The Internal Revenue Service recently concluded in Chief Counsel Advice 200926001 (CCA) that it could enforce a tax levy served on an individual taxpayer by seizing and selling incentive and non-qualified stock options he had received during his employment as an executive for the company issuing the options. The IRS reached this conclusion despite option award provisions that permitted the options to be transferred only by will, the laws of descent or distribution or under a qualified domestic relations order.
Under federal tax law, when a taxpayer fails to pay a tax liability after notice and demand, a lien attaches to all of the taxpayer’s property and property rights held by the taxpayer or a third party on behalf of the taxpayer. For this purpose, “property and property rights” includes, among other items, securities, salaries, wages, commissions or compensation. Such a lien generally applies only to property and property rights held by or on behalf of the taxpayer at the time of the levy, but a lien on wages and salary remains in effect until the tax liability is satisfied or becomes unenforceable. The tax law permits the IRS to seize and sell the taxpayer’s property and property rights covered by the lien to pay the unpaid taxes.
The CCA describes the facts of the taxpayer’s situation, including details regarding the evolution and vesting of his rights under the stock options and a settlement agreement entered into by the executive and the company. Among other things, the settlement agreement provided that the company would comply with any liens applicable to the executive or his property rights. The CCA found that, based on the facts, the taxpayer had a vested right to the options at the time the tax lien attached. Although the options were subject to specific restrictions on transferability, both statutory (in the case of the incentive stock options) and contractual, the CCA concluded that the options were not exempt from levy, seizure or sale by the IRS.
This issue is relevant for companies that award stock options as well as individual taxpayers who hold stock options and may have outstanding federal tax liability. Even if a stock option limits or restricts transfer of the option, if the option is vested the IRS may be able to seize the option and sell it to satisfy the individual taxpayer’s unpaid federal taxes.