The NASPP Blog

November 17, 2009

Final Regs on 6039 and 423

The IRS issued final regs on Sections 6039 and 423 yesterday, just in time for year-end.

NASPP Conference Impetus for Release of Final Regs
Helen Morrison from Treasury discussed both sets of regs in detail at this year’s NASPP Conference, during the session “The IRS and Treasury Speak: Hot Tax Topics and Updates” on Wednesday, November 11. She also mentioned that she pushed to have the regs released in time for our Conference, since she knew they are of high interest to our attendees. Had it not been for the Veterans’ Day holiday (yes, we scheduled the IRS and Treasury speakers to present on a government holiday–oops, sorry about that Helen and Stephen), the final regs might have premiered at the Conference (we could have had a “premier” party, with a red carpet and tax paparazzi). If you are interested in listening to Helen’s comments, we recorded the session and you can purchase the audio in MP3 format.

The NASPP has been following both sets of regs closely; we met with staff from the IRS and Treasury at last year’s Conference to offer input on them and I spent countless hours drafting our rather lengthy comment letters. I’m pleased to see that our efforts were not for naught; a number of our suggestions were incorporated into the final regs.

Section 6039: Yet Another Reprieve

Perhaps the best news of the day was that companies will not be required to file Section 6039 returns for transactions occurring in 2009. This means you have until early 2011–a whole extra year–to prepare for filing the returns. For electronic filers, which will be most of you (see my blog “Electronic Filing of Section 6039 Returns“), the first round of returns won’t be due until March 31, 2011.

Note, however, that you do still have to provide information statements to employees for transactions occurring in 2009.

ESPPs and Section 6039

The regs also clarify which transactions trigger the 6039 reporting requirements for ESPPs, a matter of ongoing confusion for many years. Under the regs, the triggering event is, for most practical purposes, the purchase date. This aligns the treatment of ISOs and ESPPs and should make 6039 compliance quite a bit easier in the long term.

Liberal Take on the $25K Limit

The final regs on Section 423 completely reverse the position the proposed regs took on the $25,000 limit, codifying the more liberal interpretation that allows employees to purchase $25,000 worth of stock for each calendar year under an offering, regardless of whether purchases are permitted during that year. This will surely come as a relief to companies in Silicon Valley, which have relied on this interpretation for decades.

Non-US Employees

On a less happy note, the final regs don’t provide all the flexibility we were hoping for in terms of excluding non-US employees from ESPPs. Some additional flexibility is provided, but not enough.

Grant Date Under Section 423

I think the biggest “gotcha” under the final regs are the requirements relating to grant date. For the beginning of the offering to be considered the grant date, the maximum number of shares that employees can purchase must be established at the start of the offering–the $25,000 limit is not sufficient for this purpose, the plan must include another limit. The regs are effective for offerings beginning after January 1, 2010, so companies with plans that don’t have these limits may have only a short time to amend their plans.

Where there is no additional limit on purchase, the purchase date will be considered the grant date. This impacts more than just the statutory holding period for preferential tax treatment: it also impacts the minimum required purchase price and the $25,000 limitation.

More Information

See the following NASPP alerts for more information:

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara