IRS Allows Flexibility in Purchase of Employer Shares by Stock Purchase Plan Participants

Morgan Lewis
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Morgan Lewis

On April 5, the IRS issued Private Letter Ruling 201911002 where it addressed whether an employer’s stock purchase plan that permits a participant to purchase employer shares via a loan from the employer or a third party qualifies as an employee stock purchase plan under Section 423(b) of the Internal Revenue Code (Code). The plan permits the exercise price to be paid through a salary reduction and/or the proceeds of a loan unless the loan is prohibited by the Sarbanes-Oxley Act of 2002.

The employer was primarily concerned with Code Section 423(b)(5), which requires all employees granted options under an employee stock purchase plan to have the “same rights and privileges.” Thus, a provision applying to one option under a plan (such as relating to the method of payment for stock) must apply to all other options under the plan in the same manner. If all options granted under a plan do not provide the employees the “same rights and privileges,” none of the options will be treated as granted under an employee stock purchase plan.

The IRS concluded that a participant’s ability to obtain a loan from its employer or a third party to purchase shares under a plan does not prevent the plan from qualifying as an employee stock purchase plan under Section 423(b). The IRS further concluded that the inability of a participant to obtain a loan to purchase shares due to the applicability of the Sarbanes-Oxley Act does not cause some options under the plan to have different “rights and privileges” in violation of Section 423(b)(5).

Although private letter rulings may not be used by taxpayers as precedent, this ruling indicates that the IRS would not consider a provision in a plan permitting a participant to purchase employer shares with loan proceeds obtained from the employer or a third party as preventing qualification as a stock purchase plan, even if the plan prohibits some employees from obtaining loans due the applicability of the Sarbanes-Oxley Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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