Information Statements and Tax Reporting for ISO and ESPP Transactions

Section 6039 of the Internal Revenue Code, as amended by Section 403 of the Tax Relief and Health Care Act of 2006, requires corporations to provide information statements to employees (including former employees) following the exercise of an incentive stock option (ISO) or the transfer by the employee or former employee of shares of stock that were purchased under an employee stock purchase plan (ESPP) designed to meet the requirements of Section 423 of the Internal Revenue Code. Information statements with respect to exercises and transfers that occurred in 2008 must be furnished to employees and former employees by January 31, 2009. Starting with ISO exercises and ESPP transfers occurring in 2009, Section 6039 will also require corporations to file information returns with the IRS with regard to such transactions.

Content of 2008 Information Statements

The IRS has specified the content required to be provided in the information statements. The information required depends on whether the transaction involves an exercise of an ISO or the transfer of stock purchased under an ESPP.

2008 ISO Information Statements

With respect to ISOs, the information statement must include the following information:

• The name, address and employer identification number of the corporation transferring the stock and (if different) the corporation whose stock is being transferred;
• The name, address and identifying number of the person to whom the shares of stock were transferred;
• The date the option was granted;
• The date the shares were transferred to the person exercising the option;
• The fair market value of the stock at the time the option was exercised;
• The number of shares of stock transferred pursuant to the exercise of the option;
• The type of option under which the transferred shares were acquired (i.e., an incentive stock option); and
• The total cost of all shares (i.e., the aggregate exercise price paid).

2008 ESPP Information Statements

With respect to the transfer of stock purchased under an ESPP, the information statement must include the following information:

• The name, address and employer identification number of the corporation whose stock is being transferred;
• The name, address, and identifying number of the transferor (i.e., the employee or former employee);
• The date the stock was transferred to the transferor (i.e., the date of purchase under the ESPP);
• The number of shares transferred; and
• The type of plan under which the transferred shares were acquired (i.e., a statement that the transfer is pursuant to a §423 plan).

Information Returns for 2009 Transactions

Starting with ISO exercises and ESPP transfers occurring in 2009, Section 6039 will require corporations to file an information return with the IRS with respect to each transfer made during a particular year, in addition to the information statements already required to be furnished to employees and former employees. Last year, the IRS issued proposed regulations addressing the time and manner for delivering and the information that must be included in the returns and information statements. Although the proposed regulations are technically effective for transactions occurring on or after January 1, 2007, the IRS has waived the requirement to file returns with the IRS for the exercise of ISOs or the transfer of shares of stock purchased under an ESPP for the 2007 and 2008 calendar years. Starting with ISO exercises and ESPP transfers in 2009, such information returns must be filed on or before January 31 of the year following the calendar year to which the return relates. The first such returns (Form 3921 for ISO exercises and Form 3922 for ESPP transfers) must be filed by January 31, 2010.

Content of 2009 Return Filings

The proposed regulations state that the content required for information returns filed with the IRS is identical to that required for information statements furnished to employees. However, the proposed regulations would modify the content requirements for such information returns and information statements.

2009 ISO Information Returns and Information Statements

Beginning with ISO exercises occurring in 2009 and reported in January 2010, the proposed regulations generally would require the same information that is currently required, with the following differences:

• Rather than the total cost of the shares, corporations must provide the exercise price per share; and
• Corporations are no longer required to include the type of option under which the transferred shares were acquired.

2009 ESPP Information Returns and Information Statements

Beginning with ESPP transfers occurring in 2009 and reported in January 2010, the proposed regulations generally would require the same information that is currently required, except that the information statements and return filings do not need to include the type of plan under which the transferred shares were acquired. The proposed regulations also would require that the information returns and information statements include the following additional information:

• The date the option was granted to the transferor (e.g., the first date of the offering period);
• The fair market value of the stock on the date the option was granted;
• The purchase price per share;
• The date the shares were purchased under the ESPP; and
• The fair market value of the stock on the date the shares were purchased under the ESPP.