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Who's the Employer?

Question 124: Can a recipient organization provide an Incentive Stock Option (ISO) plan to persons who perform services for the recipient organization but are leased from a staffing firm? Answer: Let's start by looking at the definition of an ISO in IRC 422(b): For purposes of this part, the term "incentive stock option" means an option granted to an individual for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if--[conditions deleted] So, the entity granting the option (and the stock involved in the option) must be the employer of the recipient or a parent or subsidiary of the employer. This, of course, moves us back to my favorite question (other than, perhaps "How large of a retainer would you like?"): Who's the Employer? If it is the recipient, as it usually is (see Chapter 4 of my book, Who's the Employer?), then there is absolutely no problem with the recipient granting an option to one of its common law employees. If the staffing firm is the true employer (rare), then there is no authority for the recipient to grant an ISO. The provisions of 414(n) do not apply to 422.

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