LLC Taxed as Corporation May Provide ISOs?

[Guest 91smithie]

May an LLC which is taxed as a corporation (they checked the box) grant incentive stock options to its employees?

[Guest Rand]

91Smithie, I am looking into this same question for a client. Did you find an answer to this? Thanks for any info. Rand

[jpod]

There is an old PLR (pre-check-the-box, I believe) that allowed an association taxable as a corporation to grant statutory stock options, so the same result should hold for an LLC that has elected to be taxed as a corporation.

[Kirk Maldonado]

JPOD:

You wouldn't have a cite on that PLR, would you?

That result seems counter-intuitive to me, because it is an incentive stock option, and, by definition, limited liability companies don't have stock .

[jpod]

Kirk's comment prompted me to poke around a little bit. Evidently, my memory is fading as fast as my hair, not only because I was wrong about what the PLR said, but also when it was issued.

Actually, there are two PLRs, and each is a post-check-the-box ruling. Each holds that a non-corporate subsidiary entity that is taxed as a corporation under the check-the-box regs can qualify as a "subsidiary corporation" under Section 424. PLR 9736031 involved a partnership that was taxed as a corp., and PLR 200017048 involved an association taxed as a corp. Each ruling involved options issued by the corporate parent (i.e., a "real" corporation, not merely a "tax" corporation). Neither ruling involved options issued by the non-corporate entity, so the issue of whether the non-corporate entity's equity interests could qualify as "stock" was not addressed.

I do not know what position the IRS is contemplating in view of the proliferation of LLCs. However, if you look at the regulation under Section 421 that defines the term "stock," it's not clear whether that definition is broad enough to encompass equity interests in a non-corporate entity that is taxed as a corporation. On the other hand, can anyone think of a reason why an entity that is a corporation for all purposes under the Code should not be able to issue ISOs, or have a 423 plan? I cannot, but then again I already admitted that I'm starting to "lose it."

[Kirk Maldonado]

JPOD:

There are also PLRs to that same effect regarding ESOPs.

I think trying to argue with the IRS that the interests in LLC are "stock" would be a losing battle.

[Guest CRC02]

A client who is an LLC taxed as a corporation has expressed an interest in providing ISOs. Any new information on this topic since the last post to this thread?

[ERISA25]

I am wondering if there has been any guidance issued on this point since the last comment? I am trying to figure out whether an LLC taxed as an S-Corp can issue ISOs. I cannot think of any reason why not. As I see it, the biggest issue is that LLC units are not exactly "stock," as that term is defined in 1.421-1.

I am a little confused, however, as to the meaning of 1.421-1(d)(3), which provides: "for purposes of this section . . . ownership interests other than capital stock are considered stock." Also, Rev. Rul. 64-284 provides that shares or certificates of beneficial interest in a real estate investment trust that is taxed as a corporation are shares of stock within the meaning of Section 421(d) of the Code.

Any thoughts are appreciated.

[mariemonroe]

See reg 1.421-1(i)(1) - the term "corporation" includes a LLC that's treated as a corporation for all tax purposes.