§ 207.111 - Combined credit for exercising employee stock options and paying income taxes incurred as a result of such exercise.

(a) The Board of Governors has been asked whether § 207.1(h) of Regulation G prevents a lender under an employee stock option plan that meets the requirements of § 207.4(a) from extending credit to an employee to pay the income taxes incurred as a result of the exercise of the stock option, in addition to the credit to cover the purchase price of the stock.

(b) Section 207.1(h) prohibits a lender governed by Regulation G from extending purpose credit if it is secured by collateral including margin securities, which also secures any other credit to the same person in excess of $5,000. Unless credit to pay income taxes is also treated as purpose credit, it could not be extended in an amount in excess of $5,000 when the borrower also has a purpose loan outstanding with the lender, secured by margin securities, since such collateral would be deemed to be also securing the income tax loan. Purpose credit is defined in § 207.2(c) of the regulation as credit which is for the purpose, whether immediate, incidental, or ultimate, of purchasing or carrying a margin security.”

(c) Section 207.4(a), which provides special treatment for credit extended under employee stock option plans, was designed to encourage their use in recognition of their value in giving an employee a proprietary interest in the business. Taking a position that might discourage the exercise of options because of tax complications would conflict with the purpose of § 207.4(a).

(d) Accordingly, the Board has concluded that the combined loans for the exercise of the option and the payment of the taxes in connection therewith under plans complying with § 207.4(a) may be regarded as credit which is for the purpose of purchasing or carrying a margin security within the meaning of § 207.2(c). Since the combined loans are treated as purpose credit, § 207.1(h) does not prohibit the transaction, irrespective of amount.