U.S, subsidiary of foreign parent not required to recognize gain when employees acquire parent's stock in NSO exercise; Rev. Rul. 80-76 to be revoked

In Field Service Advice 199941033, the IRS concluded that a U.S. subsidiary of a foreign corporation is not required to recognize income when the subsidiary's employees exercise their nonqualified stock options (NSOs) and obtain shares of the parent. Even though the U.S. subsidiary granted the NSOs, its employees paid the exercise price directly to the foreign parent in exchange for shares of the parent. The U.S. employer deducted the spread on the exercised options as a compensation expense but did not recognize the spread as income. A revenue agent reviewing the employer's corporate tax return asserted that the employer could not deduct the compensation expense without recognizing the gain.