
price, the company has increased the amount of stock that the insider has received
without paying for the stock. If the stock was not paid for by the insider,
the insider will be treated as receiving compensation.
Acting Assistant Secretary for Tax Policy Greg Jenner stated, "Once again,
we have made it clear that everyone has to play by the same rules. A corporate
insider whose compensation is increased because the company reduces the purchase
price on stock the insider has already purchased must pay tax on that increased
The ruling also provides that a reduction in the interest rate under the note,
or a change in the note so that the executive no longer has personal liability,
also would result in compensation income.