This Alert will serve as a reminder of certain year-end reporting requirements imposed with respect to incentive stock options and employee stock purchase plans.
Under Section 6039(a) of the Internal Revenue Code of 1986, as amended (the "Code"), every corporation that in 2005 issued stock upon the exercise of an incentive stock option (meaning a stock option that qualifies for the favorable tax treatment available under Section 421 of the Code) must furnish to the employee exercising the option, on or before January 31, 2006, a written statement containing certain specified information. In July 2001, the Internal Revenue Service (the "IRS") confirmed in an Information Letter that corporations were not required to comply with the written statement requirement of Section 6039(a)(1) of the Code upon an employee’s exercise of an incentive stock option, until the IRS issued final regulations. In August 2004, the IRS issued final regulations. The final regulations, which took exclusive effect on January 1, 2006, confirm the written statement requirement contained in Sections 6039(a)(1) and 6039(a)(2) of the Code.
Similarly, every corporation that in 2005 records (or has recorded by its transfer agent) the initial transfer of stock acquired under an employee stock purchase plan (meaning a plan that is established under Section 423 of the Code) must furnish to the employee transferring the stock, on or before January 31, 2006, a written statement containing certain specified information.
These information statements must be delivered in person or mailed to the recipient’s last known address but are not filed with the IRS. Currently, these information statements may be delivered electronically if the recipient consents to such a means of delivery. In order to satisfy the requirement relating to employee stock purchase plans, the Code also requires that a corporation transferring stock under an employee stock purchase plan identify the stock in a manner sufficient to enable it to carry out its reporting obligation (e.g., by use of special serial numbers or codes, which in practice are typically determined by the transfer agent).
In general, a penalty of $50 is imposed for each statement not timely furnished or containing incomplete or incorrect information, up to a maximum of $100,000 per calendar year.
Most stock administration software can generate these information statements. For your convenience, however, the following forms, when completed and delivered on or before January 31, 2006, will satisfy the foregoing reporting obligation:
ISO information statement(MS Word)
ESPP information statement(MS Word)
These reporting obligations are in addition to any reporting obligations that arise upon the disqualifying disposition of stock acquired under either an incentive stock option or an employee stock purchase plan. In particular, the IRS generally requires that the income of an employee from a disqualifying disposition be reported as "other compensation" on Form W-2 in order for the corporation to take a federal income tax deduction for the amount of income recognized by the employee upon a disqualifying disposition as well as to satisfy the corporation’s reporting obligations.
As an aside, amounts includible in income as a result of the exercise of a nonstatutory stock option (meaning a stock option that is not an incentive stock option for purposes of Section 422 of the Code) should be reported on a Form W-2 in the case of employees or Form 1099 in the case of non-employees, along with appropriate withholding. For Forms W-2 issued for the 2005 tax year, it is mandatory to report this income in Box 12 using code "V."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
