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Client Alert: Reporting Obligation for Exercises of Incentive Stock Options

Pursuant to Section 6039(a) of the Internal Revenue Code of 1986, as amended ("Code Section 6039"), corporations are required to provide a written information statement to their employees who exercise incentive stock options.1

As we have alerted you previously, the Tax Relief and Health Care Act of 2006 amended the information reporting requirements of Code Section 6039 by imposing an additional reporting requirement. The law requires employers to file an information return with the IRS, in addition to providing employees with an information statement, with respect to the exercise of incentive stock options by their employees. In Proposed Regulations issued in July 2008, the IRS waived the return requirements with respect to the exercise of incentive stock options occurring during 2008. However, although no report to the IRS is due at this time, employers must provide employees who have exercised incentive stock options during 2008 with the written information required by applicable existing regulations.

This written notice to each employee who exercised an incentive stock option during the year must be delivered on or before January 31 of the following year.

The notice must contain the following information:

  1. the name, address and employer identification number of the corporation transferring the stock;
  2. the name and address of the corporation the stock of which was the subject of the option (only if different from the corporation transferring the stock);
  3. the name, address and taxpayer identification number of the person to whom the shares of stock were transferred;
  4. the date the option was granted;
  5. the exercise price per share;
  6. the date the option was exercised by the person;
  7. the fair market value of the stock on the date of exercise;
  8. the number of shares of stock transferred upon exercise of the option; and
  9. a statement that the option was an incentive stock option.

The notice must be delivered in person or sent to the last known address of the employee who exercised the incentive stock option. Alternatively, the notice may be sent electronically if the employee has previously consented and certain procedures are followed. The IRS imposes a penalty of $50 for each statement not timely delivered or containing incorrect or incomplete information, up to a maximum of $100,000 per calendar year, with enhanced penalties for a company's intentional disregard of the requirements.

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