Employers are currently required to provide annual information statements to employees concerning incentive stock options and stock purchased under employee stock purchase plans. Proposed Treasury Regulations that were recently issued by the Internal Revenue Service (Prop. Treas. Reg. Section 1.6039-1, 73 Fed. Reg. 40999 (July 17, 2008)) would require employers to file similar annual information returns with the IRS.

Background

Employers are currently required to furnish information statements to employees who receive stock upon the exercise of incentive stock options. Employers are also required to furnish information statements to employees who transfer stock that was purchased under an employee stock purchase plan. These information statements must be provided by January 31st of the year following the year for which the statement is required.1 Section 1.6039-1 of the Treasury Regulations prescribes the content of these statements.

The Tax Relief and Health Care Act of 2006 amended the Internal Revenue Code to require employers to file an information return with the Internal Revenue Service, in addition to providing employees with an information statement, concerning incentive stock options and employee stock purchase plans. The IRS waived the obligation to file these information returns for stock transfers occurring in 2007. IRS Notice 2008-8. As noted below, the new proposed regulations again waive information return obligations for transfers occurring in 2008.

Information returns and statements for incentive stock options

For incentive stock options, the proposed regulations would require a corporation that transfers stock pursuant to an employee’s exercise of an incentive stock option to file a return with respect to each transfer made during a particular year. The return would include the following information:

  • The name, address, and employer identification number of the corporation transferring the stock issued to the employee (and the name and address of the corporation whose stock is being transferred, if different from the corporation transferring the stock—for example, if the employer transferring the stock is a subsidiary of the issuer)
  • The name, address and social security number of the employee
  • 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 exercise date of the option
  • The number of shares transferred upon exercise of the option.

The content of the information return is substantially the same as that of the information statement currently required to be provided to employees, except that instead of reporting the total cost of all shares purchased, the exercise price per share is reported. The information return will be made on a new form, Form 3921, which the IRS expects to release later this year. Facilitating compliance, Form 3921 will also serve as the information statement that the corporation is required to provide to employees. These returns and information statements must be filed and provided to employees no later than January 31 following the calendar year to which they relate.

Information returns and statements for stock purchased under employee stock purchase plan

The proposed regulations would require a corporation to file a return concerning each recorded transfer made during a particular year by an employee of legal title of a share of stock that the employee purchased under an employee stock purchase plan. This return is only required if the purchase price of the stock is less than the fair market value of the stock on the date the option or purchase right was granted (i.e., the beginning of the offering period). The return would include the following information:

(1) The name, address and social security number of the employee

(2) The name, address and employer identification number of the corporation whose stock is being transferred

(3) The grant date of the option (purchase right)

(4) The fair market value of the stock on the grant date of the option (purchase right)

(5) The exercise price (purchase price) per share

(6) The exercise date of the option (purchase date of the shares)

(7) The fair market value of the stock on the exercise date (purchase date)

(8) The date when legal title of the shares was transferred by the employee

(9) The number of shares to which legal title was transferred by the employee.

This return adds items (3) through (7) to the information contained in the information statement currently required to be provided to employees concerning stock purchased under an employee stock purchase plan. The information return will be made on a new form, Form 3922, which the IRS expects to release later this year. Facilitating compliance, Form 3922 will also serve as the information statement that the corporation is required to provide to employees who transfer stock purchased under an employee stock purchase plan. The information contained in this form is intended to enable employees to determine their tax obligations when they dispose of shares purchased under an employee stock purchase plan. These returns and information statements must be filed and provided to employees no later than January 31 following the calendar year to which they relate.

A return or statement is required only with respect to the first transfer of a share by the employee who purchased the share under an employee stock purchase plan. For example, if the employee transfers record title to shares to a recognized broker or financial institution, and the shares are subsequently sold by the broker or institution on behalf of the employee, the corporation is only required to file a return and furnish a written statement to the employee relating to the transfer of record title to the broker or financial institution. Similarly, a return and a written statement are required when a share of stock is transferred by the employee to himself and another person (or persons) as joint tenants, tenants by the entirety or tenants in common. However, when stock is originally issued to the employee and another person (or persons) as joint tenants, or as tenants by the entirety, the return and written statement are only required to be filed and furnished with respect to this first transfer of the title to such stock by the employee.

Every corporation which transfers a share of stock under an employee stock purchase plan to which the information return and statement requirements described above apply is required to identify such stock in a manner sufficient to enable the accurate reporting of the transfer of record title to such shares. Such identification may be accomplished by assigning to the certificates representing these shares of stock a special serial number or color.

Mailing or electronic transmission of information statements

Rules on furnishing information statements electronically and by mail, which are currently addressed in existing Treasury Regulations, will be addressed in instructions to Forms 3921 and 3922.

Penalty for failure to file; extensions

The Internal Revenue Code currently imposes penalties for failure to provide information statements required by Section 6039. The Internal Revenue Code generally imposes a US$50 penalty for each such statement that is either not furnished or is furnished but contains incorrect or incomplete information, up to a cap of US$250,000 for all such failures during any calendar year. If an employer intentionally disregards any requirement to furnish an accurate and complete information statement, the penalty imposed under the Internal Revenue Code increases to US$100 per statement or 10 percent of the aggregate amount of the items required to be reported correctly, whichever is greater, and the US$250,000 cap does not apply. The Internal Revenue Code also provides that these penalties will not be imposed if it is shown that the failure was due to reasonable cause and not to willful neglect.

The proposed regulations would impose these same penalties with regard to failures to file or furnish information returns and statements.

Currently, an extension of 30 days to furnish the information statements may be granted by the IRS if good cause is shown. The application for an extension must be filed before the date the employer is required to provide such statement to employees without an extension.

The instructions to Forms 3921 and 3922 will provide guidelines and procedures for the granting of extensions of time to file or furnish the required returns and information statements.

Effective date; transition period

Once final regulations are published, they will apply as of January 1, 2007. However, for stock transfers occurring in 2007 and 2008:

  • Employers are not required to file the information returns described above
  • Employers may comply with existing information statement requirements by relying on either existing Treasury Regulations (Section 1.6039-1) or the new proposed regulations.