GT Alert

Reporting Requirements for ISOs and ESPPs

January 2006

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This Alert is intended to explain the annual reporting requirements for incentive stock options (ISOs) and employee stock purchase plans (ESPPs). These reporting requirements are in addition to the annual Form W-2 companies must send their employees.

What is this reporting requirement?

Section 6039 of the Internal Revenue Code of 1986, as amended, (referred to in this Alert as Section 6039) requires an annual report to be sent to employees who exercise their ISOs or who sell shares purchased under an ESPP after meeting the required holding periods.

What do we have to report for ISOs?

For each ISO exercised in 2005, the company must send a written report that explains certain details of the ISO exercise. Specifically, the report must include the following information: the name, address and tax identification number of the company granting the option and, if different, the name, address and tax identification number of the company whose stock was issued upon exercise of the ISO; the name, address and social security number of the optionholder who exercised the ISO; the grant date and the exercise date of the ISO; the total fair market value of the stock transferred upon the exercise of the ISO; the number of shares transferred upon the exercise of the ISO and the total exercise price of the transferred shares and that the stock was transferred to the optionholder pursuant to an ISO.

What do we have to report for ESPPs?

For the first transfer of legal title of shares by an ESPP participant, where the shares have been held by the ESPP participant for the statutory holding period, the company must send the ESPP participant a written report that explains certain details of the ESPP purchase. Specifically, the report must include the following information: the name, address and tax identification number of the company whose stock was issued upon the ESPP purchase; the name, address and social security number of the employee who purchased stock under the ESPP; the purchase date; the number of shares transferred upon the ESPP purchase and that the stock was transferred to the employee pursuant to an ESPP purchase. If the ESPP participant sells the shares prior to the end of the holding period, there are no reporting requirements under Section 6039, though there may be reporting requirements on the Form W-2.

What exactly is the ESPP statutory holding period?

The ESPP statutory holding period is the longer of (i) two years from the first date of the offering period under which the ESPP shares were purchased and (ii) one year from the purchase date of the ESPP shares.

When is the report due?

For qualifying activity in 2005, the report is due by January 31, 2006.

To whom do we have to send the report?

The reports must be sent to the employees who exercised their ISOs or purchased shares under the ESPP. The reports do not need to be sent to the Internal Revenue Service.

Are there any penalties if we do not send the reports?

The tax laws provide that failure to send these reports, absent reasonable cause, can result in a $50 penalty for each report that is not timely sent or is incomplete with a maximum annual penalty of $100,000.

Do we still have to report ISO and ESPP information on the employee’s Form W-2?

The obligations described here are in addition to any reporting requirements for ISOs and ESPPs on Form W-2.

Do we have to send out an additional report if we provide the employees this information after each ISO exercise and ESPP purchase?

While we are not aware of a definitive answer from the Internal Revenue Service on this point, it would appear that so long as a written report is provided to the appropriate employee by January 31st, the company has met its obligations under Section 6039. Therefore, if the company issues a report to the employee with the required information after each ISO exercise and each sale of ESPP shares, there should not be any additional report needed.

This Alert was written by the firm’s Executive Compensation and Employee Benefits Group. Please contact any of the below group members or your Greenberg Traurig liaison if you have any questions regarding this Alert.

© 2006 Greenberg Traurig

Additional Information:

For more information, please review our Executive Compensation and Employee Benefits Group description, or feel free to contact one of our attorneys.

• Executive Compensation and Employee Benefits Practice Area
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