Comments Concerning FSA 199926034: FICA Liability for ESPPs

Executive Summary

1. Summary of the recommendations.

   We recommend that the Internal Revenue Service reconsider the position expressed in Field Service Advice Memorandum 199926034, which concludes that, on the exercise date of an option granted under an employee stock purchase plan that satisfies the requirements of Code § 423 (an "ESPP"), the excess of the then fair market value of ESPP stock over the option price is FICA wages, and that an employer is not excused from withholding and payment of FICA taxes resulting therefrom for periods after the Sun Microsystems decision of 1995.

   We also recommend that the Internal Revenue Service announce that Revenue Ruling 71-52 will continue to apply to ISO and ESPP options, and that a moratorium shall be imposed on the assessment and collection of employment taxes with respect to both types of options until a higher level of review of this issue is completed.

2. Summary of the issue which the recommendation addresses.

   The recommendation reviews prior guidance indicating that employment taxes are not applicable to ESPP options, and identifies the inconsistent nature of the FSA and retroactive application thereof.

3. Please explain how the proposed policy position will address the issue.

   The recommendation contemplates that a higher level of review should apply to the issue of the FICA tax liability of ESPP options. This higher level of review should also clarify, based upon existing precedent, all employment tax consequences of ESPP and ISO options.

4. Summary of any minority views or opposition which have been identified.

   No known minority views or opposition.