Client Alert: Reporting Obligation for Exercises of Incentive Stock Options

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Client Alert: Reporting Obligation for Exercises of Incentive Stock Options

Annual Reminder: Reporting Obligation for Exercises of Incentive Stock Options
Due by January 31 – IRS Issues Final Regulations

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. Additionally, 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 requirement that employers also file an annual information return with the IRS with respect to the exercise of incentive stock options.* The IRS has waived this additional filing requirement for stock transfers that occurred in 2007, 2008 and 2009 and thus no information returns will be required to be filed directly with the IRS for transactions that occurred in 2009 and prior years.

In November 2009, the IRS issued final regulations relating to the Section 6039 reporting and filing requirements. The final regulations retain the information required to be reported and require that the employee information statements and the employer information returns be provided on new IRS forms which are expected to be released in early 2010. However, under transition relief included in the final regulations, the first employee statements and IRS information returns required to be issued under the final regulations will not be due until 2011 for calendar year 2010 transactions.

Notwithstanding this transition relief, however, employers must still provide the required information statements to employees for option exercises that occurred through calendar year 2009. These 2009 statements may continue to be provided under the existing rules that have been in place for a number of years and are not required to be provided on the soon-to-be-released IRS forms.

The written notice (or information statement) required to be reported to employees who exercised incentive stock options during the 2009 calendar year must be delivered on or before January 31, 2010 and 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; and
  8. the number of shares of stock transferred upon exercise of the 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.

A sample written notice to employees who exercised incentive stock options that can be used for 2009 transactions is available for download. 2010 transactions will be required to be reported on the new IRS forms and otherwise in accordance with the final regulations.

If you have any questions, please feel free to contact your regular attorney, or the following Hutchison attorney:

Amalie - 919.829.4293

*  Similar reporting requirements exist under Code Section 6039(a) with respect to stock acquired under an employee stock purchase plan (ESPP). The Code Section 6039 regulations relating to ESPPs are not addressed in this Client Alert.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This Alert is provided for information purposes and is not intended to be, nor should it be construed as, legal advice on any specific matter. This Alert does not constitute an invitation to or create an attorney-client relationship, nor should it be construed as an advertisement for legal services.