Regs on Stockholder Approval of ISO Plans

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains a final regulation on the stockholder approval requirement for incentive stock option plans. The regulation affects corporations establishing incentive stock option plans and provides guidance on the method and degree of stockholder approval necessary for those plans. The guidance is the same as that set forth in a temporary regulation published in 1988. This document also removes obsolete regulations under a repealed Internal Revenue Code section pertaining to qualified stock options.

 EFFECTIVE DATES: The removal of sections 1.422-1 and 1.422-2 is effective November 5, 1990. Section 1.422-4 is effective November 5, 1990. The amendments to section 1.422-5 are effective August 13, 1981, and apply to options granted on or after that date and to certain options granted after December 31, 1975. FOR FURTHER INFORMATION CONTACT: Charles Deliee at 202-566-4741 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

OVERVIEW

Proposed regulations on incentive stock options were published in 1984. A temporary regulation on the stockholder approval requirement for incentive stock option plans was published in 1988. This document contains a final regulation on the stockholder approval requirement. In substance, the final regulation is the same as the temporary regulation. This document also removes obsolete regulations about qualified stock options.

EXPLANATION OF PROVISIONS

 Incentive stock options are now described in section 422 of the Internal Revenue Code of 1986. Section 422 was section 422A before being renumbered by section 11801 of OBRA'90 (the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508).

 Proposed regulations under section 422A were published in the Federal Registers February 7, 1984 (49 FR 4504). One subject addressed in those proposed regulations was the stockholder approval requirement for incentive stock option plans, which appeared in section 422A(b)(1) of the Code (now section 422(b)(1)). Written comments were received from the public on the proposed regulations.

 To address concerns raised in those comments, a temporary regulation on the stockholder approval requirement, section 14a.422A- 2, was published in T.D. 8235, 53 FR 48639, December 2, 1988.

 Under section 7805(e) of the Code, any temporary regulation issued after November 20, 1988, shall expire within 3 years after the date of its issuance. The Service expects to publish final regulations at a later date on the full range of issues addressed in the 1984 proposed regulations. Meanwhile, this Treasury decision adopts the temporary regulation in final form by redesignating it as section 1.422-5. The text of the regulation is also revised without substantive change, to eliminate the question-and-answer format and to reflect the renumbering of the underlying Internal Revenue Code section.

 OBRA'90 also repealed the generally obsolete prior section 422 of the Code, pertaining to qualified stock options. This Treasury decision removes prior sections 1.422-1 and 1.422-2, the regulations under the repealed section 422. Those removed regulations could have continuing relevance in view of the savings provision in section 11821 of OBRA'90. A new section 1.422-4 is therefore added, referring interested readers to the 1991 edition of the Code of Federal Regulations, where the removed regulations last appeared.

SPECIAL ANALYSES

 It has been determined that this rule is not a major rule as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to the regulations and, therefore, a final Regulatory Flexibility Analysis is not required.

DRAFTING INFORMATION

 The principal author of these regulations is Mark Schwimmer of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), Internal Revenue Service. However, personnel from other offices of the Service and Treasury participated in their development.

LIST OF SUBJECTS

26 CFR 1.421-1 through 1.425-1

 Income taxes, Securities.

26 CFR Part 14a

 Income taxes, Reporting and recordkeeping requirements, Securities.

Treasury Decision 8374

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1 and 14a are amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority for part 1 continues to read in part:

Authority: 68A Stat. 917; 26 U.S.C. 7805 * * *

Par. 2. Sections 1.422-1 and 1.422-2 are removed.

Par. 3. Section 1.422-4 is added, to read:

SECTION 1.422-4 QUALIFIED STOCK OPTIONS (PRIOR LAW).

Section 422 of the Code, pertaining to qualified stock options, was repealed by section 11801(a)(20) of the Omnibus Budget Reconciliation Act of 1990. In view of the savings provision of section 11821(b) of that act, the regulations under the repealed section 422, which were removed from the Code of Federal Regulations, may be of continuing interest to the public. Those regulations were set forth in 26 CFR 1.422-1 and 1.422-2 as contained in 26 CFR edition revised as of April 1, 1991.

PART 14a -- TEMPORARY INCOME TAX REGULATIONS RELATING TO INCENTIVE STOCK OPTIONS

Par. 4. The authority for part 14a continues to read:

Authority: 68A Stat. 917; 26 U.S.C. 7805.

Par. 5. Section 14a.422A-2 is redesignated as section 1.422-5 and revised to read as follows:

SECTION 1.422-5 STOCKHOLDER APPROVAL OF INCENTIVE STOCK OPTION PLANS.

 This section addresses the stockholder approval of incentive stock option plans required by section 422(b)(1) of the Internal Revenue Code. (Section 422 was added to the Code as section 422A by section 251 of the Economic Recovery Tax Act of 1981, and was redesignated as section 422 by section 11801 of the Omnibus Budget Reconciliation Act of 1990.) The approval of stockholders must comply with all applicable provisions of the corporate charter, bylaws, and applicable State law prescribing the method and degree of stockholder approval required for the issuance of corporate stock or options. If the applicable State law does not prescribe a method and degree of stockholder approval in such cases an incentive stock option plan must be approved:

(b) By a method and in a degree that would be treated as adequate under applicable State law in the case of an action requiring stockholder approval (i.e., an action on which stockholders would be entitled to vote if the action were taken at a duly held stockholders' meeting).