Year-end reporting requirements for ISO exercises and ESPP stock transfers occurring during 2010

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.