Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 71-62

1971-1 C.B. 135

Sec. 425

IRS Headnote

The adoption of an alternate plan to an existing qualified stock option plan that allows holders of outstanding options to exercise rights not in existence at the time the qualified option was granted is a modification within section 425(h)(3) of the Code.

Full Text

Rev. Rul. 71-62

Advice has been requested whether a "modification" of outstanding stock options within the meaning of section 425(h)(3) of the Internal Revenue Code of 1954 occurs under the circumstances described below.

A corporation granted stock options to its employees pursuant to a qualified stock option plan under section 422(b) of the Code. In the following year the board of directors of the corporation adopted an alternate plan to the qualified stock option plan under which certain rights were granted to the holders of the outstanding qualified stock options. The rights entitled each grantee to receive without charge a number of shares of the corporation's stock computed according to a formula, but not in excess of the number of shares he could have purchased pursuant to the exercise of the unexercised portion of his qualified stock option at the time it expired. The rights were exercisable by a grantee for a 30-day period beginning on the first day after his qualified stock option expired.

Section 425(h)(1) of the Code provides that if the terms of any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option.

Section 425(h)(3) of the Code provides, in part, that the term "modification" means any change in the terms of the option which gives the employee additional benefits under the option.

In the instant case the rights granted under the alternate plan provided each optionee with the alternative of either exercising all or part of his qualified stock option, or allowing the option, or unexercised portions thereof, to expire thereby entitling him to receive stock at no cost. The granting of such rights was therefore an implied amendment of the qualified stock option giving each optionee an alternative that did not exist at the time his qualified stock option was granted.

Accordingly, it is held that the granting of rights in the instant case provided an alternative that was an additional benefit to the holders of the qualified stock options, and consequently, was a modification of such options within the meaning of section 425(h)(3) of the Code.