(February 18, 2010) - When the Tax Relief and Health Care Act of 2006 (The Act) was signed into law on December 20, 2006, it contained a provision amending Internal Revenue Code Section 6039(a), requiring every corporation to provide a written statement to an employee where a transfer of stock pursuant to an employee’s exercise of an Incentive Stock Option Plan (ISO), or a transfer of a share of stock pursuant to the exercise of an Employee Stock Purchase Plan (ESPP) where the exercise price is less than 100% of the value of stock or is not fixed or determinable on the date of the grant. The law became effective for calendar years starting as of January 1, 2007 and requires corporations to now file information reports with the IRS and provide information to affected employees.

At the time The Act became law, its impact was relatively nil. This is because the law and proposed regulations did not specify what information should be reported. Therefore, the IRS did not require any specific reports to be filed. That just recently changed.

As of November 17, 2009 the proposed regulations were finalized and now clearly state what information and reports need be filed with both the IRS and employees. As final regulations, they are now binding upon taxpayers so we encourage corporations to begin planning for compliance now.

IRS Reporting: Per the final regulations, the IRS has allowed for a transition period by not requiring corporations to comply with the return reporting requirements until January 31, 2011 for transfers occurring in 2010. It has therefore waived reporting for calendar years 2007, 2008, and 2009. The IRS requires that one of two forms be filed depending on whether the stock is transferred via an ISO or an ESPP.

Corporations will be required to file an information report for stock transfers via an ISO on Form 3921, Exercise of a Qualified Incentive Stock Option Under Section 422(b) or via an ESPP on Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c). A quick glance at the draft forms (as the finalized versions are not yet available) will show most observers that they are similar to the 1099 series of information reporting forms. The following information will be required for reporting purposes:

1. Name, address, and Employer Identification Number (EIN) of the corporation, the corporation to which the stock applies if different from transferring corporation, and the employee
2. Option grant date, exercise date and exercise price
3. Fair market value at the time of the option exercised
4. The number of shares transferred
5. Type of option under which shares were acquired
6. Total cost of all shares

As to Form 3922 for an ESPP, the form requires all of the information listed above plus includes some additional requirements.

Employee Reporting: Unlike the IRS reporting noted above, employee reporting for the years 2007, 2008 and 2009 was not waived. Therefore, written reports should have been furnished to affected employees by January 31 of the year following each calendar year in which the transfer occurred. Due to the lack of a specified form, corporations are free to have reported the required information to employees in any suitable form. As of January 31, 2011, corporations are also to begin furnishing a copy of the Form 3921 or 3922, that is filed with the IRS, to the employee. Such reporting is required for transfers occurring in 2010 in order to fulfill the corporations reporting requirements.

As the regulations have now been finalized, corporations need to be aware of the changes to the rules and due dates in order to be in compliance. If you have any questions regarding these reporting issues, please contact your local HEIN tax professional or Kris Ponnequin in the Houston office at kponnequin@heincpa.com or 713-850-9814.

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