• IRS Proposes Additional Information Reporting Regulations for ISO and ESPP Share Transfers
  • August 10, 2008 | Author: Peter J. Withoff
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • On July 16, 2008, the IRS proposed additional regulations relating to information reporting with respect to stock transfers pursuant to incentive stock options (ISOs) and employee stock purchase plans (ESPPs). For some time, there has been a requirement to provide information to the employee (i) when an ISO is exercised and (ii) when shares that were originally acquired pursuant to an ESPP are subsequently transferred. There is no IRS form for this information. Most taxpayers have been complying with the existing requirements by including this data in their routine correspondence to participants in these types of plans.

    The Internal Revenue Code was amended in 2006 to require that this information also be sent to the IRS. While the statute is effective now, there are no regulations specifying exactly what to deliver and how to deliver it. The compliance requirement for IRS deliveries only has therefore been waived for both 2007 and 2008. The proposed regulations fill this gap and expand the information to be transmitted.

    Comments on the proposed regulations are due by October 15, 2008, and any hearings would likely be held shortly thereafter. Because the regulations do not appear to be controversial, they are likely to be finalized in roughly their present form. The information collecting and reporting is not particularly onerous, so taxpayers should not expect further extensions of the effective date.

    The following are important comments about the proposed regulations:

    1. The IRS will be creating forms to specify what information needs to be reported. The forms are scheduled to be released this fall.

    2. Unlike the present system in which the information is only given to the employee, under the new system the information will also be given to the IRS.

    3. Returns for a year will be due by January 31 of the following year. The system will work much like the current system for 1099 and W-2 forms in which the form is delivered to the employee and a copy is simultaneously sent to the IRS.

    4. The proposed regulations contemplate that the new IRS forms and instructions will provide for electronic delivery of the required information, presumably to both the employee and the IRS.

    5. The new system will apply to transfers starting in 2009. The first information returns would not be due until January 31, 2010.

    6. For ISOs, the only significant difference in the information reporting is that under the current regulations, the aggregate exercise price and exercise date fair market value must be disclosed. Under the proposed regulations, this information must be disclosed on a per share basis.

    7. Much more detailed information will be required with respect to transfers of ESPP shares. In particular, employers will need to disclose per share data as well as the underlying data relating to the calculation of the purchase price discount under the plan (e.g., the 15 percent discount from the lesser of beginning or ending fair market value for the purchase period). Most of this is aimed at giving employees the data they need to calculate their tax basis in the shares and the ordinary income portion of any gain they recognize on the transfer.

    Even though the first information returns under the new system would not be filed until January 2010, taxpayers may want to start considering what systems they need to have in place so that they have the data readily available to comply with the proposed requirements.