Congress recently passed the Tax Relief and Health Care Act of 2006 amending section 6039 of the Internal Revenue Code. The amendment is effective on January 1, 2007, but the new reports will not be due until 2008.

Previously, Code section 6039 did not require a corporation to file an information return with the IRS when it transferred shares to an employee who exercised incentive stock options ("ISO") or employee stock purchase plans ("ESPP"). The Code only required the corporation to provide the employee exercising the option with a written statement describing the transfer. The written statement was due on or before January 31 following the calendar year of the transfer. The treasury regulations required written statements for ESPPs to identify the corporation and the employee, and state the transfer date, the number of shares transferred, and the type of option under which the shares were acquired. The regulations required written statements for ISOs to include similar information, as well as the date the option was granted, the stock's fair market value when the option was exercised, and the total cost of all the shares.

Amended Code section 6039 requires a corporation to file an information return with the IRS whenever an employee receives stock by exercising an ISO or ESPP. The IRS will prescribe regulations outlining what information the return must include and the filing date. The due date will likely be February 28, similar to other required information returns. A corporation still must provide a written statement to the employee who acquired stock by January 31 of the calendar year after the transfer. The IRS will issue regulations detailing the information that the written statement must include. The information required on the written statement will likely be similar to that prior to the amendment.

Congress added the reporting requirement under Code section 6039 in order to reinforce compliance. Previously, there was no incentive for employees to report ISO and ESPP transactions aside from honesty. Employees will be more likely to report stock exercises on their personal income tax returns when their employers report the exercises to the IRS.
Congress recently passed the Tax Relief and Health Care Act of 2006 amending section 6039 of the Internal Revenue Code. The amendment is effective on January 1, 2007, but the new reports will not be due until 2008.