Re: Proposal to Remove section III.H.l. From the Chairman’s Mark of the Tax Cuts and Jobs Act

November 14, 2017

U.S. Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, D.C. 20510-6200

I write in support of the tax reform efforts being considered by Congress and advocate for the removal of section III.H.1 from the Chairman’s Mark of the Tax Cuts and Jobs Act, JCX-51-17(2017).


My law firm, the Royse Law Firm, is a Silicon Valley-based law firm that advises companies on tax, business, and corporate law matters. If section III.H.l. becomes law, startup and growth tech companies will no longer be able to offer equity compensation to most employees, thus preventing American workers from sharing in the wealth of their companies. This will profoundly impair our tech sector and hinder U.S. competitiveness abroad.

Current U.S. Tax Treatment of Stock Options

Under current tax law, employees must generally include stock compensation in their taxable income at grant or when the shares become substantially vested. Stock options, however, are not included in income until exercised. Likewise, a common stock option is not treated as nonqualified deferred compensation for 409A purposes as long as the exercise price of the stock option cannot be less than the fair market value, on the date the option is granted, of the stock subject to the option (and the option does not otherwise include a deferral feature).

The JCT. III.H.l. Proposal

Under Section III.H.l., any compensation deferred under a nonqualified deferred compensation plan, including stock options, would be includible in the gross income of the service provider when there is no substantial risk of forfeiture of the service provider’s rights to such compensation. Moreover, for tax purposes, the rights of a service provider to compensation would be treated as subject to a substantial risk of forfeiture only if the rights are conditioned on the future performance of substantial services by an individual. This means that a condition related to a purpose of the compensation, other than the future performance of substantial services, such as a condition based on achieving a specified performance goal or a condition intended in whole or in part to defer taxation, would not create a substantial risk of forfeiture, regardless of whether the possibility of forfeiture is substantial. In addition, a covenant not to compete would not create a substantial risk of forfeiture.

Remove JCT, III.H.l, from the Chairman’s Mark of the Tax Cuts and Jobs Act

The current proposal applies to all stock options and SARs (and similar arrangements involving noncorporate entities), regardless of how the exercise price compares to the value of the related stock on the date the option or SAR is granted. It is intended by the proposal that no exceptions are to be provided in treasury regulations or other administrative guidance. This means that companies can no longer rely on a safe harbor to offer equity compensation under a stock option plan to their employees. Instead, we will see equity compensation replaced with cash compensation and the ability of employees to share in the wealth of their companies will be taken away. Thus, we advocate for the removal of section III.H.l. from the Tax Cuts and Job Act to protect our tech sector and incentivize equity ownership in American companies.

Revive the Empowering Employees through Stock Ownership Act, H.R. 5719 (2016)

In 2016, Congress took steps to help alleviate the tax burden associated with equity compensation plans. The House of Representatives passed a bill titled the “Empowering Employees through Stock Ownership Act” to help implement better tax policy. The goal was to permit private companies to issue stock to their employees without triggering the immediate inclusion of taxable income. This bill died in the previous Congress after its receipt in the Senate.

If revived, H.R. 5719 would alleviate the hardships imposed by the tax treatment of stock compensation in small, startup businesses as well as larger, private companies. To accomplish this goal, an eligible employee could elect to defer taxation until an event triggers the cash or cash-equivalent that the employee needs to pay the income tax on the stock compensation. Under the original bill, the company would be required to provide the stock compensation to at least 80 percent of its workforce. Further, the income deferral would not be available for top management and top paid employees. The Silicon Valley was built on equity compensation. It is time for the tax law to catch up and encourage the further development of the innovation economy.


1 hope that you will find this proposal helpful and informative as Congress acts to modernize U.S. tax law and empower American businesses. I am also available upon request to testify as to the content of this letter and the proposal contained herein.

Very truly yours,


Roger Royse
Attorney at Law

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