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Laying Claim to Options Expense Deductions


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The IRS concludes that stock-option payments made to employees of a former subsidiary create a compensation expense and deduction that belong to the subsidiary, not the parent company.

Guidance from the Internal Revenue Service’s chief counsel, released last summer, opined on the tax treatment of stock-option payments made by a parent company to employees of a former subsidiary. The memo, referred to as a Chief Council Advice, found that these types of option payments give rise to capital losses. Here’s the situation as described in the memo (see CCA 200942038, June 26, 2009).

A parent corporation owned all of the stock of a current subsidiary (SubOne) and a former subsidiary (FormerSub). During January of Year2, the parent’s equity interest in FormerSub was canceled after FormerSub emerged from Chapter 11 bankruptcy proceedings. FormerSub’s creditors received all of the subsidiary’s equity interest, and the parent initially claimed a capital loss in the amount of the canceled FormerSub stock.

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