PRIA, Government Policy, Made Personal

Summary

A tax must be paid by any disqualified individual tied to a company that becomes an expatriated corporation. The tax equals the rate in section 1(h)(1)(D) multiplied by the value of specified stock compensation the person or a family member held at any time during the 12‑month period that starts six months before the expatriation date. Stock options and stock appreciation rights are valued at their fair value; other stock pay is valued at fair market value. Values are measured on the expatriation date if held then, the day before cancellation if canceled in the six months before expatriation, or on the grant date if granted after expatriation. The tax only applies if shareholders recognize gain because of the acquisition described in section 7874(a)(2)(B)(i). The rule does not apply to an option exercised on or during the six months before expatriation (and the stock’s income is recognized under section 83 on or before the expatriation date), or to other stock pay that is cashed out or otherwise paid during that period if all income, gain, or loss is fully recognized. Disqualified individual: an insider who is subject to section 16(a) of the Securities Exchange Act of 1934 during that 12‑month window. Expatriated corporation: a company that is an expatriated entity under section 7874(a)(2), including predecessors and successors. Specified stock compensation: stock-based pay or rights tied to the company’s stock given for services by or for a disqualified individual (excludes certain options under part II of subchapter D of chapter 1 and payments from plans covered by section 280G(b)(6)). Expanded affiliated group: the usual affiliated group rule but using “more than 50 percent.” Cancellation of a never‑lapping restriction counts as a grant. If the company pays the tax, that payment counts as stock compensation and is not deductible. Transfers of property count as payments. The Secretary must issue rules to carry this out.

Title 26, §4985

Internal Revenue Code, Source: USLM XML via OLRC

(a)Imposition of tax

In the case of an individual who is a disqualified individual with respect to any expatriated corporation, there is hereby imposed on such person a tax equal to—

(1)the rate of tax specified in section 1(h)(1)(D), multiplied by

(2)the value (determined under subsection (b)) of the specified stock compensation held (directly or indirectly) by or for the benefit of such individual or a member of such individual’s family (as defined in section 267) at any time during the 12-month period beginning on the date which is 6 months before the expatriation date.

(b)Value

For purposes of subsection (a)—

(1)In general

The value of specified stock compensation shall be—

(A)in the case of a stock option (or other similar right) or a stock appreciation right, the fair value of such option or right, and

(B)in any other case, the fair market value of such compensation.

(2)Date for determining value

The determination of value shall be made—

(A)in the case of specified stock compensation held on the expatriation date, on such date,

(B)in the case of such compensation which is canceled during the 6 months before the expatriation date, on the day before such cancellation, and

(C)in the case of such compensation which is granted after the expatriation date, on the date such compensation is granted.

(c)Tax to apply only if shareholder gain recognized

Subsection (a) shall apply to any disqualified individual with respect to an expatriated corporation only if gain (if any) on any stock in such corporation is recognized in whole or part by any shareholder by reason of the acquisition referred to in section 7874(a)(2)(B)(i) with respect to such corporation.

(d)Exception where gain recognized on compensation

Subsection (a) shall not apply to—

(1)any stock option which is exercised on the expatriation date or during the 6-month period before such date and to the stock acquired in such exercise, if income is recognized under section 83 on or before the expatriation date with respect to the stock acquired pursuant to such exercise, and

(2)any other specified stock compensation which is exercised, sold, exchanged, distributed, cashed-out, or otherwise paid during such period in a transaction in which income, gain, or loss is recognized in full.

(e)Definitions

For purposes of this section

(1) Disqualified individual

(2)Expatriated corporation; expatriation date

(A)Expatriated corporation

The term “expatriated corporation” means any corporation which is an expatriated entity (as defined in section 7874(a)(2)). Such term includes any predecessor or successor of such a corporation.

(B)Expatriation date

The term “expatriation date” means, with respect to a corporation, the date on which the corporation first becomes an expatriated corporation.

(3)Specified stock compensation

(A)In general

The term “specified stock compensation” means payment (or right to payment) granted by the expatriated corporation (or by any member of the expanded affiliated group which includes such corporation) to any person in connection with the performance of services by a disqualified individual for such corporation or member if the value of such payment or right is based on (or determined by reference to) the value (or change in value) of stock in such corporation (or any such member).

(B)Exceptions

Such term shall not include—

(i)any option to which part II of subchapter D of chapter 1 applies, or

(ii)any payment or right to payment from a plan referred to in section 280G(b)(6).

(4)Expanded affiliated group

The term “expanded affiliated group” means an affiliated group (as defined in section 1504(a) without regard to section 1504(b)(3)); except that section 1504(a) shall be applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears.

(f)Special rules

For purposes of this section

(1) Cancellation of restriction

(2)Payment or reimbursement of tax by corporation treated as specified stock compensation

Any payment of the tax imposed by this section directly or indirectly by the expatriated corporation or by any member of the expanded affiliated group which includes such corporation—

(A)shall be treated as specified stock compensation, and

(B)shall not be allowed as a deduction under any provision of chapter 1.

(3)Certain restrictions ignored

Whether there is specified stock compensation, and the value thereof, shall be determined without regard to any restriction other than a restriction which by its terms will never lapse.

(4)Property transfers

Any transfer of property shall be treated as a payment and any right to a transfer of property shall be treated as a right to a payment.

(5)Other administrative provisions

For purposes of subtitle F, any tax imposed by this section shall be treated as a tax imposed by subtitle A.

(g)Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

Notes & Related Subsidiaries

Editorial Notes

References in Text

section 16(a) of the Securities Exchange Act of 1934, referred to in subsec. (e)(1)(A), is classified to section 78p(a) of Title 15, Commerce and Trade.

Prior Provisions

Prior sections 4986 to 4998 were repealed by Pub. L. 100–418, title I, § 1941(a), (c), Aug. 23, 1988, 102 Stat. 1322, 1324, applicable to crude oil removed from the premises on or after Aug. 23, 1988. section 4986, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 230, related to imposition of windfall profit tax on domestic crude oil. section 4987, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 230; amended Pub. L. 97–34, title VI, § 602(a), Aug. 13, 1981, 95 Stat. 337; Pub. L. 98–369, div. A, title I, § 25(a), July 18, 1984, 98 Stat. 506, related to amount of windfall profit tax on domestic crude oil. section 4988, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 231; amended Pub. L. 97–448, title II, § 201(a), (h)(1)(D), Jan. 12, 1983, 96 Stat. 2391, 2394; Pub. L. 99–514, title XIII, § 1301(j)(4), Oct. 22, 1986, 100 Stat. 2657, related to windfall profit and removal price. section 4989, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 233; amended Pub. L. 97–448, title II, § 201(b), Jan. 12, 1983, 96 Stat. 2392, related to adjusted base price for purposes of windfall profit tax on domestic crude oil. section 4990, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 234, related to phaseout of windfall profit tax on domestic crude oil. section 4991, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 235; amended Pub. L. 97–34, title VI, §§ 601(b)(1), 603(a), Aug. 13, 1981, 95 Stat. 336, 338; Pub. L. 97–448, title II, § 201(c), Jan. 12, 1983, 96 Stat. 2392; Pub. L. 99–514, title XVIII, § 1879(h)(1), Oct. 22, 1986, 100 Stat. 2907, related to taxable crude oil and categories of oil. section 4992, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 236; amended Pub. L. 97–34, title VI, § 603(c), Aug. 13, 1981, 95 Stat. 338; Pub. L. 97–354, § 3(b)(2), Oct. 19, 1982, 96 Stat. 1688; Pub. L. 97–448, title II, § 201(d), Jan. 12, 1983, 96 Stat. 2392, related to independent producer oil. section 4993, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 239; amended Pub. L. 97–448, title II, § 201(e), Jan. 12, 1983, 96 Stat. 2392, related to incremental tertiary oil. section 4994, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 241; amended Pub. L. 97–34, title VI, §§ 601(b)(2), 603(b), 604(a)–(c), Aug. 13, 1981, 95 Stat. 337–339; Pub. L. 97–248, title II, § 291, Sept. 3, 1982, 96 Stat. 572; Pub. L. 97–448, title I, § 106(a)(2), (4)(B), (b), title II, § 201(f), Jan. 12, 1983, 96 Stat. 2388, 2390, 2392, related to definitions and special rules with respect to exempt oil. section 4995, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 244; amended Pub. L. 97–34, title VI, § 601(b)(3), Aug. 13, 1981, 95 Stat. 337; Pub. L. 97–448, title II, § 201(g), Jan. 12, 1983, 96 Stat. 2393, related to withholding and depository requirements bearing on the windfall profit tax. section 4996, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 247; amended Pub. L. 97–248, title II, § 284(a), Sept. 3, 1982, 96 Stat. 569; Pub. L. 97–354, § 3(b)(1), Oct. 19, 1982, 96 Stat. 1688; Pub. L. 97–448, title II, § 201(h)(1)(A)–(C), (2), Jan. 12, 1983, 96 Stat. 2393–2395, provided for other definitions and special rules bearing on the windfall profit tax. section 4997, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 249; amended Pub. L. 97–448, title II, § 201(i)(1), Jan. 12, 1983, 96 Stat. 2395, related to records and information, and

Regulations

, bearing on the windfall profit. section 4998, added Pub. L. 96–223, title I, § 101(a)(1), Apr. 2, 1980, 94 Stat. 250, related to cross references.

Amendments

2017—Subsec. (a)(1). Pub. L. 115–97 substituted “section 1(h)(1)(D)” for “section 1(h)(1)(C)”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2017 Amendment Pub. L. 115–97, title I, § 13604(b), Dec. 22, 2017, 131 Stat. 2165, provided that: “The amendment made by this section [amending this section] shall apply to corporations first becoming expatriated corporations (as defined in section 4985 of the Internal Revenue Code of 1986) after the date of enactment of this Act [Dec. 22, 2017].”

Effective Date

Pub. L. 108–357, title VIII, § 802(d), Oct. 22, 2004, 118 Stat. 1568, provided that: “The

Amendments

made by this section [enacting this chapter and amending section 162, 275, and 3121 of this title] shall take effect on March 4, 2003; except that periods before such date shall not be taken into account in applying the periods in subsections (a) and (e)(1) of section 4985 of the Internal Revenue Code of 1986, as added by this section.”

§4985 Stock Compensation of Insiders in Expatriated Corporations

Summary

Title 26, §4985

Notes & Related Subsidiaries

Editorial Notes

References in Text

Prior Provisions

Regulations

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Amendments

Citations & Metadata