On July 16, 2008, the Internal Revenue Service ("IRS") issued proposed new regulations relating to the information return and information statement requirements under Section 6039 of the Internal Revenue Code. As we reported in our January 24, 2008 blog article, Code Section 6039 requires corporations to file an information return with the IRS (the "Return") and furnish a written information statement (the "Statement") to each employee who exercises incentive stock options ("ISOs") or sells or otherwise transfers shares acquired under an employee stock purchase plan ("ESPP") by January 31 following the year in which such transactions occur.
In December 2006, Code Section 6039 was amended to provide that, with respect to stock transfers that occurred after 2006, corporations would need to file a Return. Prior to this statutory amendment, Code Section 6039 only required corporations to provide an annual Statement to employees who effected a covered stock transfer in the prior calendar year. However, in December 2007, the IRS waived the obligation to file a Return for stock transfers that occurred in 2007 (see IRS Notice 2008-8). The proposed new regulations under Section 1.6039-1(a) and -2(a) (relating to ISOs) and Section 1.6039-1(b) and -2(b) (relating to ESPPs) address the content, time and manner for both filing the Return and delivering the Statement to employees.
With respect to the Return and the Statement covering transfers of stock upon the exercise of an ISO, the information required to be included under the proposed regulations is generally the same as the information required to be furnished in the Statement pursuant to the existing 2004 final regulations. However, with respect to the Return and the Statement covering transfers of stock acquired under an ESPP, the proposed regulations stated that the information required to be furnished pursuant to existing regulations was considered insufficient to enable employees to calculate tax liability upon a later disposition of some or all of the stock. Accordingly, while the existing final regulations require the Statement to report the total cost of all shares acquired with respect to ESPP stock transfers, the proposed regulations would instead require the corporation to report the exercise price per share. The IRS plans to issue two forms later in 2008 (Form 3921 for ISO transactions and Form 3922 for ESPP transfers) and these forms would be used to satisfy both the Return and Statement reporting requirements under Section 6039.
The proposed regulations apply to any stock transfer occurring on or after January 1, 2007. However, the proposed regulations provide that corporations are not required to file a Return for stock transfers that occur during the 2007 and 2008 calendar years. Notwithstanding this waiver of the Return requirement, corporations must still continue to furnish Statements to employees for any ISO/ESPP stock transfers. For purposes of furnishing such Statements for 2007 and 2008 stock transfers, corporations may rely either on Section 1.6039-1 of the 2004 final regulations or on Section 1.6039-2 of the proposed new regulations. The IRS will give consideration to any comments on the proposed regulations and/or requests for a public hearing which are received by the IRS by October 15, 2008.