Treasury Issues Final Regulations under Section 6039
On
November 16, 2009, Treasury released for publication the final
regulations under section 6039 of the Code ("Final Regulations")
dealing with return and information statements for incentive stock
options (ISOs) and section 423 employee stock purchase plans (ESPPs).
We
previously reported on the Proposed Regulations back in July 2008 and
provided updates following submission of our comment letter on the
Proposed Regulations and the hearing attended by Ed Burmeister in which
we proposed significant revisions to the Proposed Regulations.
We are please to report that most of the changes we proposed were accepted and have found their way into the Final Regulations.
Background
IRC
section 6039 was amended by section 403 of the Tax Relief and Health
Care Act of 2006 ("2006 Act") to require companies issuing ISOs or
maintaining ESPPs to file an annual information return with the
Internal Revenue Service (IRS) reporting certain transfers of ISO or
ESPP shares, in addition to the requirement to provide an annual
information statement to participants, as required by prior law.
The
Proposed Regulations issued on July 17, 2008, set out the requirements
for the new return and information statement reporting. Subsequently, the effective date of these new rules was postponed until January 2010 (for reporting 2009 transactions).
Unfortunately,
we found that the proposed requirements of the IRS reporting,
particularly the timing and some of the content of the information
return, presented a series of problems for our clients. Those problems prompted our comment letter and appearance at the IRS hearing on the Proposed Regulations. The
NASPP (through Barbara Baksa) also contributed useful comments and
suggestion to the IRS with respect to the Proposed Regulations. The
principal problem in the Proposed Regulations, as set forth in our
comment letter, was that they seemingly required, for ESPPs, that plan
sponsors track dispositions of the shares for an indefinite period and
report those transfers to employees (on the annual employee statement)
and also to the IRS on the annual information return in the year of
transfer of those shares,. This reporting imposed a substantial burden on employers maintaining ESPPs.
Fortunately,
our voices were heard and the Final Regulations represent a much more
reasonable and administrable set of rules for section 6039 reporting.
Requirements of Final Regulations
· Effective Date
The
first piece of good news is that the effective date has been delayed
one year, so the first employee statements and IRS information returns
to be issued under the Final Regulations will not be required until
January 2011 for calendar year 2010 transactions. Notwithstanding,
companies sponsoring ESPPs or granting ISOs will still need to provide
the employee information statements for stock transfers that occurred
through calendar year 2009, but those information statements can be
provided under the existing rules which have been in place for a number
of years. No IRS information returns will be due for 2009 transactions.
· Transfers to be Reported
The
key change in the Final Regulations from the Proposed Regulations is
that issuing companies have to report, both for ISOs and ESPPs, the acquisition of shares by the employee (exercise of an ISO or purchase under the ESPP). No
later reporting of the disposition of the shares under section 6039
will be required, either to the employee or to the IRS, but, of course,
disqualifying disposition tracking and Form W-2 reporting remain in
effect and unchanged. Technically, this ability to report
the acquisition of shares under the ESPP at the purchase date is
limited to ESPPs where, upon purchase, the shares are immediately
deposited into a brokerage account on behalf of the employee. We believe this requirement will cover essentially all public company ESPPs.
· Additional Information to be Provided
Under
the Final Regulations, the information required to be reported on the
soon-to-be published IRS Form 3922 (for ESPPs) was modified to add the
following item:
The
exercise price per share determined as if the option were exercised on
the date the option was granted to the transferor (to be provided only
if the exercise price per share is not fixed or determinable on the
date the options is granted).
The
Proposed Regulations had overlooked the fact that, in the case of a
qualifying disposition, there is a deemed exercise at the grant date in
the typical plan in which the exercise price is not fixed until the
purchase date.
· Reporting for Nonresident Aliens
The
Final Regulations accepted our recommendation to exempt from the return
requirement the exercise of an ISO or purchase under an ESPP by a
nonresident alien who performs services outside the United States and
thus for whom the company is not required to file a Form W-2 for any
calendar year the option or purchase right was outstanding (or until
later disposition for an ESPP in which shares are not transferred
directly to a broker upon purchase).
· Forms of Returns
Returns
to the IRS and statements to employees will be made on IRS Form 3921
(with respect to ISOs) and 3922 (with respect to ESPPs). These forms should be issued within the next month or two. The
Forms will be due on January 31 of the year following the year for
which an ISO exercise or ESPP purchase, as the case may be, is to be
reported.
The
Final Regulations indicate that the filing/delivery requirements may be
satisfied by filing Forms 3921/3922 with the IRS, while delivering
substitute Forms 3921/3922 to the employees in accordance with the
guidelines in IRS Publication 1179. This should permit electronic delivery of forms to employees (See section 4.5 of Publication 1179).
Summary
The
Final Regulations represent a distinct improvement over the Proposed
Regulations and now set forth a workable approach for companies issuing
ISOs and maintaining ESPPs that need to comply with the section 6039
information statements and information return requirements. The
first statement/return to be provided under the Final Regulations will
be due in January 2011 for calendar year 2010 acquisition of shares
upon an ISO exercise or ESPP purchase.
Companies
should begin the process now of determining how they will comply with
these new requirements, as transactions beginning in January 2010 will
be the first one covered under these new rules.
For
more information regarding the Final Regulations, please contact the
Baker & McKenzie LLP attorney with whom you are working on equity
compensation matters or register for our November 19th webinar.
I would personally like to thank Ed Burmiester of Baker and McKenzie and Elizabeth Dodge of Stock and Option Solutions for their part in educating the IRS as to the problems in the originally proposed rules.
I think we would get favorable results more often if we all took the time to comment on proposed rules. Just a thought....Dan