United States: Special Reporting Requirements Regarding 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 2006 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, 2007, a written statement containing certain specified information.

Similarly, every corporation that in 2006 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, 2007, 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. However, as we have provided in prior years, for your convenience, the following forms, when completed and delivered on or before January 31, 2007, will satisfy the foregoing reporting obligation:

ISO information statement (MS Word)

ESPP information statement (MS Word)

Please note that we have modified these forms from those provided in prior years to delete references to the employee’s social security number. Instead, we inserted a reference to the employee’s "Employee Identifying Number." We made this change because the privacy laws of various jurisdictions may prohibit companies from mailing an employee’s social security number. For example, California Civil Code Section 1978.85(a)(5)¹ prohibits a person or entity from printing an individual’s social security number on any materials that are mailed to the individual, unless state or federal law requires the social security number to be on the document to be mailed.

The Treasury Regulations require that the information statement include the ­employee’s "identifying number." Thus, it is not clear that federal law requires that the employee’s social security number be included in the information statement. Because of this, we recommend that companies use an employee identifying number different from the employee’s social security number or that companies use only the final four digits of the employee’s social security number.

Currently, Section 6039(a) of the Code does not require the employer to provide this information to the IRS. The 2006 Tax Relief and Health Care Act changes that, effective for transfers occurring in 2007, by adding a requirement that an employer file an information return with the IRS in addition to providing an information statement to the employee. It is possible that the information return the employer will be required to file with the IRS will be in the same form as the information statement to be provided to the employees. In such case, the information statement will need to include the employee’s social security number, as that information will certainly be required in the information return filed with the IRS.

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 2006 tax year, it is mandatory to report this income in Box 12 using code "V."

Footnotes

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.