What are SARs?

Stock Appreciation Rights are a method of compensating employees or independent contractors.  A Stock Appreciation Right (SAR) is an arrangement, during a specified period, which the employee has the right to receive the increased value of the employer’s stock by cashing out or exercising the SAR. The employee can only benefit from the appreciation in the value of the stock; therefore, a taxable event does not take place until the exercise of a SAR.  The amount received upon exercise of the SAR is includible in the employee’s income, constitutes wages, and creates a deduction to the employer at that time.  See Rev. Rul. 80-300, 1980-2 C.B. 165, Rev. Rul. 82-121, 1982-1 C.B. 79, and Treas. Reg. §1.451-2(a). Stock appreciation rights are NOT deferred compensation subject to the special timing rule under IRC §3121(v)(2).  See Treas. Reg. §31.3121(v)(2)-1(b)(4)(ii) and Notice 2005-1. However, if the terms of the SAR limit the amount that an employee may receive upon exercise, the IRS has ruled income has been constructively received in the tax year in which the maximum limit has been attained.  See Private Letter Ruling (PLR) 8104119.  In addition, an employee who fails to exercise a SAR has constructively received the value of stock at the end of its term.  See PLR 8120103.