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Section 6039 of the Internal Revenue Code requires a corporation to furnish a written statement to any employee or former employee who either (i) exercised an incentive stock option during 2009 or (ii) during 2009 first transferred legal title to shares acquired under the corporation’s Section 423 employee stock purchase plan.

This requirement applies to both privately held and publicly traded corporations.

The corporation must furnish the statement by mailing it to the last known address of the employee or former employee by January 31, 2010.

ISO Exercises

Corporations must include the following information in the Section 6039 statement provided to an employee or former employee who during 2009 exercised an incentive stock option within the meaning of Section 422(b) of the Internal Revenue Code:

1. The name, address and employer identification number of the corporation transferring the shares

2. The name, address and employer identification number of the corporation whose stock is subject to the option (if other than the corporation transferring the shares)

3. The name, address and identifying number of the person to whom the shares were transferred pursuant to the exercise of the option

4. The date the option was granted

5. The exercise price per share

6. The date the option was exercised

7. The fair market value of a share on the date the option was exercised, and

8. The number of shares transferred pursuant to the exercise of the option

ESPP Share Transfers

Corporations must include the following information in the Section 6039 statement provided to an employee or former employee for whom it records in 2009 the first transfer of legal title to shares of stock acquired by the individual pursuant to an option granted under an employee stock purchase plan to which Section 423(c) of the Internal Revenue Code applies and where the exercise price was less than 100 percent of the fair market value of the shares on the date of grant or was not fixed and determinable on the date of grant (e.g., because the exercise price is 85 percent of the lesser of the grant date or exercise date fair market value per share):

1. The name, address and employer identification number of the corporation whose stock was transferred

2. The name, address and identifying number of the transferor (i.e., the employee who acquired the shares under the employee stock purchase plan)

3. The date the option was granted to the transferor

4. The fair market value of a share of stock on the date the option was granted

5. The exercise price per share

6. The date the option was exercised

7. The fair market value of a share of stock on the date the option was exercised

8. The date the legal title of the shares was transferred by the transferor. and

9. The number of shares to which title was transferred by the transferor

The final Section 6039 regulations (discussed below) clarify that the “first transfer of legal title” that triggers the ESPP share transfer information statement requirement includes an immediate deposit of the shares acquired under the plan into a brokerage account established on behalf of the employee. For many employers, this means that their ESPP participants’ first transfer of legal title will occur on the ESPP purchase date. For employers that do not utilize a “captive broker” arrangement but instead issue shares acquired under the ESPP in certificate or book-entry form, the first transfer of legal title will occur when the employee subsequently sells the shares or transfers them to a brokerage account.

Sample Information Statements

To view a sample ISO exercise information statement, please click here.

To view a sample initial ESPP share transfer information statement, please click here.

Final Regulations Issued Under Section 6039

In November 2009, the IRS issued final regulations under Section 6039 that establish the requirements for employee information statements and information returns to be filed with the IRS. These final regulations will be mandatory for incentive stock option exercises and initial transfers of ESPP shares that occur after December 31, 2009. For information statements due by January 31, 2010 for 2009 transactions, employers may continue to rely on the provisions of either the 2004 final or 2008 proposed regulations. The information statement items listed in this Employee Benefits Alert reflect the requirements of the 2008 proposed regulations.

The final regulations establish that employers do not have reporting obligations under Section 6039 for employees who are nonresident aliens and for whom the employer is not required to provide a Form W-2 for any calendar year during the period beginning with the first day of the calendar year in which the option was granted and ending with the last day of the calendar year in which the option was exercised (or legal title to ESPP shares was first transferred).

Effective for ISO exercises and initial ESPP share transfers occurring in 2010, the final regulations modify the information that must be furnished and will require employers to file an information return with the IRS, as well as providing information statements to employees. The information returns, Form 3921 for ISO exercises and Form 3922 for initial ESPP share transfers, are expected to be published in 2010. The employee information statements will have to be provided using these same forms or substitute forms satisfying IRS guidelines.

Timely Furnishing of Section 6039 Statements is Important

Section 6722 of the Internal Revenue Code imposes a penalty of $50 on each failure to furnish a correct Section 6039 statement (up to a maximum of $100,000 per calendar year). “Failure” is defined as either (1) failure to furnish a timely statement, or (2) failure to include all of the information required or inclusion of incorrect information. For intentional disregard of the reporting requirement, the penalty is $100 per failure, and the $100,000 maximum does not apply.

For more information, please contact any of the members of our Employee Benefits and Executive Compensation Group.