As
you may know, Ed Burmeister appeared at the IRS hearing on the proposed
Section 6039 regulations, dealing with information returns and
statements for ISOs and ESPPs, which was held on October 30, 2008.
The
IRS was represented at the hearing by Thomas Scholz, Assistant Branch
Chief, Executive Compensation Branch and Ilya Enkishav, Attorney,
Executive Compensation Branch. Also, representing the government was Helen Morrison of Treasury, the Acting Deputy Benefits Tax Counsel. Ed Burmeister was the only non-government person appearing at the hearing. Ed made the following points at the hearing:
1.
The final regulations should not require that issuers or service
providers put the employee social security number on the statements
that go to the employee, as required in the Proposed Regulations. This
raises serious privacy concerns and is not necessary, in as much as the
employee will know his/her own social security number.
2. The
final regulations should make it clear that the statements and returns
can be provided electronically or through paper filings, at the choice
of the companies and service providers.
3. Ed
made the point that the fact that this is now going to be a tax return
filing will create significant administrative problems for companies
and their service providers. Historically, this type of
information has been provided on IRS Form W-2, the preparation of which
is often outsourced to a payroll provider; however, the payroll
providers are not yet prepared to produce this type of return, since
much of the data comes from the stock administration software. On
the other hand, companies have typically outsourced the stock
administration to a broker or other service provider, and these service
providers are very reluctant to prepare tax return filings. In
any event, filing the return for transfers occurring in 2009 would be a
very difficult task, given the little time remaining before covered
transfers will occur and the lack of any form having been produced to
date. Accordingly, Ed suggested that the return filing
requirement be delayed another year so as not to come into play until
transfers occurring in 2010, at the earliest.
4. Ed addressed the issue of which transfers would be the subject of the return and statement requirements. He
set forth a position that, based on the statutory language, as applied
to ESPPs (which references the transfer of record title to the shares
acquired by the employee), this should be construed to mean the title
transfer that occurs when the shares are placed into an individual or
omnibus brokerage account at the time of purchase. He
indicated that the employee is in fact acquiring the shares as a matter
of beneficial and economic ownership and, therefore, the transfer of
record title to the broker could be construed as a transfer of record
title of the shares acquired by the employee at that time. He
pointed out that all the necessary information to file an appropriate
tax return for either a qualifying or disqualifying disposition would
be known at this time, other than the number of shares sold and the
value on which the shares are later sold, which would be reported on a
Form 1099-B from the broker at that time. He pointed out
that transfers of legal title following the initial recording of title
with the broker are not recorded by the company or its transfer agent,
and so would not be reportable under the statutory language. He
suggested that the regulations should clarify these issues so that
companies and their service providers can comply with the regulations
and provide useful information to the employee, while at the same time
having an administrable system.
5. Ed indicated that the statement and return should not be required for those employees who are not receiving W-2s, e.g., foreign nationals working for non-U.S. subsidiaries.
Ed
then discussed some technical points relating to the information to be
provided on the return as it relates to employee stock purchase plans. He
pointed out that the amount of ordinary income tax would be calculated
differently in the case of a qualifying and disqualifying disposition
(either based on the purchase date discount or the grant date discount)
and that the information required to be provided on the form as set
forth in the proposed regulations does not distinguish these two
ordinary income calculations and may be confusing to the employees.
Of
course, the representatives of the IRS and Treasury did not commit to
adopting any of these suggestions, but they did seem receptive and
understanding of the points being made, and as a result, we are
somewhat optimistic that useful modifications will be made before the
regulations are published in final form, which should occur before the
end of this year, unless a notice comes out extending for another year
both the return and the necessity of filing the statement in accordance
with the new regulations, which is a distinct possibility.
Thanks
to all of you who provided an input to us so that we could prepare our
initial comments and also to prepare the oral comments made at the
hearing.
