Notice 87-49 (1987-2 C.B. 355)

addresses potential inconsistencies among, and coordination of, the proposed regulations under section 83, former section 422A (current section 422), and Rev. Rul. 71-52. Notice 87-49 provides that Rev. Rul. 71-52 is being reconsidered, but until the results of such reconsideration are announced, the principles of Rev. Rul. 71-52 will apply to the disposition of stock acquired by an individual pursuant to the exercise of an ISO, which does not meet the requirements of former section 422A(a) (current section 422(a)).

III. Reconsideration of Rev. Rul. 71-52 and Interim Guidance

A. Reconsideration of Rev. Rul. 71-52

Treasury and the Service have concluded that the holding and principles of Rev. Rul. 71-52 do not apply to the exercise of ISOs or options granted under an ESPP, or to the disposition of stock acquired pursuant to such statutory options, and have therefore determined that Rev. Rul. 71-52 is obsolete. Accordingly, the provisions of Notice 87-49 described above no longer apply.

B. Interim Guidance

In view of the lack of clear administrative guidance regarding the application of FICA, FUTA, and income tax withholding to statutory options, the Service, with respect to statutory options exercised before January 1, 2003, will not treat the

disposition of stock acquired by an employee pursuant to the exercise of a statutory option as subject to income tax withholding and will not assess FICA tax or FUTA tax upon the exercise of a statutory option.

This Part III.B applies to an exercise of a statutory option and the disposition of stock acquired by an individual pursuant to the exercise of a statutory option, if the exercise occurs on or after publication of this notice and before January 1, 2003. However, employers may, at their option, choose to apply this Part III.B with respect to any exercise of statutory options, or dispositions of stock acquired by individuals pursuant to any exercise of statutory options, that occurred before the publication of this notice. Thus, with respect to exercises of statutory options covered by this Part III.B, the Service will not require payment of FICA tax or FUTA tax, will not assert penalties or interest, and will honor otherwise allowable adjustments and claims for refund of any FICA tax or FUTA tax paid. Furthermore, with respect to dispositions of stock acquired pursuant to the exercise of statutory options covered by this Part III.B, the Service will not require income tax withholding and will not assert penalties or interest. This Part III.B does not relieve individual taxpayers of the obligation to include any compensation in income upon a disposition of stock acquired pursuant to the exercise of a statutory option, and does not relieve employers of any of their reporting obligations.

IV. Request for Comments on Anticipated Administrative Guidance

A. Anticipated Guidance

Treasury and the Service anticipate issuing administrative guidance that will clarify current law with respect to FICA tax, FUTA tax, and income tax withholding on statutory options. It is anticipated that the administrative guidance would reflect the view that the statute defines “wages” for FICA tax and FUTA tax purposes broadly, without any statutory exclusion for exercises of statutory options. With respect to the disposition of stock acquired pursuant to such an exercise, however, it is the view of Treasury and the Service that there may be authority for future administrative guidance to

treat amounts realized upon such disposition of stock as not being subject to income tax withholding.

Comments are requested regarding the anticipated administrative guidance. In particular, comments are requested on whether it is appropriate, in light of the issues of administrative feasibility associated with a requirement of income tax withholding upon disposition of stock acquired pursuant to the exercise of a statutory option (when the optionee may no longer be employed by the grantor), to treat amounts realized upon the disposition as not being subject to income tax withholding. All comments will be available for public inspection and copying.

B. Prospective Effective Date

It is anticipated that the administrative guidance described in this Part IV will be effective only prospectively. However, it is anticipated that employers will be permitted to apply the guidance to exercises of statutory options that occurred on an earlier date and to a disposition of stock acquired pursuant to such exercises.

V. Effect on Other Documents

This notice constitutes the result of the reconsideration of Rev. Rul. 71-52, referred to in Notice 87-49. This notice concludes that the holding and principles of Rev. Rul. 71-52 do not apply to the exercise of ISOs described in section 422(b) or options granted under an ESPP described in section 423(b), or to the disposition of stock acquired pursuant to the exercise of such statutory options and, thus, Rev. Rul. 71-52 is determined to be obsolete. Notice 87-49 is modified to the extent it is inconsistent with this notice.

VI. Submission of Comments

Comments must be submitted by May 7, 2001. Comments should reference Notice 2001-14, and be addressed to:

Associate Chief Counsel (Tax Exempt and Government Entities) CC:TEGE ATTN: Employment Taxes and Statutory Options Room 5214 Internal Revenue Service 1111 Constitution Ave., N.W. Washington, D.C. 20224

February 5, 2001 518 2001–6 I.R.B.

VII. Drafting Information

The principal author of this notice is Stephen Tackney of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice contact Stephen Tackney at (202) 622-6040 (not a toll-free call).

2001–6 I.R.B. 519 February 5, 2001