It’s restricted stock and unit week here at the NASPP. For today’s blog, I have five trends in the usage of restricted stock and units, from the 2016 Domestic Stock Plan Design Survey, co-sponsored by the NASPP and Deloitte Consulting.
Trend #1: Use of time-based stock grants and awards is still on the rise.
The percentage of companies issuing stock grants and awards increased by 10 percent since our last survey (up from 81 percent in our 2013 survey to 89 percent in 2016). In addition, among those companies that use restricted stock and unit awards, close to 40 percent of respondents report that their usage of these vehicles has increased at some level of their organization over the past three years, while only 18 percent report decreased usage over the same time period. Overall, that nets out to greater usage of restricted stock and units by more companies than in past surveys.
Trend #2: Time-based stock grants and awards are the equity vehicle most frequently granted to lower-ranking employees.
Stock grants and awards are the equity vehicles most commonly granted to lower-ranking employees, with 77 percent of respondents granting awards to middle management (approximately three times the percentage of respondents that grant either stock options or performance awards at this employee rank). Fifty-two percent of respondents grant restricted stock/units to other exempt employees (compared to 13 percent for stock options and 11 percent for performance awards) and 19 percent grant these awards to nonexempt employees (compared to 7 percent for stock options and 3 percent for performance awards).
Trend #3: Time-based stock grants and awards are also common at the top of the house.
Stock grants and awards are even more common for senior-level employees with 79 percent of respondents granting awards to the CEO, CFO, and named executives, and 84 percent granting awards to other senior management. The five-point drop in usage of restricted stock/units at the CEO, CFO, and NEO level as compared to other senior management is likely due to the increased usage of performance awards in the C-suite.
Trend #4: Restricted stock units are the vehicle of choice among various types of time-based full-value awards.
The 2016 survey saw a continuation in the shift away from restricted stock awards toward restricted stock units. Respondents reporting that they currently grant restricted stock awards* dropped from 44 percent in 2013 to 31 percent in 2016, while respondents currently granting restricted stock units* increased from 77 percent in 2013 to 83 percent in 2016.
* Awards not in lieu of cash.
Trend #5: Awards are most commonly granted on an annual frequency.
The overwhelming majority of companies that make grants of stock and units do so on an annual basis (ranging from 95 percent of respondents for CEOs, CFOs, and named executives to 75 percent of respondents for nonexempt employees). In addition to annual grants, stock/units are most frequently awarded upon hire, promotion, and for retention purposes.
For today’s blog, I feature five trends in tax withholding practices for restricted stock and units, from the 2016 Domestic Stock Plan Design Survey (co-sponsored by the NASPP and Deloitte Consulting):
Share Withholding Dominates; Sell-to-Cover Is a Distant Second. The majority (79% of respondents for executive transactions, 77% for non-executive transactions) report that share withholding is used to fund the tax payments the majority (greater than 75%) of award transactions. Most of the remaining respondents (17% of respondents for executive transactions, 18% for non-executive transactions) report that sell-to-cover is used to pay the taxes due on the majority of award transactions.
Rounding Up Is the Way to Go. Where shares are withheld to cover taxes, 75% of respondents report that the shares withheld are rounded up to the nearest whole share. Most respondents (62% overall) include the excess with employees’ tax payments; only 13% refund the excess to employees.
FMV Is Usually the Close or Average. The overwhelming majority (87%) of respondents use the close or average stock price on the vesting date to determine taxable income. Only 12% look to the prior day’s value to determine taxable income, despite the fact that this approach provides an additional 24 hours to determine, collect, and deposit the tax withholding due as a result of the vesting event (see “Need More Time? Consider Using Prior Day Close“).
Form 1099-B Is Rare for Share Withholding. Although share withholding can be considered the equivalent of a sale of stock to the company, only 21% of respondents issue a Form 1099-B to employees for the shares withheld.
Companies Are Split on Collecting FICA from Retirement Eligible Employees. Where awards provide for accelerated or continued vesting upon retirement, practices with respect to the collection of FICA taxes are largely split between share withholding and collecting the tax from employees’ other compensation (41% of respondents in each case).
For today’s blog, we have a special guest entry from Emily Cervino of Fidelity Stock Plan Services on a subject near and dear to my heart: defining FMV as the prior day close for purposes of determining taxable gain on award vesting events and the price of shares purchased under your ESPP.
What a Difference a Day Makes! Considering Prior Day Close
By Emily Cervino of Fidelity Stock Plan Services
At the recent NASPP Annual Conference in Houston, I had the opportunity to present “This Ain’t My First Rodeo: Lessons Learned about Equity Compensation.” I took advantage of the new format introduced at the conference: laser-focused, 20-minute sessions during breaks—as an alternative to the traditional, more in-depth breakout panels. I love this format. Short sessions appeal to conference-goers who are looking to cram in as much learning as possible, as well as those whose shorter attention spans make an hour-long, detailed session a hard sell.
I broke this micro-session into even smaller bits and used it as an opportunity to talk about four concepts that can make equity professionals’ lives easier. One concept, which I’d like to review here, is reconsidering the fair market value (FMV) definitions used for equity awards. FMV is an important concept used to set the price on stock options, calculate the taxable income on cash exercise and restricted releases, and determine the purchase price for ESPP.
Back when I started out, things were simpler. FMV was used for grant pricing, and, when it came to calculating taxable income on stock option exercises, where the vast majority of transactions were same-day sales, the actual sale price was utilized. Today, the equity landscape has changed dramatically. The majority of grants now come in the form of restricted stock, which doesn’t include an exercise. Rather, as a time-based vehicle, restricted stock releases (creating a taxable event) are based on a preset schedule.
According to the NASPP Stock Plan Design Survey, 87% of companies use close or average as the FMV to calculate taxable income on restricted stock.(1) Among clients of Fidelity Stock Plan Services, we see very similar results, with 85% of companies using close or average.(2) Which means, for most companies, taxable income can’t be calculated until the market closes on vest date. The exceptions (12% of NASPP responses, 13% of Fidelity clients) are using prior day close (or average), a better option that provides them with a full additional day for calculations! That means on the day before vest date, the FMV is determined as of market close, and the restricted release process can begin, allowing shares to be delivered to participants sooner.
And the benefits don’t end there. This is also a great strategy for ESPP. NASPP doesn’t specifically ask about FMV for ESPP, but in the Fidelity client base, while close and average still rule, we see 5% using prior day close, and a full 20% using current day open price as FMV, providing the benefit of extra hours to one-in-four companies processing their ESPP.
So why do most companies stick with close or average? This may be one of those things that falls into the “we’ve always done it this way” category. While many companies have changed the award types they grant, their FMV definition hasn’t yet evolved.
Plan Sponsors should check out their plan documents. It may be that FMV is only defined for grant pricing, where close or average is a great strategy. The plan document may provide flexibility with respect to the FMV used for tax purposes and/or ESPP. Even if the plan prescribes close or average FMV for tax and/or ESPP, a switch to prior day close (or current day open price) could be effected at the board or committee level and would not require shareholder approval.
Check it out! The gift of time is priceless.
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[1] 2016 NASPP Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
2 Fidelity client base, as of 9/30/2016
Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.
Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, a member of NASPP, GEO, and NCEO, and a 2015 recipient of the NASPP’s Individual Achievement Award. Emily is a Certified Equity Professional (CEP) and she holds Series 7 and 63 securities registrations.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments.
Links to third-party websites may be shared on this page. Those sites are unaffiliated with Fidelity. Fidelity has not been involved in the preparation of the content supplied at the unaffiliated site and does not guarantee or assume any responsibility for its content.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. 780300.1.0
The full results from the 2016 Domestic Stock Plan Design Survey, which the NASPP co-sponsors with Deloitte Consulting LLP, are now available. Companies that participated in the survey (and service providers who weren’t eligible to participate) have access to the full results. And all NASPP members can hear highlights from the survey results by listening to the archive of the webcast “Top Trends in Equity Plan Design,” which we presented in early November.
For today’s blog entry, I highlight ten data points from the survey results that I think are worth noting:
Full Value Awards Still Rising. This survey saw yet another increase in the usage of full value awards at all employee levels. Overall, companies granting time-based restricted stock or units increased to 89% of respondents in 2016 (up from 81% in 2013). Most full value awards are now in the form of units; use of restricted stock has been declining over the past several survey cycles.
Performance Awards Are for Execs. We are continuing to see a lot of growth in the usage of performance awards for high-ranking employees. Companies granting performance awards to CEOs and NEOs increased to 80% in 2016 (up from 70% in 2013) and companies granting to other senior management increased to 69% (from 58% in 2013). But for middle management and below, use of performance award largely stagnated.
Stock Options Are Still in Decline. Usage of stock options dropped slightly at all employee levels and overall to 51% of respondents (down from 54% in 2013).
TSR Is Hot. As a performance metric, TSR has been on an upwards trajectory for the last several survey cycles. In 2016, 52% of respondents report using this metric (up from 43% in 2013). This is first time in the history of the NASPP’s survey that a single performance metric has been used by more than half of the respondents.
The Typical TSR Award. Most companies that grant TSR awards, use relative performance (92% of respondents that grant TSR awards), pay out the awards even when TSR is negative if the company outperformed its peers (81%), and cap the payout (69%).
Clawbacks on the Rise. Not surprisingly, implementation of clawback provisions is also increasing, with 68% of respondents indicating that their grants are subject to one (up from 60% in 2013). Enforcement of clawbacks remains spotty, however: 5% of respondents haven’t enforced their clawback for any violations, 8% have enforced it for only some violations, and only 3% of respondents have enforced their clawback for all violations (84% of respondents haven’t had a violation occur).
Dividend Trends. Payment of dividend equivalents in RSUs is increasing: 78% of respondents in 2016, up from 71% in 2013, 64% in 2010, and 61% in 2007. Payment of dividends on restricted stock increased slightly (75% of respondents, up from 73% in 2013) but the overall trend over the past four surveys (going back to 2007) appears to be a slight decline. For both restricted stock and RSUs, companies are moving away from paying dividends/equivalents on a current basis and are instead paying them out with the underlying award.
Payouts to Retirees Are Common. Around two-thirds of companies provide some type of automated accelerated or continued vesting upon retirement (60% of respondents for stock grants/awards; 68% for performance awards, and 60% for stock options). This is up slightly in all cases from 2013.
Post-Vesting Holding Periods are Still Catching On. This was the first year that we asked about post-vesting holding periods: usage is relatively low, with only 18% of companies implementing them for stock grants/awards and only 13% for performance awards.
ISOs, Your Days May be Numbered. Of the respondents that grant stock options, only 18% grant ISOs. This works out to about 10% of the total survey respondents, down from 62% back in 2000. In fact, to further demonstrate the amount by which option usage has declined, let me point out that the percentage of respondents granting stock options in 2016 (51%) is less than the percentage of respondents granting ISOs in 2000 (and 100% of respondents granted options in 2000—an achievement no other award has accomplished).
Next year, we will conduct the Domestic Stock Plan Administration Survey, which covers administration and communication of stock plans, ESPPs, insider trading compliance, stock ownership guidelines, and outside director plans. Look for the survey announcement in March and make sure you participate to have access to the full results!
In what is possibly the least controversial decision ever made by the IRS, the agency has adopted its proposed amendment to the procedures for filing Section 83(b) elections, eliminating the requirement that taxpayers file a copy of the election with their tax return for the year that they make the election.
It’s Nice that We Can All Agree on Something
The amendment, which was proposed last year (see “IRS Proposes Amendment to 83(b) Election,” received no comments at all. Zip. Zero. No one requested a public hearing and no hearings were held. Cue the sound of crickets (ok, technically that’s the sound of frogs—I don’t have a video of cricket sounds). Hence the amendment was adopted with no changes from the original proposal.
Background
In the context of stock compensation, Section 83(b) elections are most frequently filed when employees exercise stock options prior to vesting. They are also sometimes filed upon grant of restricted stock. The election accelerates the taxable event for the award to the date of exercise (in the case of stock options) or grant (in the case of restricted stock). Employees wishing to file a Section 83(b) election must submit the election to their IRS service center within 30 days of the event triggering the election. Employees must also provide a copy of the election to their employer. Prior to this proposed amendment, a copy of the election also had to be included with employees’ tax returns for the year.
Now that the IRS is encouraging taxpayers to file tax returns electronically, the requirement to include the election with tax returns has proved to be problematic, since few efiling systems can attach a scanned document to the return. There was also a concern that taxpayers might be able to revoke an election after the 30-day election period by simply failing to include it with their tax return.
Effective Date
The amendment is effective for transactions occurring on or after January 1, 2016 but the IRS permitted taxpayers to rely on it for Section 83(b) elections filed in 2015. For more information, see the NASPP Alert “IRS Finalizes Amendment to Section 83(b) Election.”
More Frogs and Tax Developments
I took that frog sound video when I was visiting the Hilton Americas – Houston where the 24th Annual NASPP Conference will be held. It’s at a pond in the park across the street from the hotel. You know what else you can do in Houston besides hear the awesome sound of frogs at night? You can get an update on this and other recent tax developments directly from IRS and Treasury staffers during the session “The IRS and Treasury Speak.” Register by September 9 for the early-bird discount.
With the FASB and the SEC issuing significant announcements impacting stock and executive compensation, it only seems right that we should also be dealing with changes to the tax regs impacting stock compensation. Luckily the IRS has obliged with a proposed amendment to the procedures for filing Section 83(b) elections.
Background
I’m going to assume that you all know what a Section 83(b) election is and when it would be filed. If not, read the discussion of “Early Exercise” in the NQSO Portal and the discussion of “Section 83(b) Elections for Restricted Stock Awards” in the article “Taxation of Restricted Stock Awards,” available in the Restricted Stock Portal.
Previously, award and option holders wishing to file a Section 83(b) election had to mail the election to their IRS service center within thirty days of the triggering transfer (a grant of restricted stock or exercise of an unvested option) and also include a copy of their election with their tax return for that year. With the IRS now encouraging taxpayers to file their returns electronically, the requirement to include a copy with your tax return has turned out to be problematic. Many (dare I say all?) of the systems used to electronically file returns with the IRS simply don’t have the capability of including a copy of a Section 83(b) election, forcing taxpayers to file on paper—a situation in which everyone, both the IRS and the taxpayer, loses.
Recent Developments
Last year, in PLR 201438006, the IRS ruled that a Section 83(b) election is valid even if the taxpayer fails to include a copy of the election with his/her tax return for the year (see my February 3, 2015 blog entry, “Grab Bag“). This ruling was to avoid giving taxpayers an opportunity to rescind their election by simply failing to include the copy with their tax return but it also steered us on a course for the recently proposed amendment (if the election is valid without including a copy with your return, why is the copy necessary).
Proposed Amendments
The proposed amendment would simply eliminate this requirement altogether. There’s really no need for it; as the IRS notes in the preamble to the proposed regs, they already have the original and they scan that for their records upon receipt of it. The requirement to file the copy with your tax return is an anachronism, harkening back to a day before electronic forms and scanners were commonplace.
The IRS does note that taxpayers should keep a copy of the election in their records until the statute of limitations expires for the return on which the sale of the shares subject to the election is reported.
The proposed regulations would apply to all stock transferred (grants of restricted stock and exercises of unvested stock options) on or after January 1, 2016 but taxpayers can rely on them for stock transferred in 2015.
Delaware recently amended its general corporation law to allow boards to delegate authority to approve restricted stock grants to officers (or other people) who aren’t directors. Just to clarify: it isn’t that the restricted stock is being granted to people who aren’t directors, it’s that non-directors can now approve restricted stock grants.
Background
For well over a decade (ten points if you remember when this law changed), Delaware has permitted boards to delegate authority for approving stock option grants and other rights (generally interpreted to include RSUs) to officers, even if those officers are not board members. Now the law has been amended to also allow this for restricted stock.
Hold On—Don’t Go Crazy Now
The resolution delegating approval authority must include the following restrictions:
The maximum number of shares that can be issued
The time period over which the shares can be issued
The minimum consideration that must be received for the shares (if the shares are subject to par value, this minimum cannot be less than that amount)
Just as for stock options and other rights, the delegation of authority is solely for determining who receives the awards and the number of shares issued to each person. Vesting requirements and other terms and provisions still must be determined by the board.
Plan Must Allow Delegation
Also, before your board delegates authority to approve restricted stock grants to anyone other than a board member (or committee thereof), the plan must allow this. Maybe your plan anticipated Delaware eventually changing their laws and already allows this, but there’s probably a pretty good chance it doesn’t. Luckily, plans can always be amended, oftentimes without shareholder approval. Amending the plan to allow this delegation of authority should be something that can be accomplished by board action alone. Thus the board could amend the plan to allow this delegation of authority and then delegate authority under the amended plan at the same meeting; but to safe, make sure they do it in that order.
Free lunches (not too mention breakfasts, dinners, and snacks), open offices, games and nap rooms, shuttle services for commuting employees—we all know Silicon Valley operates a little differently than the rest of corporate America. But just how different is the Valley when it comes to stock compensation?
Last week, I attended a presentation hosted by the Silicon Valley NASPP chapter on how Silicon Valley differs from the rest of the United States when it comes to stock compensation. Tara Tays of Deloitte Consulting ran special northern California cuts of the results of the NASPP’s 2013 and 2014 Domestic Stock Plan Design and Administration Surveys and compared them to the national results. She was joined by Sue Berry of Infoblox and Patti Hoffman-Friedes of Seagate Technology, who provided color commentary.
As it turns out, not as different as you might think. In many areas, the northern CA data aligned fairly closely with the national data. These areas included the use of full value and performance awards, overhang levels, timing of grants, termination and forfeiture provisions, and performance metrics. But here are five areas where Silicon Valley does its own thing:
Burn Rates
This probably isn’t a big surprise to anyone, but burn rates are higher in Silicon Valley. Nationally, 77% of respondents report a burn rate of less than 2.5%. In northern California, only 56% of respondents report burn rates below this level. Interestingly, however, the higher burn rates did not translate to higher overhang; in this area the northern California numbers align closely with the national data.
Clawbacks
In the national data, 60% of respondents report that equity awards are subject to a clawback provisions, representing an almost 90% increase in the use of these provisions since our 2010 survey. But this trend doesn’t appear to have taken hold yet in Silicon Valley; only 34% of companies in northern California report that their awards are subject to clawbacks.
RSUs
While usage of full value awards (vs. stock options) in northern California aligns with the national data, practices vary with respect to the type of award granted. Just over 90% of northern California respondents grant RSUs but, nationally, RSUs are granted by only 77% of respondents. Restricted stock is granted by only 26% of northern California respondents but 44% of national respondents.
Vesting Schedules
For full value awards, graded vesting is more common in northern California (88% of respondents) than it is nationally (65% of respondents). But vesting schedules for full value awards appear to be slightly longer in Silicon Valley. 57% of northern California respondents report a four-year schedule and 37% report a three-year schedule, whereas this trend is flipped at the national level. There, 60% of respondent report a three-year schedule and 30% report a four-year schedule.
For stock options, monthly vesting is far more common in Silicon Valley than nationally. 53% of northern California companies report that options vesting with a one-year cliff and monthly thereafter; only 11% of respondents report this in the national data (27% for high-tech companies).
ESPP Participation
When it comes to ESPP participation, Silicon Valley comes out on top. Close to 60% of northern California companies report that their participation rate is between 61% to 90% of employees; nationally only 20% of companies were able to achieve this. ESPPs are also more generous in northern California, with more companies reporting that their plans offer a look-back and 24-month offering than nationally. This may account for some of the increase in participation but I’m not sure it accounts for all of it (note to self: must do quick survey on this).
At the same time that the IRS released regulations designed to clarify which restrictions constitute a substantial risk of forfeiture under Section 83 (see my blog entry “IRS Issues Final Regs Under Section 83,” March 4), a recent tax court decision casts doubt on the definition in the context of employees that are eligible to retire.
Background
As my readers know, where an employee is eligible to retire and holds restricted stock that provides for accelerated or continued vesting upon retirement, the awards are considered to no longer be subject to a substantial risk of forfeiture, and, consequently, are subject to tax under Section 83. This also applies to RSUs, because for FICA purposes, RSUs are subject to tax when no longer subject to a substantial risk of forfeiture and the regs in this area look to Section 83 to determine what constitutes a substantial risk of forfeiture.
Although there’s usually some limited risk of forfeiture in the event that the retirement-eligible employee is terminated for cause, that risk isn’t considered to be substantial. As a practical matter, at many companies just about any termination after achieving retirement age is treated as a retirement.
Austin v. Commissioner
In Austin v. Commissioner however, the court held that an employee’s awards were still subject to a substantial risk of forfeiture even though the only circumstance in which the awards could be forfeited was termination due to cause. In this case, in addition to the typical definition of commission of a crime, “cause” included failure on the part of the employee to perform his job or to comply with company policies, standards, etc.
Implications
Up until now, most practitioners have assumed that providing for forfeiture solely in the event of termination due to cause is not sufficient to establish a substantial risk of forfeiture, regardless of how broad the definition of “cause” is. Austin seems to suggest, however, that, in some circumstances, defining “cause” more broadly (e.g., as more than just the commission of a crime) could implicate a substantial risk of forfeiture, thereby delaying taxation (for both income and FICA purposes in the case of restricted stock, for FICA purposes in the case of RSUs) until the award vests.
On the other hand, there are several aspects to this case that I think make the application of the court’s decision to other situations somewhat unclear. First, and most important, the termination provisions of the award in question were remarkably convoluted. So much so that resignation on the part of the employee would have constituted “cause” under the award agreement. There were not any special provisions relating to retirement; all voluntary terminations by the employee were treated the same under the agreement. In addition, the employee was subject to an employment agreement and the forfeiture provisions of the award were intended to ensure that the employee fulfilled the terms of this agreement.
Finally, the decision notes that, for a substantial risk of forfeiture to exist, it must be likely that the forfeiture provision would be enforced. I think that, for retirees, this often isn’t the case–the only time a forfeiture provision would be enforced would be in the event of some sort of crime or other egregious behavior. Termination for cause is likely to be met with resistance from the otherwise retirement-eligible employee; many companies feel that, with the exception of circumstances involving clearly egregious acts, it is preferable to simply pay out retirement benefits than to incur the cost of a lawsuit.
Never-the-less, it is worth noting that 26% of respondents to the NASPP’s recent quick survey on retirement provisions believe that awards held by retirees are subject to a substantial risk of forfeiture.
Last week, the IRS issued the final version of the new Section 1.83-3 regs that were proposed back in 2012.
Background: The Proposed Regs
Section 83 provides that property transferred in exchange for services is taxable when it is transferable or no longer subject to a substantial risk of forfeiture (whichever occurs first). As explained in the preamble to the proposed regs, the purpose of this revision was to clarify that, for a substantial risk of forfeiture to exist, there has to be 1) some reasonable possibility of forfeiture (e.g., a performance goal which is certain to be met would not give rise to a substantial risk of forfeiture) and 2) there has to be some likelihood that the forfeiture provision would be enforced.
Most of us always thought this was the case, so we were surprised to see the proposed regs. Some speculated that companies would now have to estimate the likelihood of forfeiture due to failure to meet the vesting requirements to determine if taxation is delayed under Section 83. During his session at the 2012 NASPP Conference, Stephen Tackney, of the Office of Chief Counsel, at the IRS explained that this wasn’t the IRS’s intention and that they were really only concerned about situations where the likelihood of forfeiture was so infinitesimally small as to be almost nonexistent. Apparently the IRS lost a couple of enforcement actions in court due to a misunderstanding about this concept, so they decided to make the rules a little clearer.
The proposed regs also clarified that lock-up restrictions and trading black-out periods don’t delay taxation under Section 83 and codified a prior Rev. Rul. clarifying when taxation is deferred as a result of the operation of Section 16(b) (for practical purposes, virtually never).
What’s New in the Final Regs
Well, not much, really. In response to the concerns that the regulations were perhaps raising the threshold for a substantial risk of forfeiture, the IRS explains in the preamble that the new regulations are not intended to depart from the historic position that the IRS has taken with respect to Section 83. The IRS also edited the language of the regs, I think with the intention of making this clearer.
The IRS added a sentence to the regs to further clarify that it must be likely that the forfeiture restrictions would be enforced for there to be a substantial risk of forfeiture. Here again, I don’t think this represents a change in position for the IRS.
Finally, the IRS added an example to clarify that, where a Section 16 insider engages in a non-exempt purchase in the six months before an otherwise taxable acquisition under a stock option or award, the non-exempt purchase doesn’t delay taxation of the option or award (even though it does delay when the insider can sell the shares acquired under the option/award). We had noticed there were some differences in opinion among practitioners as to whether this was the case and had asked for clarification. Although the situation probably doesn’t come up that often, when it does come up, we thought it important to know what the correct tax treatment is. And now we know (and I think it’s the answer most of us had been assuming all along).
Read more about the final regs, including our redline comparing the proposed and final regs, in the NASPP Alert “IRS Issues Final Regs Under Section 83.”
