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Companies Have Reporting Obligations for 2010 Incentive Stock Option Exercises and Stock Transfers Under Employee Stock Purchase Plans

    Client Alerts
  • January 07, 2011

Companies already are required under Section 6039 of the Internal Revenue Code to provide information statements by January 31 of each year to participants with respect to the exercise of incentive stock options ("ISOs") or transfers of stock acquired under an employee stock purchase plan ("ESPP") for the prior year. Section 6039 of the Internal Revenue Code was amended in 2006 to also require companies to file an information return with the IRS regarding these same transactions, but companies were exempt from the filing requirements until final regulations and forms were published by the IRS. With the recent publication of IRS Form 3921, Exercise of an Incentive Stock Option under Section 422(b) (for ISOs), and IRS Form 3922, Transfer of Stock Acquired through an Employee Stock Purchase Plan under Section 423(c) (for ESPPs), companies must now provide information statements to participants and also file information returns with the IRS in early 2011. 

A company must file Form 3921 if an employee exercised an ISO in 2010. Also beginning in 2010, Form 3922 must be filed upon the first transfer of the "legal title" of shares subsequent to purchase under an ESPP if the purchase price of the shares was (a) less than the fair market value of the stock on the date of grant or (b) not fixed or determinable on the date of grant. (Generally, the transfer of legal title to a recognized broker or financial institution (e.g., if the stock purchased under an ESPP is immediately deposited in a brokerage account established on behalf of the participant) is considered the first transfer for purposes of the filing requirement. However, an initial transfer of legal title does not occur if the company instead issues stock certificates directly to the participant, or registers the shares in the participant's name on the company's record books and holds the shares in book-entry form.) 

A company must file a separate return for each transaction that occurred in 2010. Therefore, if an employee exercised two ISOs in 2010, two separate Forms 3921 must be filed for that individual with the IRS. If a company has to file 250 or more of one of the Forms, the company must file such Form electronically. This means that if a company has to file 260 Forms 3921 and 110 Forms 3922, the company must file the Forms 3921 electronically, but may choose to file the Forms 3922 electronically or on paper. 

The applicable filing deadline for both Forms is February 28, 2011 if the returns are paper filings. However, if a company chooses to (or is required to) file its returns electronically, the company has until March 31, 2011. If a company anticipates that it will have difficulty meeting the applicable deadlines for filing Forms 3921 or 3922 with the IRS, the company may request an automatic 30-day extension by filing Form 8809 with the IRS by the regular filing deadline.

A copy of the Forms 3921 or 3922 filed with the IRS also must be provided to the employee. Forms 3921 and 3922 come with Copies A and B. Copy A of the Form must be filed with the IRS as the information return, and in order to comply with the information statement requirement, many companies may choose to provide Copy B of the Form 3921 or 3922 to the employee as the information statement (or a substitute information statement that meets IRS rules). In addition, a company may choose to include additional information explaining the Form to employees. Although the date for filing the information returns with the IRS is later, the information statement must be provided to participants by January 31, 2011.

Companies could be subject to penalties for returns (or information statements to participants) that are incorrect, incomplete or not timely filed. Employers that issue ISOs and/or that have ESPPs should acquaint themselves with Forms 3921 and 3922 and prepare for the filing requirements. Employers also should coordinate with their stock plan administrators regarding the information return and information statement requirements.