On November 17, 2009, the Internal Revenue Service (IRS) published Final Regulations (the Regulations) under Section 6039 of the Internal Revenue Code of 1986, as amended (the Code). That section requires employers to file information returns with the IRS and to provide information statements to employees who exercise incentive stock options that satisfy Code Section 422 (ISOs) or transfer shares acquired under employee stock purchase plans that satisfy Code Section 423 (ESPPs).
Prior to its amendment by the Tax Relief and Health Care Act of 2006 (the Act), Section 6039 required corporations to provide annual written statements to employees who exercised ISOs or transferred shares acquired under an ESPP, but did not require returns to be filed with the IRS. The Act provides that, for calendar years beginning after December 20, 2006, corporations must also file an information return with the IRS. The Regulations provide guidance on the application of the Act, specify the information that corporations must provide to both the IRS and employees, and specify deadlines and procedures for returns and information statements under the Act.
The Regulations are effective as of January 1, 2007. However, the Regulations waive the requirement to file a return with the IRS for stock transfers that occurred during the 2007, 2008 and 2009 calendar years. The Regulations do not waive the requirement that the corporation provide the information statements to employees for stock transfers during 2007, 2008, and 2009. In preparing the information statements for these years, the corporation may rely on the 2004 final regulations or the 2008 proposed regulations. For stock transfers during 2009, the corporation may also rely on the Regulations. Generally, information statements must be furnished to employees on or before January 31 following the year during which the transaction occurred.
Requirements for Incentive Stock Options
If a corporation transfers stock to an employee in a calendar year pursuant to the employee’s exercise of an ISO, then, under Section 6039, the corporation must provide an information statement to the employee reflecting the transfer and, for transfers in years after 2009, must also file an information return with the IRS. The information statement is intended to provide employees with information that will permit them to calculate their tax liability for the disposition of the stock acquired through an ISO. The form for both the information return and information statement is Form 3921, “Exercise of an Incentive Stock Option Under Section 422(b).”
Requirements for Employee Stock Purchase Plans
The information return and information statement requirements also apply to stock transfers under an ESPP that provides for a discount purchase price. For this purpose, an ESPP will be considered to provide for a discount purchase price if the price is less than the value of the stock on the date that the right to purchase the stock is provided under the ESPP (referred to as the grant date, which generally is the beginning of the applicable subscription period) or is not fixed or determinable on the grant date.
The Regulations require that, at the time the employee transfers legal title to the stock, the corporation must provide an information statement to the employee and, for transfers after 2009, must also file an information return with the IRS. A transfer by the employee is not deemed to have occurred by reason of the corporation transferring title to the employee (including, for example, registering the shares in book entry form in the employee’s name). As a result, such a transfer to the employee is not considered the first transfer of legal title and the corporation is not required to file a return for that transfer. The transfer of those shares by the employee is treated as the first transfer, which must be reflected by provision of the information statement and filing of the return. However, if, for example, at the time of acquisition of the shares by the employee, the corporation transfers title to a broker or financial institution (with the employee as the beneficial owner), that transfer to the broker or financial institution is treated as the first transfer, which must be reflected by an information statement and information return. No further statement or filing is required when the employee transfers the shares from the broker or financial institution.
The information statement is intended to provide employees with information that will permit them to calculate their tax liability for the disposition of the stock acquired under an ESPP. The form for both the information return and information statement is Form 3922, “Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under 423(c).” The Regulations clarify that the return and information statement requirements apply regardless of whether a transfer of legal title is a qualifying or disqualifying disposition.