United States: Executive Compensation, Employee Benefits and Share Incentives Alert 16 November 2010

Article by William L. Neff , Carin C. Carithers and Christian Chandler

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This Alert is intended to remind you of certain year-end
reporting requirements with respect to stock issued upon the
exercise of an incentive stock option (ISO) or transferred under a
tax-qualified employee stock purchase plan (ESPP) and inform you of
new IRS filing requirements for transactions occurring in 2010
which will be reportable as soon as January 31, 2011.

For ISO exercises and ESPP stock transfers that occurred prior
to calendar year 2010, Section 6039(a) of the Internal Revenue Code
required corporations to provide certain written informational
reports to employees (or former employees) but did not require
corporations to make any filings with the IRS. Under new IRS
final regulations applicable to ISO exercises and ESPP stock
transfers occurring during calendar year 2010, corporations must
file information returns with the IRS in addition to providing
written statements to employees. For ISO exercises,
corporations must file IRS Form 3921 and for ESPP stock
transfers, corporations must file IRS Form 3922. These forms and the
information that must be reported on them are discussed in greater
detail below. 

The written information corporations must provide to employees
(or former employees) who exercised an ISO or received a stock
transfer under an ESPP during calendar year 2010 can be furnished
by providing the individual with the appropriate copy of IRS Form
3921 or IRS Form 3922, as applicable. Written statements with
regards to ISO exercises or ESPP stock transfers that occurred
during calendar year 2010 must be provided no later than
January 31, 2011. Corporations are required to file
these same forms with the IRS for transactions that occurred during
calendar year 2010 no later than February 28, 2011, if
filing on paper, or March 31, 2011, if filing
electronically. 

Please note, the requirement for providing written statements
to employees must be fulfilled prior to filing the new forms with
the IRS so, as a practical matter, the January 31, 2011, deadline
is the most important for reporting purposes.

ISO exercises reported on IRS Form 3921

Corporations that have transferred stock to a person pursuant to
an ISO in a calendar year must timely file IRS Form 3921. To
complete IRS Form 3921 a corporation must provide:

• 
  
  the name,
  address, and employer identification number of the corporation
  transferring the stock;
  
  
  
  


• 
  
  if other than the
  corporation transferring the stock, the name, address, and employer
  identification number of the corporation whose stock is being
  transferred;
  
  
  
  


• 
  
  the name,
  address, and identifying number of the person to whom the shares of
  stock were transferred pursuant to the exercise of the ISO;
  
  
  
  


• 
  
  the date the
  option was granted;
  
  
  
  


• 
  
  the exercise
  price per share;
  
  
  
  


• 
  
  the date the
  option was exercised;
  
  
  
  


• 
  
  the fair market
  value of a share of stock on the date the option was exercised;
  and
  
  
  
  


• 
  
  the number of
  shares of stock transferred pursuant to the exercise of the
  ISO.
  
  

ESPP stock transfers reported on IRS Form
3922

Corporations that have recorded, or have had their agents
record, a transfer of the legal title of stock purchased pursuant
to an ESPP in a calendar year must timely file IRS Form 3922. To
complete IRS Form 3922 a corporation must provide:

• 
  
  the name, address,
  and employer identification number of the transferor;
  
  
  
  


• 
  
  the name, address,
  and employer identification number of the corporation whose stock
  is being transferred;
  
  
  
  


• 
  
  the grant date for
  the ESPP purchase right pursuant to which the shares were issued to
  the transferor;
  
  
  
  


• 
  
  the fair market
  value of the stock on the grant date;
  
  
  
  


• 
  
  the actual
  exercise price paid per share;
  
  
  
  


• 
  
  the exercise price
  per share determined as if the ESPP purchase right was granted to
  the transferor (to be provided only if the exercise price per share
  is not fixed or determinable on the date of grant);
  
  
  
  


• 
  
  the date the ESPP
  purchase right was exercised by the transferor;
  
  
  
  


• 
  
  the fair market
  value of the stock on the date the ESPP purchase right was
  exercised by the transferor;
  
  
  
  


• 
  
  the date the legal
  title of the shares was transferred by the transferor; and
  
  
  
  


• 
  
  the number of
  shares to which legal title was transferred by the
  transferor.
  
  

A return is required only with respect to the first transfer of
legal title of the shares by a transferor, which includes the first
transfer of legal title to a recognized broker or financial
institution. If the stock purchased by an individual pursuant to an
ESPP purchase right is immediately deposited in a brokerage account
established on behalf of the transferor, that deposit is the first
transfer for purposes of the filing requirement.

Additional information

In general, a penalty of $50 for each statement not
timely furnished or $50 for each statement containing incomplete or
incorrect information is imposed.

This reporting obligation is in addition to any reporting
obligations that arise upon a disqualifying disposition of stock.
In particular, the Internal Revenue Service 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.

The reporting rules relating to nonqualified stock option
exercises are unaffected by these rules such that amounts
includible in income as a result of the exercise of a nonqualified
stock option should be reported on a Form W-2 in the case of
employees or Form 1099 in the case of non-employees along with any
appropriate withholding.

For non-resident aliens to whom a corporation is not required to
provide a Form W-2, the reporting requirements under Section
6039(a) of the Internal Revenue Code are not applicable with
respect to the non-resident alien for any calendar year during any
period beginning with the first day of the calendar year in which
the option was granted to the employee, and ending with the last
day of the calendar year in which the employee exercised the ISO or
the ESPP stock transfer occurred.

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.

Specific Questions relating to this article should be addressed directly to the author.