Editor: Greg A. Fairbanks, J.D., LL.M.
Sec. 6039 requires corporations to furnish a written statement containing certain information to an employee who exercises incentive stock options (ISOs) or who receives stock under an employee stock purchase plan (ESPP). In 2006, Congress expanded these reporting obligations by requiring that corporations also furnish information to the IRS (Tax Relief and Health Care Act of 2006, P.L. 109-432). In July 2008, the IRS issued proposed regulations to reflect the additional reporting requirements (REG-103146-08). In November 2009, the IRS issued final regulations (T.D. 9470).
The new reporting requirements go into effect for stock transfers that occur during 2010. Thus, it is important that corporations prepare now to collect the information that they must report. Presumably, employers have already been collecting the information in order to fulfill the reporting requirements to employees. However, corporations should recognize that the new final regulations modify the reporting requirements somewhat from prior regulations that the IRS issued in 2004 (T.D. 9144). In addition, now that corporations must report information to the IRS, it is even more important that they make efforts to collect and report the information fully and accurately.
At the time it issued the final regulations, the IRS indicated that it was in the process of developing two new forms that taxpayers will use to fulfill the reporting requirements: Form 3921, Exercise of an Incentive Stock Option Under Section 422(b), and Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c).
For stock transfers that occur during 2010, the returns are due on January 31, 2011. Fortunately, corporations use the same form to fulfill the requirement to furnish information to employees and to the IRS.
The reporting obligation arises for ISOs when an employee exercises an ISO. The reporting obligation for ESPPs arises when an employee first transfers stock acquired through the ESPP to another party. This includes a transfer of the stock to an account maintained for the employee by a broker or financial institution. Reporting is required for an ESPP only where the exercise price is less than 100% of the value of the stock on the date of grant or where the exercise price is not fixed or determinable on the date of the grant.
For ISOs, the final regulations indicate that Form 3921 will require the following information:
- Name, address, and employer identification number (EIN) of the corporation transferring the stock;
- If different from above, name, address, and EIN of the corporation the stock of which is being transferred;
- Name, address, and identifying number of the person to whom the shares were transferred under the exercise;
- Date the option was granted;
- Date the option was exercised;
- Exercise price per share;
- Fair market value per share on the exercise date; and
- Number of shares transferred under the exercise.
Corporations will find that the list above from the 2009 final regulations (new regulations) is almost identical to the list provided in the 2004 final regulations (old regulations). In fact, there is only one difference. Under the new regulations, corporations must report the exercise price per share. The old regulations required only that the corporation report the total exercise price paid for the year. The IRS made this change so that employees can more easily calculate their capital gain or loss when they sell only a portion of the shares acquired during a given year.
For ESPPs, the final regulations indicate that Form 3922 will require the following information:
- Name, address, and identifying number of the transferor;
- Name, address, and EIN of the corporation the stock of which is being transferred;
- Date of grant;
- Fair market value of stock on grant date;
- Exercise price paid per share;
- Exercise price per share determined as if the option were exercised on the date the option was granted (to be provided only if the exercise price per share is not fixed or determinable on the date the option was granted);
- Exercise date;
- Fair market value on the exercise date;
- Date legal title of the shares was transferred; and
- Number of shares to which legal title was transferred.
Corporations will find that the list above from the new regulations is a significant expansion of the list provided in the old regulations. The old regulations did not require the reporting of the date of grant, the fair market value of the stock on the grant date and the exercise date, the exercise price, or the exercise date. The IRS expanded the list in order to provide sufficient information to employees to enable them to calculate their tax obligations.
Corporations should evaluate whether their information systems accurately capture all the information they must report to employees and the IRS under the new regulations. Corporations that begin this evaluation process now should be able to revise their systems as necessary in plenty of time to meet the January 31, 2011, reporting deadline.
Greg Fairbanks is a tax manager with Grant Thornton LLP in Washington, DC.
Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.For additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or firstname.lastname@example.org