Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 70-94

1970-1 C.B. 112

Sec. 425

IRS Headnote

An amendment to a qualified stock option, exercisable in installments while the optionee is living, to provide that upon his death the estate may exercise the option in full is not a "modification" under section 425(h)(3) of the Code.

Full Text

Rev. Rul. 70-94

A corporation granted an employee a stock option that met the requirements of section 422(b) of the Internal Revenue Code of 1954 that defines qualified stock options. The option was exercisable in five equal annual installments beginning on the first anniversary of the date of grant. To the extent an installment is not exercised on the applicable date, the shares not purchased accumulate and may be purchased at any time prior to the expiration of the option. The option provided, in part, that if the optionee died while in the corporation's employ or within three months after retirement, his estate could exercise the option within twelve months after his death, but only to the extent that the optionee was entitled to exercise it immediately prior to his death.

Later, the corporation amended the option to provide that in the event of the optionee's death while in the employ of the company or within three months after retirement, his estate could exercise the option in full, even though the optionee, immediately prior to his death, could exercise only a portion of it. The requirement that the estate must exercise such option within twelve months of the optionee's death remained unchanged.

Section 425(h)(3) of the Code defines the term "modification" as any change in the terms of an option which gives the optionee additional benefits thereunder. However, under the provisions of section 425(h)(3)(C) of the Code, a change in the terms of an option not immediately exercisable in full to accelerate the time at which the option may be exercised is not considered a modification as defined in section 425(h)(3) of the Code.

Held, the amendment to the option in the instant case is an acceleration of the time at which a portion of the option may be exercised with respect to an existing number of shares already subject to option, and is not a "modification" within the meaning of section 425(h)(3) of the Code.