Revenue Ruling 2002-22

A taxpayer and the taxpayer’s spouse divorced in 2002. Before the divorce, the taxpayer’s employer issued nonstatutory stock options to the taxpayer. The employer also maintained nonqualified deferred-compensation plans under which the taxpayer had the right to receive postemployment payments from the employer. Under the law of the state where the taxpayer and the spouse lived, stock options and deferred-compensation rights were subject to equitable distribution between divorcing spouses. The divorce judgment between the taxpayer and the former spouse provided that the taxpayer was to transfer to the former spouse one-third of the stock options and certain rights to receive payment from the taxpayer’s employer under the deferred-compensation plans. The former spouse subsequently exercised the stock options and received payouts from the deferred-compensation plans after the taxpayer ceased working for the taxpayer’s employer. The Internal Revenue Service (IRS) issued a revenue ruling that discussed whether the taxpayer should be taxed on the transfer of the options and deferred-compensation rights under the assignment-of-income doctrine (i.e., the principle that income is taxed to the person who earns the income) or instead, whether the former spouse should be taxed when the former spouse exercised the stock options and received the deferred-compensation payouts.