Statement Required Upon Exercise of Qualified Stock Options
[Jan. 2002]

The IRS requires that a corporation provide certain written information to any person who exercised an incentive stock option ("ISO") during the year, or who received stock during the year pursuant to the exercise of a discounted option under a qualified Employee Stock Purchase Plan as provided by Section 423(c) of the Internal Revenue Code.

Who is affected?

Under Section 6039(a) of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation that issues stock pursuant to the exercise of an ISO must furnish a written statement on or before January 31 of the following calendar year.

In addition, a corporation that during a calendar year records (or has recorded by its transfer agent) a transfer of stock acquired under an employee stock purchase plan, where the option price is between 85 percent and 100 percent of the value of the stock (a plan established under Section 423(c) of the Code), must also furnish a written statement. Again, the statement must be furnished on or before January 31 of the following year.

Who receives the notice?

In each case the corporation must send the notice to the employee who exercised the ISO or who acquired "discounted" shares under an Employee Stock Purchase Plan under Code Section 423.

What information needs to be provided in the case of an ISO?

(1) The name, address and employer identification number of the corporation transferring the stock;

(2) The name, address, and identifying number of the person to whom the share or shares of stock were transferred;

(3) The name and address of the corporation the stock of which is the subject of the option (if other than the corporation transferring the stock);

(4) The date the option was granted;

(5) The date the shares were transferred to the person exercising the option;

(6) The fair market value of the stock at the time the option was exercised;

(7) The number of shares of stock transferred pursuant to the option; and

(8) The type of option under which the transferred shares were acquired.

What information needs to be provided in the case of an ESPP?

(1) The name, address and employer identification number of the corporation whose stock is being transferred;

(2) The name, address, and identifying number of the person to whom the share or shares of stock were transferred;

(3) The date the stock was transferred;

(4) The number of shares to which title is being transferred;

(5) The number of shares of stock transferred pursuant to the option; and

(6) The type of option under which the transferred shares were acquired.

What needs to go to the IRS?

No return is filed with the IRS unless a disqualifying disposition occurs.

What about disqualifying dispositions?

The statement provided under Section 6039(a) is independent of any IRS requirement that the income of an employee from a disqualifying disposition be reported as "other compensation" on Form W-2. If a disqualifying disposition occurs, the corporation must report the income in order for the corporation to take a federal income tax deduction and to satisfy the corporation's reporting obligations.

What are the penalties for failing to comply?

The IRS imposes a penalty of $50 for each statement not timely furnished or containing incomplete or incorrect information. As a practical matter this is rarely an issue. However, the corporation may request an extension of 30 days in which to furnish the statements for good cause shown.

What should employers do?

Sample notices are provided in the links below. Any employees, who during the prior year, exercised incentive stock options or acquired discounted shares pursuant to an Employee Stock Purchase Plan should receive an information statement.

click here for ESPP Notice

click here for ISO Notice

This Employee Benefits Alert is a publication of the Employee Benefits Department of Davis Wright Tremaine LLP. Our purpose in publishing this Alert is to inform our clients and friends of recent developments in employee benefits. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2002, Davis Wright Tremaine LLP.

return to Advisory Bulletins main page