May an LLC which is taxed as a corporation (they checked the box) grant incentive stock options to its employees?

91Smithie, I am looking into this same question for a client. Did you find an answer to this? Thanks for any info. Rand

There is an old PLR (pre-check-the-box, I believe) that allowed an association taxable as a corporation to grant statutory stock options, so the same result should hold for an LLC that has elected to be taxed as a corporation.

JPOD:

You wouldn't have a cite on that PLR, would you?

That result seems counter-intuitive to me, because it is an incentive stock option, and, by definition, limited liability companies don't have stock .

Kirk's comment prompted me to poke around a little bit. Evidently, my memory is fading as fast as my hair, not only because I was wrong about what the PLR said, but also when it was issued.

Actually, there are two PLRs, and each is a post-check-the-box ruling. Each holds that a non-corporate subsidiary entity that is taxed as a corporation under the check-the-box regs can qualify as a "subsidiary corporation" under Section 424. PLR 9736031 involved a partnership that was taxed as a corp., and PLR 200017048 involved an association taxed as a corp. Each ruling involved options issued by the corporate parent (i.e., a "real" corporation, not merely a "tax" corporation). Neither ruling involved options issued by the non-corporate entity, so the issue of whether the non-corporate entity's equity interests could qualify as "stock" was not addressed.

I do not know what position the IRS is contemplating in view of the proliferation of LLCs. However, if you look at the regulation under Section 421 that defines the term "stock," it's not clear whether that definition is broad enough to encompass equity interests in a non-corporate entity that is taxed as a corporation. On the other hand, can anyone think of a reason why an entity that is a corporation for all purposes under the Code should not be able to issue ISOs, or have a 423 plan? I cannot, but then again I already admitted that I'm starting to "lose it."

JPOD:

There are also PLRs to that same effect regarding ESOPs.

I think trying to argue with the IRS that the interests in LLC are "stock" would be a losing battle.

A client who is an LLC taxed as a corporation has expressed an interest in providing ISOs. Any new information on this topic since the last post to this thread?