On November 16, 2009, the IRS issued final regulations governing the informational reporting and disclosure requirements that are triggered by the transfer of stock (“Stock Transfers”) acquired pursuant to the exercise of incentive stock options (ISOs) or purchased under an employee stock purchase plan (ESPP).

The provisions of the final regulations are generally similar to those set forth in the proposed regulations issued July 17, 2008, however, there are several important differences. Please refer to our previous Alert, Deadline for Disclosure Statements Relating to 2008 ISO and ESPP Stock Transfers, published in January 2009, regarding the informational reporting and disclosure requirements set forth in the proposed regulations. As with the proposed regulations, the final regulations require that the company furnish disclosure statements to the applicable employees or former employees on or before January 31, 2010, with respect to Stock Transfers that occurred during the 2009 calendar year.

The final regulations describe the requirements that apply to the informational return requirements and employee disclosures following Stock Transfers. However, the final regulations waive the information return requirements for Stock Transfers that occurred during the 2007, 2008 and 2009 calendar years. Notwithstanding the waiver of the return requirements for those calendar years, companies must still furnish the employee disclosure statements for any Stock Transfers that occurred during the 2009 calendar year. With respect to Stock Transfers that occurred during 2009, companies may rely upon the rules set forth in Section 1.6039-1 of the 2004 final regulations, Section 1.6039-2 of the 2008 proposed regulations, or these 2009 final regulations.

Informational Reporting and Employee Disclosure Requirements

ISO Requirements

The final regulations did not change the particular requirements with respect to the informational reporting to the Internal Revenue Service and employee disclosure statements that are required to be furnished following the transfer of stock acquired pursuant to the exercise of an ISO. In particular, the final regulations require that the informational return and/or employee disclosure must contain the following information:

  • The name, address, and employer identification number of the corporation transferring the stock;
  • If other than the corporation identified above, 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 share or shares of stock were transferred pursuant to the exercise of the option;
  • The date the option was granted to the person;
  • The exercise price per share;
  • The date the option was exercised by the person;
  • The fair market value of a share of stock on the date the option was exercised by the person; and
  • The number of shares of stock transferred to the person pursuant to the exercise of the option.

ESPP Requirements

The final regulations modified the content requirements of the informational reporting and disclosure statements that are required to be furnished following the first transfer of legal title of a share of stock acquired by the employee where the stock was acquired pursuant to an ESPP. The change was intended to address situations where the exercise price per share of an option granted under an ESPP is not fixed or determinable on the date the option was granted to the employee. Under these circumstances, the informational reporting and disclosure statements must now include the exercise price per share determined as if the option were exercised on the date of grant.

The final regulations also clarified certain circumstances under which the informational reporting and disclosure statements must be submitted. The final regulations clarify that the first transfer of legal title occurs where legal title of the shares acquired under the ESPP are deposited into a brokerage account held by another entity acting as a securities depository, holding the shares in the street name of the broker.

On the other hand, the first transfer of legal title does not occur if the company issues stock certificates directly to the employee following the purchase of stock pursuant to an ESPP, or the company registers the shares in the employee’s name on the company’s record books and the company or its transfer agent holds the shares in bookentry form. Under these circumstances, the company is not required to comply with the informational reporting and disclosure obligations until the first transfer of legal title to the stock (i.e. when the employee sells the stock or transfers the stock to a brokerage account on behalf of the employee).

Under the final regulations, the following information must be included in the informational reporting and disclosure statements:

  • The name, address, and identifying number of the transferor;
  • The name, address and employer identification number of the corporation whose stock is being transferred;
  • The date the option was granted to the transferor;
  • The fair market value of the stock on the date the option was granted;
  • The actual exercise price paid per share;
  • The exercise price per share determined as if the option were exercised on the date the option was granted to the transferor (to be provided only if the exercise price per share is not fixed or determinable on the date the option was granted);
  • The date the option was exercised by the transferor;
  • The fair market value of the stock on the date the option 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.

Exception to Return Requirements for Certain Nonresident Aliens

The final regulations provide an exception to the informational return obligations which applies to employees who are nonresident aliens (as defined under Section 7701(b) of the Code) and to whom the company is not required to provide a Form W-2 for any calendar year within the time period beginning with the first day of the calendar year in which the option was granted to the employee and ending on the last day of the calendar year in which the employee exercised the option (in the case of ISOs) or first transferred legal title to the shares acquired under the ESPP.