Sección 16 Opciones Sobre Acciones

Opciones sobre acciones y Sección 16 (b) de la SEC.

Opciones de acciones son una forma popular de atraer talento. Generalmente, pueden ser estatutarias (opciones de acciones de incentivos (ISO)) o no estatutarias (opciones de acciones no calificadas (NQSO)).El tratamiento fiscal de cada una difiere. Bajo la Sec. 83, las NQSO se gravan al empleado en la fecha en que se ejercitó. La cantidad incluida en el ingreso es la diferencia entre el valor justo de mercado de la acción (FMV) en la fecha de adjudicación y el monto que el empleado pagó por la acción.

Los ingresos obtenidos por el ejercicio de ISOs no se incluyen en la base imponible ordinaria cuando son ejercitados por el empleado. Más bien, asumiendo los requisitos de la Sec. 422 se cumple, el empleado es gravado sobre los ingresos obtenidos cuando él o ella vende la acción subyacente; Es la ganancia de capital, no el ingreso ordinario. Para fines de impuestos mínimos alternativos (AMT), Sec. 56 (b) (3) establece que las ISOs son tratadas como NQSO y gravadas cuando se ejercen.

Hay historias de terror en las que los contribuyentes ejercieron opciones en una acción de alto vuelo y no vendieron la acción antes de que cayera el precio, debido a la SEC (Securities and Exchange Commission) y / o restricciones a las transacciones de información privilegiada corporativa. El contribuyente entonces se enfrentó a una gran ley AMT sin dinero para pagarla, o tenía grandes ingresos ordinarios y una pérdida de capital.

¿Cómo se gravan las empresas de información privilegiada sobre el ejercicio de opciones sobre acciones sujetas a SEC y las restricciones de venta corporativa? Rev. Rul. 2005-48 y dos TAM proporcionan orientación.

Hechos: El empleado E recibió NQSOs de la Compañía M el 2 de enero de 2005. El 1 de mayo de 2005, M vendió sus acciones ordinarias en una oferta pública inicial. El acuerdo de aseguramiento estipuló que E no podría vender, de otra manera disponer o cubrir cualquier M acciones ordinarias, opciones, warrants o valores convertibles a partir del 1 de mayo de 2005-nov. 1, 2005 (período de bloqueo).

M también adoptó un programa de cumplimiento de operaciones con información privilegiada bajo el cual las personas con información privilegiada podrían negociar acciones M sólo entre el 5 de noviembre y el 30 de noviembre de ese año (ventana de operaciones). El incumplimiento de estas reglas resultaría en la terminación. El ejercicio de las NQSO no estaba prohibido.

El 15 de agosto de 2005, E ejerció la opción totalmente adquirida. También en esa fecha, E poseía información material no pública sobre M que lo sometería a responsabilidad bajo la Regla 10b-5 bajo la Ley de Valores y Cambios de 1934 (Ley 34) si E vendiera las acciones mientras estuviera en posesión de dicha información.

Ley: Sec. 83 (a) estipula que, cuando la propiedad se transfiere a un contribuyente en relación con la prestación de servicios, su VFM (determinada sin tener en cuenta cualquier restricción de caducidad), menos el monto pagado por ella, puede incluirse en los ingresos del contribuyente. El FMV de la propiedad se determina el primer día en que los derechos del cesionario en la propiedad son transferibles o no están sujetos a un riesgo sustancial de confiscación.

Segundo. 83 (e) (3) establece que la Sec. 83 (a) no se aplica a la transferencia de una opción sin una FMV fácilmente verificable. Sin embargo, se aplica a una opción en el momento en que se ejerce.

Segundo. 83 (c) (3) y Regs. Segundo. J) estipular que si la venta de un bien con una ganancia dentro de los seis meses siguientes a su compra pudiera someter a una persona a una demanda conforme a la Sección 16 (b) de la Ley del 34, los derechos de la persona en la propiedad son tratados como sujetos a Un riesgo sustancial de decomiso y como no transferible hasta después de la expiración del período de seis meses o el primer día en que una venta de dichos bienes con una ganancia no someterá a la persona a demandar bajo la Sección 16 (b). El fallo afirma:

Debido a que al promulgar el artículo 83 (c) (3), el Congreso decidió que la única disposición de la ley de valores que retrasaría la tributación bajo esa sección sería la sección 16 (b), la responsabilidad potencial por el abuso de información privilegiada bajo la Regla 10b-5, para Por ejemplo, no hace que los derechos sobre bienes sujetos a impuestos en virtud del artículo 83 sean sustancialmente no adquiridos.

Según el fallo, la Sección 16 (b) es accionada por una "compra y venta" o una "venta y compra" de un valor en un período de menos de seis meses por un oficial, director o mayor del 10% Propietario de la corporación. Por lo tanto, la combinación del evento de compra y venta desencadena la responsabilidad de la Sección 16 (b).

Rev. Rul. 2005-48 señaló que, antes del 1 de mayo de 1991, la adquisición de acciones como resultado del ejercicio de una opción se consideraba una "compra" para fines de la Sección 16 (b). Así, el período de seis meses bajo la Sección 16 (b) fue medido a partir de la fecha en que se ejerció una opción.

En 1991, se cambió la Sección 16 (b) para dar a las opciones (y otros derivados) el mismo estatus que las acciones; La SEC reconoció "que la tenencia de valores derivados es funcionalmente equivalente a la tenencia de los valores de renta variable subyacentes para los fines de la Sección 16 (b), ya que el valor de los valores derivados es una función o relacionado con el valor del fondo de renta variable subyacente". Así, después de 1991, el período de tenencia de seis meses según la Sección 16 (b) comienza cuando se otorgan las opciones, en lugar de cuando se ejercen.

Resolución: El fallo concluyó que el Artículo 16 (b) interactúa con la Sec. 83 como sigue: si, por ejemplo, las acciones se adquieren mediante el ejercicio de una NQSO en una transferencia imponible de acuerdo con la Sec. 83, dichas acciones no estarán sujetas a la obligación de la Sección 16 (b) a menos que sean adquiridas durante el período de seis meses que comienza con la fecha de otorgamiento. Incluso si un partícipe ejerce una opción y vende las acciones subyacentes en un plazo de seis meses a partir de la fecha de la concesión, una exención de responsabilidad bajo la Sección 16 (b) puede estar disponible bajo otras reglas de la SEC.

La responsabilidad de la Sección 16 (b) de E expiró el 2 de julio de 2005 (seis meses después de que se otorgaran las opciones). Por lo tanto, el pasivo expiró antes de que E ejerciera sus opciones y las acciones no estuvieran sujetas a un riesgo sustancial de decomiso bajo la Sec. 83 (c) (3) y Regs. Segundo. 1,83-3 (j).

El fallo también decidió otras dos cuestiones. En primer lugar, los acuerdos de bloqueo y los programas de cumplimiento de operaciones con información privilegiada no establecían que los derechos de E estuvieran sujetos a un riesgo sustancial de decomiso. Ninguna de las acciones estaba condicionada al "rendimiento futuro de servicios sustanciales". En segundo lugar, en cuanto a la valoración de las acciones, las restricciones de transferencia impuestas a las ventas de E de las acciones eran "restricciones de caducidad". Por lo tanto, tuvieron que ser ignorados al valorar las acciones obtenidas a través de los ejercicios.

El fallo señaló que las cuestiones en el caso eran las mismas que las consideradas en Tanner, 117 TC 237 (2001), aff'd, 65 FedAppx 508 (Quinta Cir. 2003), y que las conclusiones alcanzadas son consistentes con la decisión en Ese caso.

Las Sentencias de Carta (TAM) 200338010 y 200338011 son dos resoluciones casi idénticas que proporcionan orientación sobre ISOs. Los TAM siguieron una lógica muy similar a Rev. Rul. 2005-48 y concluyó que los ingresos se reconocen para los propósitos de AMT en la fecha de ejercicio (suponiendo que sea por lo menos seis meses después de la fecha de concesión).

Las personas jurídicas corporativas que reciben opciones sobre acciones pueden tener restricciones en cuanto a cuándo pueden vender las acciones subyacentes. Esta restricción puede crear una carga tributaria, si la acción declina significativamente en valor en el momento en que el iniciado se permite disponer de las acciones. Se deben considerar las conclusiones del fallo y las dos TAM. El Tesoro tiene la intención de enmendar la Sec. 83 reglamentos para exponer explícitamente las tenencias en Rev. Rul. 200548, pero aún no se han concluido las enmiendas.

DE MATTHEW R. COSCIA, CPA, MONTGOMERY COSCIA GREILICH LLP, PLANO, TX (NO AFILIADO CON CPAMERICA INTERNATIONAL)

COPYRIGHT 2006 American Institute of CPA No se puede reproducir ninguna parte de este artículo sin el permiso expreso por escrito del titular de los derechos de autor.

Copyright 2006, Grupo Gale. Todos los derechos reservados. Gale Group es una empresa de Thomson Corporation.

Ley SEC: Sección 16

¿Qué son las Formas 3, 4 y 5? ¿Cuándo se presentan ante la SEC?

Alerta: La SEC toma en serio sus responsabilidades de presentación y los plazos, como lo demuestra una acción de aplicación y las sanciones relacionadas emitidas por la SEC en septiembre de 2014. Para más detalles y lecciones, vea comentarios de los firmas de abogados Hogan Lovells y Gibson Dunn & Crutcher.

La Forma 3 es el informe inicial que debe presentar una persona que informa sobre la Sección 16 (por ejemplo, un ejecutivo senior). Debe presentarse (1) dentro de los 10 días posteriores a la fecha en que el director u oficial asume su cargo o (2) a más tardar en la fecha de entrada en vigencia de la declaración de registro para una compañía de IPO que registra por primera vez bajo la Sección 12 de la Exchange Act. El formulario muestra cuánta acción de la empresa, y en qué forma, el funcionario se mantuvo en la fecha en que asumió este rango o de la OPI. El Formulario 3 también debe presentarse dentro de los diez días después de que las tenencias de una persona excedan el 10% de cualquier clase de los valores de capital social registrados de la compañía.

El Formulario 4 se utiliza para la notificación requerida de los cambios en la propiedad de acciones. Las leyes que entraron en vigencia en 2002 requieren que presente el Formulario 4 antes de que finalice el segundo día hábil posterior al día en que tuvo lugar la transacción pertinente: prácticamente todos los cambios de propiedad deben comunicarse con el código de transacción correspondiente. Incluso si, como resultado del equilibrio entre compras y ventas, no hubo cambios netos en las tenencias durante el mes.

Alerta: Consulte el calendario de vacaciones observado por el gobierno federal si no está seguro de si un día de fiesta específico califica como "día hábil" para los fines del plazo de presentación de dos días. El sistema EDGAR no recibirá presentaciones en días festivos oficiales.

Generalmente, se debe presentar un Formulario 4 para cualquier subvención relacionada con la equidad, ejercicio de opciones, adquisición de acciones restringidas / RSU (en ciertas situaciones), ventas de acciones (incluyendo ventas según los planes de comercio de Regla 10b5-1), recepción de un legajo bajo Un testamento, una transferencia a un fideicomiso y una transacción en acciones de la empresa por una sociedad de la que sea miembro el miembro que reporta. Si se cumplen ciertas condiciones, es permisible reportar varias compras o ventas de mercado abierto en el mismo día en el agregado (por ejemplo, en una sola línea) en el Formulario 4. (Vea la Carta de No-Acción de la SEC del 25 de junio de 2008. A la Sociedad de Secretarios Corporativos y Profesionales de Gobierno Corporativo.) Existen exenciones específicas para ciertas transacciones bajo órdenes de relaciones domésticas en el divorcio y reglas especiales en caso de muerte.

El Formulario 5 solía ser presentado por todas las personas sujetas a la Sección 16 (a) para reportar cualquier transacción de valores que aún no había sido reportada en el Formulario 4 ya sea porque las reglas permiten el reporte diferido (por ejemplo, para regalos) Un informe requerido. Se presentó a más tardar el 45º día después del cierre del año fiscal de la compañía. Sin embargo, la SEC ha reducido el uso de la Forma 5: las transacciones con la compañía, incluyendo emisiones de opciones, cancelaciones, reintegros y reimpresiones, así como ejercicios, ahora requieren informes de dos días en el Formulario 4. El futuro del Formulario 5 no está claro.

Alerta: La SEC ya no acepta presentaciones en papel de los Formularios 3, 4 y 5 (excepto en casos excepcionales en los que se otorga exención por dificultades). La presentación electrónica de los informes de la Sección 16 ahora es obligatoria. Para archivar electrónicamente, usted debe obtener los códigos de acceso de EDGAR completando y enviando el Form ID de la SEC. Los informes archivados tarde activarán la divulgación del Artículo 405 en la declaración de su compañía y en el Formulario 10-K, además del riesgo de las acciones de cumplimiento de la SEC por violaciones flagrantes en curso.

Para obtener una lista de las transacciones que deben ser reportadas y de lo que forma la Sección 16, vea SEC Adopta las Nuevas Reglas de Reporte de la Sección 16 por Gibson Dunn & Crutcher. Para las interpretaciones recientes sobre la Sección 16 por el personal de la División de Finanzas Corporativas de la SEC, y las reglas y formularios relacionados, vea la sección Interpretaciones de Cumplimiento y Divulgación en el sitio web de la SEC.

Estos requisitos de presentación están separados de las reglas del pasivo de ganancias de corto plazo (es decir, la coincidencia de compras y ventas dentro de un período de seis meses).

Sección 16 de la Ley de Cambio y Reglas y Formularios Relacionados

Última actualización: 11 de agosto de 2010

Estas interpretaciones sustituyen a las interpretaciones de la Sección 16 en el Manual de Interpretaciones de Teléfonos Publicamente Disponibles de julio de 1997, el Suplemento de marzo de 1999 al Manual de Interpretaciones de Teléfonos Publicamente Disponibles, la Sección 16 de Reporte Electrónico de Preguntas Frecuentes y la Ley de Sarbanes - . Algunas de las interpretaciones incluidas aquí se publicaron originalmente en las fuentes mencionadas anteriormente, y se han revisado en algunos casos. La fecha entre corchetes que sigue a cada interpretación es la última fecha de publicación o revisión.

PREGUNTAS Y RESPUESTAS DE APLICABILIDAD GENERAL

Sección 101. Sección 16 & # 8211; Orientación general

Pregunta 101.01

Pregunta: Una empresa reincorporada desde Canadá a Delaware, perdiendo así su estatus de "emisor privado extranjero" (ver la Regla 3b-4 de la Ley de Cambios). Antes de la reincorporación, un funcionario de la compañía compró acciones de acciones comunes de la compañía, que vendió después de la reincorporación, pero dentro de los seis meses de su compra. ¿La compra del oficial estará sujeta a la Sección 16?

Respuesta: Sí. La compra del funcionario estaría sujeta a la Sección 16 y el funcionario tendría que presentar un Formulario 3 dentro de los 10 días de la reincorporación y un Formulario 4 que informara tanto de la compra y venta de las acciones ordinarias después de la venta de esas acciones. En general, el personal considera que las transacciones efectuadas por funcionarios y directores de una empresa extranjera antes de la pérdida del estatus de "emisor privado extranjero" no están sujetas a la Sección 16 (véase la Pregunta 110.03), esta posición no ha sido aplicable si El evento que culminó con la pérdida del estatus de "emisor privado extranjero" también implicó el registro inicial de valores de renta variable de la compañía bajo la Sección 12 de la Ley de Intercambio de Valores (ver Pregunta 110.04). En tal caso, sería aplicable la Regla 16a-2 (a), que sujeta a las transacciones de la Sección 16 efectuadas por un director o funcionario en los seis meses anteriores al registro inicial de la Sección 12. A juicio del personal, a efectos de la Sección 16, una reincorporación por parte de una empresa extranjera que hace que pierda su estatus de "emisor privado extranjero" es análoga a la inscripción inicial de una sociedad de valores de renta variable según la Sección 12 porque, en cada caso, En el estatus de "emisor privado extranjero" de la compañía estaba bajo el control de la compañía y los iniciados deberían haber sido conscientes del cambio con suficiente anticipación para tener en cuenta las responsabilidades potenciales de la Sección 16 al comprar y vender valores de la compañía. [Ago. 11, 2010]

Pregunta 101.02

Pregunta: La Regla 3b-4 (c) de la Ley de Cambios establece que un emisor extranjero determina si es un emisor privado extranjero a partir del último día hábil de su último trimestre fiscal más reciente (la "fecha de determinación"). De acuerdo con la Regla 3b-4 (e), si un emisor extranjero con valores registrados bajo la Sección 12 de la Ley de Cambio no califica como un emisor privado extranjero a la fecha de determinación, debe comenzar a usar los formularios prescritos para compañías nacionales y cumplir con la Sección 16 , A partir del primer día del año fiscal siguiente a la fecha de determinación. En esta situación, ¿cuándo debe presentarse el Formulario 3?

Respuesta: Un Formulario 3 debe ser presentado en o antes del primer día del año fiscal siguiente a la fecha de determinación. [Ago. 11, 2010]

Sección 102. Sección 16 (a)

Pregunta 102.01

Pregunta: Si un iniciado compra unidades consistentes en acciones ordinarias y debentures de la compañía del iniciado, ¿debe el archivo de información privilegiada un informe de la Sección 16 (a) que cubre la adquisición de la acción?

Respuesta: Sí. Una persona que compra unidades que consisten en acciones ordinarias y obligaciones de la compañía del iniciado debe presentar un informe de la Sección 16 (a) que cubre la adquisición de la acción. Las obligaciones no deben ser reportadas a menos que también se consideren como valores de renta variable, como ocurriría, por ejemplo, si fueran convertibles en acciones ordinarias. [23 de mayo de 2007]

Pregunta 102.02

Pregunta: La sección 16 (a) (3) (B) de la Ley de Intercambio, enmendada por la Ley Sarbanes-Oxley de 2002, establece en parte que los Formularios 4 y 5 "indicarán la propiedad por la persona que archivó en la fecha De presentación ". ¿Significa esto que una persona con información privilegiada debe declarar la propiedad de todas las clases de valores de renta variable del emisor cada vez que la persona con información privilegiada presenta un Formulario 4 ó 5?

Respuesta: Cuando una persona con información privilegiada presenta un Formulario 4 ó 5, la persona con información privilegiada sólo debe reportar la propiedad después de la transacción o al final del año fiscal, respectivamente, de las clases de valores de renta variable del emisor a las que la información privilegiada Una transacción. Debido a que la Sección 16 contenía el mismo lenguaje antes de la enmienda estatutaria, la enmienda no expandió la obligación de un iniciado de reportar la posesión posterior a la transacción. [23 de mayo de 2007]

Pregunta 102.03

Pregunta: ¿Puede un emisor satisfacer su obligación de publicación en el sitio Web si publica formularios directamente en PDF?

Respuesta: Suponiendo que un emisor cumpla con los requisitos de publicación en el sitio Web, es posible publicar formularios directamente en PDF si el sitio web explica claramente la necesidad de utilizar Adobe Acrobat para acceder a los formularios y proporciona instrucciones claras sobre cómo descargarlo fácilmente y Sin costo utilizando un enlace fácilmente accesible proporcionado en el sitio web del emisor. [23 de mayo de 2007]

Sección 103. El artículo 16 (b)

Pregunta 103.01

Pregunta: ¿El personal de la División expresará una opinión sobre si una transacción particular implica una "compra" o "venta" para los propósitos de la Sección 16 (b)?

Respuesta: No. Puesto que la ejecución de la Sección 16 (b) se deja a las partes privadas y los tribunales, el personal de la División ordinariamente no expresará una opinión sobre si una transacción particular implica una "compra" o "venta" para los propósitos de esta sección. [23 de mayo de 2007]

Sección 104. Sección 16 (c)

Artículo 105. El Artículo 16 (d)

Sección 106. Sección 16 (e)

Pregunta 106.01

Pregunta: La Sección 16 (e) exime las transacciones de arbitraje extranjeras y domésticas de las otras disposiciones de la Sección 16. La Regla 16e-1 establece que la exención de la Sección 16 (e) no se aplica a tales transacciones de arbitraje por parte de oficiales y directores. ¿El personal de la División expresará una opinión sobre si alguna transacción particular califica para la exención de la Sección 16 (e)?

Respuesta: No. En la Nota de Publicación No. 34-26333 (2 de diciembre de 1988), la Comisión observó que la Sección 16 (e) "otorga a la Comisión autoridad para definir" arbitraje de buena fe ", pero la Comisión no ha ejercido esta autoridad , Optando por dejar esa interpretación a los tribunales ". En la Publicación No. 34-26333, la Comisión solicitó comentarios sobre "si se necesitan más orientaciones en este campo" sin proponer ninguna regla adicional de la Sección 16 (e). Debido a que la Comisión no adoptó posteriormente ninguna norma que definiera el "arbitraje de buena fe" o abordara de otra manera el tema, la declaración de la liberación No. 34-26333 sobre dejar tal interpretación a los tribunales sigue siendo la declaración de la Comisión con respecto a sus intenciones. En consecuencia, el personal no expresará una opinión sobre si alguna transacción particular califica para la exención de la Sección 16 (e), sino que dirigirá consejo a la jurisprudencia pertinente, por ejemplo, Falco v. Donner, 208 F.2d 600 (2ª edición, 1953). [23 de mayo de 2007]

Sección 107. Sección 16 (f)

Sección 108. Sección 16 (g)

Artículo 109. Regla 16a-1 & # 8211; Definición de términos

Pregunta 109.01

Pregunta: ¿Un Secretario Asistente ordinariamente sería considerado un oficial de una compañía bajo la Sección 16 (a)?

Respuesta: No. Un Secretario Auxiliar normalmente no sería considerado un funcionario de una compañía bajo la Sección 16 (a), a menos que esa persona desempeñe alguna de las funciones que harían a tal persona un oficial como se define en la Regla 16a-1 (f). [23 de mayo de 2007]

Artículo 110. Regla 16a-2 & # 8211; Personas sujetas a la Sección 16

Pregunta 110.01

Pregunta: Cuando la Regla 16a-2 (a) hace que el Artículo 16 sea aplicable a una transacción que ocurra antes del registro de la Sección 12 del emisor, ¿están disponibles las exenciones proporcionadas por las otras reglas bajo la Sección 16 en la misma medida que para cualquier otra transacción sujeta a la Sección ¿dieciséis?

Respuesta: Sí. Las exenciones previstas por las demás reglas de la Sección 16 deberían estar disponibles en la misma medida que para cualquier otra transacción sujeta a la Sección 16. [23 de mayo de 2007]

Pregunta 110.02

Pregunta: La Regla 16a-2 (c) estipula que un propietario beneficioso del diez por ciento que no esté sujeto a la Sección 16 de la Ley debe reportar solamente aquellas transacciones realizadas mientras que el beneficiario efectivo de más de diez por ciento de una clase de valores de renta variable Del emisor registrado de acuerdo con la Sección 12 de la Ley. & # 8221; Una persona está sujeta a la Sección 16 únicamente por ser miembro de un grupo, como se describe en la Sección 13 (d) (3) y la Regla 13d-5 (b) bajo la misma, que es propietaria de más del 10 por ciento de dicha clase de capital seguridad. La persona ya no acepta actuar junto con los demás miembros del grupo con el fin de adquirir, poseer, votar o disponer de valores de renta variable del emisor. ¿La regla 16a-2 (c) requiere que la persona informe sus transacciones en valores de capital de emisor que ocurren después de que la persona deja de actuar como miembro del grupo?

Respuesta: No. La pertenencia a un grupo se interpreta de la misma manera a los efectos de la Sección 16 (a) y la Regla 16a-2 (c) como para propósitos de la Sección 13 (d). La membresía del grupo termina cuando la persona ya no acepta actuar conjuntamente con los demás miembros del grupo con el propósito de adquirir, mantener, votar o disponer de valores de renta variable del emisor. Si después de dejar de actuar como miembro del grupo, la propiedad beneficiaria de la persona no excede el 10 por ciento de una clase de valores de capital de emisor registrados bajo la Sección 12 y la persona no está sujeta de otra manera a la Sección 16 con respecto a El emisor, la Regla 16a-2 (c) no requiere que la persona informe sus transacciones en valores de capital de emisor que ocurren después de que la persona deja de actuar como miembro del grupo. [Abr. 24, 2009]

Pregunta 110.03

Pregunta: Si un emisor extranjero con valores registrados bajo la Sección 12 de la Ley de Cambio pierde el estatus de emisor privado extranjero como se describe en la Pregunta 101.02. ¿Se aplica la Regla 16a-2 (a) para hacer transacciones efectuadas por sus oficiales y directores antes de que el Formulario 3 sea debido sujeto a la Sección 16 y debe ser reportado en el Formulario 4?

Respuesta: No. [Aug. 11, 2010]

Pregunta 110.04

Pregunta: Un emisor extranjero que no es un emisor privado extranjero presenta su declaración de registro inicial para registrar los títulos de renta variable según la Sección 12 de la Ley de Intercambio. ¿Se aplicaría la Regla 16a-2 (a) para realizar transacciones por sus funcionarios dentro de los seis meses antes de la efectividad De la declaración de registro sujeto a la Sección 16 y debe ser reportado en la Forma 4?

Respuesta: Sí. [Ago. 11, 2010]

Sección 111. Regla 16a-3 & # 8211; Reporte de transacciones y participaciones

Pregunta 111.01

Pregunta: Si una empresa mantiene un plan de reinversión de dividendos que cumpla con las condiciones de exención de la Regla 16a-11, las reinversiones automáticas de dividendos bajo un plan de compensación diferida no calificado también serán elegibles para la exención de la Regla 16a-11, No se requiere que se informe, reduciendo así el número de formularios 4 debidos?

Respuesta: Los planes de compensación diferida no calificados no son Planes de Beneficios Excedentes, según lo definido por la Regla 16b-3 (b) (2) bajo la Ley de Cambios, en la cual las transacciones están exentas por la Regla 16b-3 (c). Ver carta interpretativa a la American Bar Association (10 de febrero de 1999, Q. 2 (c)). De conformidad con la Regla 16a-3 (g) (1), según enmendada en la Versión No. 34-46421 (27 de agosto de 2002), cada transacción en un plan de compensación diferida no calificado debe ser reportada en un Formulario 4 a más tardar el Final del segundo día hábil siguiente al día en que se haya ejecutado la operación. Sin embargo, si una compañía mantiene un plan de reinversión de dividendos que cumple con las condiciones de exención de la Regla 16a-11, las reinversiones automáticas de dividendos bajo un plan de compensación diferida no calificado también son elegibles para la exención de la Regla 16a-11. Vea la carta interpretativa a American Home Products (15 de diciembre de 1992). [23 de mayo de 2007]

Pregunta 111.02

Pregunta: Con el fin de satisfacer las condiciones de defensa afirmativa de la Regla 10b5-1 (c), un iniciado adopta un plan por escrito para la compra o venta de valores de capital del emisor. En el plan, que fue redactado por un broker-dealer, el broker-dealer especificó las fechas en que las transacciones del plan serán ejecutadas. ¿Puede la persona con información privilegiada confiar en la Regla 16a-3 (g) (2) para calcular la fecha de vencimiento del Formulario 4 para las transacciones del plan basándose en una fecha de ejecución estimada?

Respuesta: No. Al adoptar un plan escrito que especifica las fechas en que se ejecutarán las transacciones del plan, el iniciado habrá seleccionado la fecha de ejecución para las transacciones del plan. En consecuencia, el iniciado no podrá basarse en la Regla 16a-3 (g) (2) para calcular la fecha de vencimiento del Formulario 4 para las transacciones del plan basándose en una fecha de ejecución considerada. [23 de mayo de 2007]

Pregunta 111.03

Pregunta: ¿Cuando un nuevo beneficiario efectivo se une a un conjunto existente de beneficiarios efectivos que se presentan como grupo, el nuevo beneficiario tiene que presentar un nuevo Formulario 3, aunque el nuevo propietario no añada nuevos valores a las participaciones del grupo?

Respuesta: Sí. De conformidad con la Regla 16a-3 (j), el nuevo beneficiario efectivo deberá presentar un nuevo Formulario 3, incluso si el nuevo propietario no agrega nuevos valores a las participaciones del grupo. [23 de mayo de 2007]

Pregunta 111.04

Pregunta: Con el fin de reducir el número de Formularios 4 debidos anualmente, un miembro de la empresa toma las siguientes decisiones: En relación con la elección anual de fin de año para diferir parte del salario del año siguiente en un plan de compensación diferida no calificado, Para tener deducciones de nómina invertidas en la cuenta de interés solamente del plan. La persona con privilegios también elige para el salario diferido invertido de tal manera que sea "barrido" trimestralmente en la cuenta del fondo de acciones del plan. ¿Cómo se deben reportar estas transacciones de "barrido"?

Respuesta: Cada transacción de "barrido" sería reportada separadamente en el Formulario 4. Si la elección de "barrido" cumple con las Condiciones Excepcionales de la Regla 16b-3 (f) para las Transacciones Discrecionales (como se define en la Regla 16b-3 (b) (1) , Las transacciones de "barrido" se informarán utilizando el Código I. Además, si la persona informante no selecciona la fecha de ejecución para un "barrido" que es una Transacción Discrecional, las Reglas 16a-3 (g) (3) y (4) ) Se aplicaría para determinar la fecha de ejecución presunta. [23 de mayo de 2007]

Sección 112. Regla 16a-4 & # 8211; Valores Derivados

Sección 113. Regla 16a-5 & # 8211; Distribuidores de Odd-Lot

Sección 114. Regla 16a-6 & # 8211; Pequeñas Adquisiciones

Artículo 117. Regla 16a-9 & # 8211; Divisiones, Dividendos de Acciones y Derechos Pro Rata

Pregunta 117.01

Pregunta: ¿La regla 16a-9 (a) exime un dividendo en acciones pagadero cuando sólo hay un accionista de la clase en la cual se paga el dividendo?

Respuesta: No. Esta posición refleja la preocupación del personal de que tal transacción representaría un uso manipulador de la regla con el propósito de beneficiar a un accionista. Para propósitos de esta interpretación, un solo grupo requerido para presentar un Anexo 13D es tratado de la misma manera que un solo accionista. [23 de mayo de 2007]

Pregunta 117.02

Pregunta: ¿La Regla 16a-9 (b) exime de la Sección 16 la adquisición pro rata de derechos por un accionista que es un comprador de reserva?

Respuesta: La Regla 16a-9 (b) exonera de la Sección 16 la adquisición de derechos, tales como derechos de accionista o de preferencia, de acuerdo con una concesión prorrateada a todos los tenedores de la misma clase de valores de capital registrados bajo la Sección 12. Cuando la distribución de Derechos es proporcional, la adquisición de los derechos así distribuidos está exenta, incluida la adquisición pro rata por un accionista que es un comprador de reserva. Sin embargo, la adquisición de acciones subyacentes por parte del comprador de reserva en virtud del ejercicio de derechos no ejercitados por otros accionistas no está exenta por la Regla 16a-9 (b) porque dicha adquisición es el resultado de un contrato negociado de forma independiente con el emisor que no es Disponible a todos los accionistas en una base proporcional. [23 de mayo de 2007]

Pregunta 117.03

Pregunta: Una compañía realizará una división de acciones inversa de 1 por 4 para todas sus acciones ordinarias en circulación. En lugar de emitir acciones fraccionarias, la empresa pagará en efectivo por el valor de las fracciones de acciones. ¿Está esta transacción exenta de la Sección 16?

Respuesta: Sí. La Regla 16a-9 (a) exonera de la Sección 16 "el aumento o disminución en el número de valores mantenidos como resultado de un dividendo o dividendos en acciones que se apliquen por igual a todos los valores de una clase, incluyendo un dividendo en acciones en el cual los valores de renta variable de Se distribuye un emisor distinto. " Esta regla está disponible para eximir la disposición de fracciones de acciones incidentales al escisión de acciones inversas donde el retiro de acciones fraccionarias, como el reparto mismo, se aplica igualmente a todos los valores de la clase y no hay opción de recibir fracciones de acciones En lugar de efectivo. [Ago. 14, 2009]

Artículo 118. Regla 16a-10 & # 8211; Las exenciones bajo la Sección 16 (a)

Artículo 119. Regla 16a-11 & # 8211; Planes de reinversión de dividendos o intereses

Pregunta 119.01

Pregunta: La Regla 16a-11 exime de las secciones 16 (a) y 16 (b) de la Ley de Intercambio la adquisición de valores por parte de iniciados a través de la reinversión de dividendos conforme a planes de reinversión de dividendos que cumplen con las condiciones de la regla. ¿La disposición de dichos valores también está exenta por la Regla 16a-11?

Respuesta: No. Las disposiciones de los valores adquiridos por los iniciados mediante la reinversión de dividendos en virtud de planes de reinversión de dividendos que cumplen las condiciones de la norma no están exentas por la Regla 16a-11. Además, la Regla 16a-11 no exime de las disposiciones de responsabilidad de la Sección 16 (b) la adquisición de valores adicionales mediante inversiones adicionales voluntarias permitidas por dichos planes. [23 de mayo de 2007]

Pregunta 119.02

Pregunta: Cuando un plan de reinversión de dividendos que cumpla con los requisitos de la Regla 16a-11 sea terminado y la acción en poder del plan sea distribuida a los participantes, ¿se debe informar la distribución de las acciones de las personas a las personas cubiertas por la Sección 16?

Respuesta: No. En esta situación no existe un cambio efectivo en la propiedad beneficiaria y por lo tanto, de acuerdo con la Regla 16a-13, la distribución de acciones a personas cubiertas por la Sección 16 no necesita ser reportada como una adquisición de valores, suponiendo que esas acciones Previamente habían sido reportados como indirectamente beneficiados. [23 de mayo de 2007]

Artículo 120. Regla 16a-12 & # 8211; Órdenes de relaciones domésticas

Artículo 121. Regla 16a-13 & # 8211; Cambio en la forma de propiedad benéfica

Sección 122. Regla 16b-1 & # 8211; Transacción aprobada por una autoridad reguladora

Sección 123. Regla 16b-3 & # 8211; Transacciones entre un emisor y sus funcionarios o directores

Pregunta 123.01

Pregunta: ¿La Regla 16b-3 exime las transacciones de valores de capital del emisor entre el emisor y las personas que están sujetas a la Sección 16 solamente porque son más de 10 por ciento de beneficiarios efectivos?

Respuesta: No. La Regla 16b-3 exime las transacciones de valores de capital del emisor entre el emisor (incluyendo un plan de beneficios para empleados patrocinado por el emisor) y un funcionario o director del emisor. La regla, sin embargo, no exime transacciones similares por personas que están sujetas a la Sección 16 solamente porque son más de 10 por ciento de beneficiarios efectivos. La regla 16b-3 está a disposición de un propietario beneficiario de más del 10 por ciento que también está sujeto a la Sección 16 en virtud de ser un funcionario o director del emisor (véase el comunicado No. 34-37260 (31 de mayo de 1996) Parte 1 y Parte 2)), incluyendo un director "delegado" (vea el Resumen de la Comisión de Valores y Bolsa, Amicus Curiae en Roth contra Perseus, LLC) [23 de mayo de 2007]

Pregunta 123.02

Pregunta: ¿La regla 16b-3 exime una transacción entre el emisor y (1) el fideicomiso de caridad restante de un oficial, o (2) un asesor de inversiones del cual un director es un director?

Respuesta: No. La Regla 16b-3 exime las transacciones de valores de capital del emisor entre el emisor (incluyendo un plan de beneficios para empleados patrocinado por el emisor) y un funcionario o director del emisor. La Regla 16b-3 no eximirá a una transacción entre el emisor y (1) el fideicomiso de caridad de un oficial, o (2) un asesor de inversiones del cual un director es el principal. Sin embargo, en su carta interpretativa a la American Bar Association (10 de febrero de 1999), Q. 4, el personal de la División ha declarado que la Regla 16b-3 está disponible para eximir el interés pecuniario indirecto de un oficial o director en ciertas transacciones específicas. [23 de mayo de 2007]

Pregunta 123.03

Question: For purposes of determining whether a plan is a "Stock Purchase Plan," as defined by Rule 16b-3(b)(5), how are satisfaction of the coverage and participation requirements of Internal Revenue Code Section 410 measured?

Answer: Satisfaction of the coverage and participation requirements of Internal Revenue Code Section 410 are measured by reference to employees eligible to participate, rather than employees actually participating. [May 23, 2007]

Question 123.04

Question: Does the definition of a "Stock Purchase Plan" in Rule 16b-3(b)(5), which includes employee benefit plans that satisfy the coverage and participation requirements of Sections 423(b)(3) and (b)(5) of the Internal Revenue Code, contemplate that such plans are broad-based?

Answer: Yes. While Rule 16b-3(b)(5) does not specifically indicate that such plans must also meet the broad-based plan requirements in Section 423(b)(4) of the Internal Revenue Code (because these requirements may be more restrictive than was intended for purposes of Rule 16b-3(b)(5)), Rule 16b-3(b)(5) contemplates that Stock Purchase Plans are broad-based. See footnote 50 to Release No. 34-37260 (May 31, 1996) (Part 1 and Part 2 ). Accordingly, a director-only or senior-executive only plan would not be a Stock Purchase Plan within the meaning of Rule 16b-3(b)(5) or Rule 16b-3(c). [May 23, 2007]

Question 123.05

Question: A Stock Purchase Plan, as defined in Rule 16b-3(b)(5), includes a dividend reinvestment feature. Would dividend acquisitions pursuant to this plan be exempted by Rule 16b-3(c)?

Answer: Yes. Dividend acquisitions pursuant to the Stock Purchase Plan are exempted by Rule 16b-3(c), because any acquisition pursuant to a Stock Purchase Plan is exempted by Rule 16b-3(c). [May 23, 2007]

Question 123.06

Question: Would a stand-alone top hat plan that qualifies for an exemption under Section 201(2) of ERISA be an Excess Benefit Plan eligible for exemption under Rule 16b-3(c)?

Answer: No. A stand-alone top hat plan that qualifies for an exemption under Section 201(2) of ERISA would not be an Excess Benefit Plan eligible for exemption under Rule 16b-3(c), because such plan would not be operated in conjunction with a Qualified Plan, as defined in Rule 16b-3(b)(4). [May 23, 2007]

Question 123.07

Question: Are the Non-Employee Director standards of Rule 16b-3(b)(3) independent of the "outside director" standards of Internal Revenue Code Section 162(m)?

Answer: Yes. Accordingly, satisfaction of the Non-Employee Director standards cannot be presumed based on satisfaction of the Section 162(m) "outside director" standards. [May 23, 2007]

Question 123.08

Question: What is the relevant date for determining Non-Employee Director status under Rule 16b-3?

Answer: The relevant date for determining Non-Employee Director status is the date such director proposes to act as a Non-Employee Director. This would be the date on which approval is obtained, even where an award is not deemed to occur until a later date, for example, upon the satisfaction of conditions (other than the passage of time and continued employment) that are not tied to the market price of an equity security of the issuer. Cf. Bioject Medical Technologies Inc. (Nov. 24, 1993). [May 23, 2007]

Question 123.09

Question: Rule 16b-3(b)(3)(i)(A) disqualifies for service as a Non-Employee Director any director who currently is an officer of or otherwise currently employed by the issuer, its parent or subsidiary. How is the term "subsidiary" defined for the purposes of this rule?

Answer: For the purposes of Rule 16b-3(b)(3)(i)(A), "subsidiary" would be defined pursuant to the broad standards of Rule 12b-2, i. e. . as an affiliate controlled directly or indirectly through one or more intermediaries. [May 23, 2007]

Question 123.10

Question: Will a sale into the open market from a Stock Purchase Plan or other Tax-Conditioned Plan be exempt pursuant to Rule 16b-3(c)? Will such a sale be a Discretionary Transaction (as defined in Rule 16b-3(b)(1)) eligible for exemption pursuant to Rule 16b-3(f)?

Answer: No to both questions. Such transactions will not be eligible for exemption from Section 16(b) pursuant to Rule 16b-3. [May 23, 2007]

Question 123.11

Question: Would stock acquisitions through an open market purchase plan that is not a Rule 16b-3(b) Stock Purchase Plan (and hence ineligible for Rule 16b-3(c) exemption) but is "sponsored by the issuer" as interpreted in the interpretive letter to American Bar Association (Oct. 15, 1999) be considered "acquisitions from the issuer" eligible for the Rule 16b-3(d) exemption?

Answer: No. [May 23, 2007]

Question 123.12

Question: Is a diversification transaction permitted by Section 401(a)(35) of the Internal Revenue Code a "Discretionary Transaction," as defined in Rule 16b-3(b)(1), subject to the exemptive conditions of Rule 16b-3(f)?

Answer: Yes. Section 401(a)(35) of the Internal Revenue Code provides diversification rights to qualifying participants in defined contribution plans that hold publicly-traded employer securities. Specifically, Section 401(a)(35) makes intra-plan transfers out of and back into the plan's issuer securities fund available no less frequently than quarterly. As explained in Release No. 34-37260 (May 31, 1996) (Part 1 and Part 2 ), periodic fund-switching transactions involving an issuer equity securities fund may present opportunities for abuse, because the investment decision is similar to that involved in a market transaction. Moreover, the plan may buy and sell issuer equity securities in the market in order to effect these transactions, so that the actual counterparty to the transaction is not the issuer, but instead is a market participant.

Rule 16b-3(b)(1)(iii) excludes from the definition of "Discretionary Transaction" a transaction "required to be made available to a plan participant pursuant to a provision of the Internal Revenue Code." This provision was adopted in 1996 to exclude:

the diversification elections and distributions that Section 401(a)(28) of the Internal Revenue Code makes available t 10-year plan participants wh have reached age 55, and

the distributions that Section 401(a)(9) of the Internal Revenue Code requires at the later of the employee's retirement or reaching age 70Ѕ.

The basis for the Rule 16b-3(b)(1)(iii) exclusion was that the insider's opportunity to speculate in the context of the specified events was well circumscribed. In contrast, Section 401(a)(35) of the Internal Revenue Code, which was added by Section 901 of the Pension Protection Act of 2006, makes available the periodic fund-switching transactions for which the exemptive conditions of Rule 16b-3(f) were designed to apply. Because the Commission did not consider the later-enacted Section 401(a)(35) of the Internal Revenue Code when it adopted Rule 16b-3(b)(1)(iii), this rule should not be construed to exclude Section 401(a)(35) transactions from the exemptive conditions of Rule 16b-3(f). [May 23, 2007]

Question 123.13

Question: May a plan be bifurcated so that it is eligible in part for exemption under Rule 16b-3(c)?

Answer: A plan may be bifurcated so that it is eligible in part for exemption under Rule 16b-3(c) only if it works entirely as a Tax-Conditioned Plan with respect to a segregable class of participants and entirely as a non-Tax-Conditioned Plan as to a different class of participants. [May 23, 2007]

Question 123.14

Question: Would an amendment to a material term of a security acquired pursuant to the full board, Non-Employee Director or shareholder approval conditions of Rule 16b-3(d) require further approval pursuant to any one of those approval conditions?

Answer: Yes, an amendment to a material term of a security acquired pursuant to the full board, Non-Employee Director or shareholder approval conditions of Rule 16b-3(d) would require further approval pursuant to any one of those approval conditions in order for the specific approval conditions of Note 3 to the rule to be satisfied. This is required because allowing a material term to be changed without subsequent approval would vitiate the specific approval requirement of the rule. Such further approval is required whether or not the amendment would result in the cancellation and regrant of the security. For example, an amendment to accelerate vesting (which, pursuant to the interpretive letter to Foster Pepper & Shefelman (Dec. 20, 1991), does not effect a cancellation and regrant) would require further approval. [May 23, 2007]

Question 123.15

Question: Will initial approval of a plan satisfy the specificity requirement where the specific terms and conditions of each acquisition are fixed in advance, such as a formula plan?

Answer: Yes. [May 23, 2007]

Question 123.16

Question: Would approval of a grant that by its terms provides for automatic reloads satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants?

Answer: Yes. Approval of a grant that by its terms provides for automatic reloads would satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants, unless the automatic reload feature permitted the reload grants to be withheld by the issuer on a discretionary basis. The same result applies under Rule 16b-3(e) where the automatic feature is a tax - or exercise-withholding right. [May 23, 2007]

Question 123.17

Question: Could the six-month holding period of Rule 16b-3(d)(3) be used to exempt an officer's or director's purchase of the issuer's stock in an underwritten public offering?

Answer: No. Rule 16b-3 would not exempt this transaction, because the rule was not intended to cover a situation where someone other than the issuer controls to whom the sales are made and on what terms. For the same reasons, Rule 16b-3 would not exempt an officer's or director's purchase of the issuer's stock in a public offering pursuant to a "friends and family" allocation. [May 23, 2007]

Question 123.18

Question: Are the dispositions of issuer securities that take place in cashless exercises through a broker eligible for exemption pursuant to Rule 16b-3(e)?

Answer: No. The dispositions that take place pursuant to these transactions are not eligible for exemption pursuant to Rule 16b-3(e) because cashless exercises through a broker do not involve a transaction with the issuer or the issuer's employee benefit plan. [May 23, 2007]

Question 123.19

Question: Is the disclosure regarding loans by a bank, savings and loan association, or broker-dealer contemplated by Instruction 4.c to Item 404(a) (loan made in ordinary course of business, on substantially same terms as for unrelated persons, no more than normal risk of collectibility, etc.) Item 404(a) disclosure that would disqualify a director from being a Non-Employee Director, as defined in Rule 16b-3(b)(3)?

Answer: No. Statements disclosed pursuant to Instruction 4.c to Item 404(a) will not be considered Item 404(a) disclosure that would disqualify a director from being a Non-Employee Director. Release No. 33-8732A, in the Item 404 discussion at Section V. A.3, characterizes this instruction as addressing a situation that "do[es] not raise the potential issues underlying our principle for disclosure."

Section 124. Rule 16b-5 – Bona Fide Gifts and Inheritance

Section 125. Rule 16b-6 – Derivative Securities

Question 125.01

Question: Would Rule 16b-6(b) be available to exempt the cash settlement of phantom stock?

Answer: No. Rule 16b-6(b) would not be available to exempt the cash settlement of phantom stock, because the deemed sale of the underlying stock following exercise of the phantom stock is outside the exemptive scope of Rule 16b-6(b). In contrast, Rule 16b-6(b) would be available to exempt the stock settlement of phantom stock because such transaction involves only the exercise of a derivative security. [May 23, 2007]

Section 126. Rule 16b-7 – Mergers, Reclassifications and Consolidations

Section 127. Rule 16b-8 – Voting Trusts

Section 128. Rule 16c-1 – corredores

Section 133. Forms 3, 4 and 5 – General

Question 133.01

Question: What information does an insider report for the issuer's ticker or trading symbol (Item 3 of Form 3, and Item 2 of Forms 4 and 5) if there is none?

Responder . The insider should enter "NONE." [May 23, 2007]

Question 133.02

Question: Does an insider need to file a power of attorney with the filing?

Answer: If the Form is signed on behalf of an individual by another person, the power of attorney establishing the authority of such person to sign the Form must be filed in an exhibit to the Form or as soon as practicable in an amendment to the Form, unless a previously filed paper or electronic power of attorney is still in effect. The power of attorney need only indicate that the reporting person authorizes and designates the named person or persons to sign and file the Form on the reporting person's behalf and state its duration. [May 23, 2007]

Question 133.03

Question: How should an insider sign the document when it uses a power of attorney?

Answer: The staff recommends that the document signature be the typed signature of the person holding the power of attorney. The remainder of the signature line would then indicate that the person is signing on behalf of the named officer, director or more than 10 percent shareholder under a power of attorney. For example, "John Jones, by power of attorney," where John Jones holds power of attorney for insider Susan Smith. [May 23, 2007]

Question 133.04

Question: How can a filer indicate the title of the person filing the Form?

Answer: The title of the person may be included on the same line as the signature. [May 23, 2007]

Question 133.05

Question: Do all officers and directors need filing codes?

Answer: Yes. Each officer, director and more than 10 percent shareholder will need his/her own CIK, CCC and Password codes. The codes are needed whether the insider is filing as an individual or as part of a group. It is very important to use the insider's CIK rather than, for example, the issuer's CIK, so that users can readily identify the insider filing the form (if the wrong CIK has been used, file a new form with the correct CIK). Only one set of codes is permitted even if the filer is an officer, director, or more than 10 percent shareholder of more than one company. We strongly recommend that companies applying for codes on behalf of their insiders verify that the persons do not already have codes assigned to them. [May 23, 2007]

Question 133.06

Question: When reporting derivative securities on Table II of Form 4 or Form 5, are options that have different economic characteristics (such as exercise price and expiration date) considered different classes of securities?

Answer: Yes. General Instruction 4(a)(i) to Form 4 requires an insider to "report total beneficial ownership following the reported transaction(s) for each class of securities in which a transaction was reported." In reporting derivative securities on Table II, options that have different economic characteristics (such as exercise price and expiration date) are considered different classes of options. For example, in reporting the grant of options with an exercise price of $10 per share and an expiration date of March 1, 2014, the holdings column should show the total number of options with the same terms, and should not include the insider's holdings of options with an exercise price of $8 per share and an expiration date of November 1, 2012. On a voluntary basis, the insider may report on a separate line(s) holdings of options that are of a different class(es) than the options transaction reported. General Instruction 4(a)(iii) to Form 5, which requires an insider to "report total beneficial ownership as of the end of the issuer's fiscal year for all classes of securities in which a transaction was reported," is construed the same way. [May 23, 2007]

Question 133.07

Question: Column 8 of Table II in Form 4 and Form 5 requires disclosure of the "Price of Derivative Security." Does this column require the exercise price of the derivative security, the fair market value of the underlying security on the date of the reported transaction, or some other price?

Answer: The "Price of Derivative Security" required in Column 8 of Table II is the price, if any . that the insider paid to acquire the derivative security (where an acquisition is reported) or received when disposing of the derivative security (where a disposition is reported). It is not the exercise price of the derivative security (which is reportable in Column 2) or the fair market value of the underlying security on the date of the reported transaction. [May 23, 2007]

Question 133.08

Section 134. Form 3

Question 134.01

Question: Must an estate that holds more than 10 percent of a class of an issuer's equity securities file a Form 3 to report its holdings?

Answer: Yes. An estate that holds more than 10 percent of a class of an issuer's equity securities must file a Form 3 to report its holdings. Rule 16a-2(d), which permits an executor not to report transactions in securities held by an estate for the first 12 months following appointment as an executor, does not apply to the reporting of holdings on a Form 3. However, if the executor is already an insider (e. g. by virtue of being an officer of the issuer), in accordance with Rule 16a-3(b)(2) the executor need not file an additional Form 3 in the capacity of executor. Rather, when the executor next files a Form 4 (e. g. in the executor's individual capacity or for the estate after the 12 month period has elapsed), the executor would indicate the additional capacity in Box 5. [May 23, 2007]

Section 135. Form 4

Question 135.01

Question: May an officer of a company whose securities are registered under Section 12(g) of the Exchange Act file a Form 4 report solely to indicate the officer's resignation?

Answer: Yes. An officer of a company whose securities are registered under Section 12(g) of the Exchange Act may, but is not legally required to, file a Form 4 report, checking the exit box, solely to indicate the officer's resignation. [May 23, 2007]

Question 135.02

Question: On Form 4, what date should be entered for Item 3 (Date of Earliest Transaction Required to be Reported)?

Answer: The date in Item 3 should be the transaction date of the earliest transaction reported that you are required to report on Form 4. This is the same date you enter in Column 2 of Table I (or Column 3 of Table II), not the Deemed Execution Date you would enter in Column 2A of Table I (or Column 3A of Table II). Where the transactions reported on the Form 4 include a transaction that the insider previously failed to report timely on Form 4, the transaction date for that transaction should be entered in Item 3. [May 23, 2007]

Question 135.03

Question: What date should be entered for Item 3 on a Form 4 filed solely to report voluntarily a transaction that is eligible for deferred reporting on Form 5, such as a Rule 16b-5 gift or a Rule 16a-6(a) small acquisition?

Answer: Enter the transaction date reported in Column 2 of Table I (or Column 3 of Table II). In reporting the transaction, make sure that "V" is designated in Column 3 of Table I (or Column 4 of Table II). [May 23, 2007]

Section 136. Form 5

Question 136.01

Question: Are Discretionary Transactions required to be reported on Form 5 individually, rather than on an aggregate basis, even when they are "same way" rather than "opposite way" transactions?

Answer: Yes. Discretionary Transactions are required to be reported individually, rather than on an aggregate basis, even when they are "same way" rather than "opposite way" transactions. [May 23, 2007]

INTERPRETIVE RESPONSES REGARDING PARTICULAR SITUATIONS

Section 201. Section 16 – General Guidance

Section 202. Section 16(a)

202.01 In connection with a bank holding company formation, in which jurisdiction over a Section 12(g) entity passes from a banking agency to the Commission, officers, directors and more than 10 percent shareholders are not required to file either a Form 3 or Form 4 with the Commission to reflect the transaction establishing the holding company. However, in the interest of ownership reporting continuity, the next filing on Form 4 or Form 5 by an insider reporting a change in his or her ownership of equity securities should reflect that the holding company is the issuer for purposes of filing under Section 16(a). [May 23, 2007]

Section 203. Section 16(b)

Section 204. Section 16(c)

Section 205. Section 16(d)

205.01 A broker-dealer that had ceased making a market in a public company's securities cannot rely upon the Section 16(d) exemption with respect to sales of securities remaining in its inventory. Furthermore, even if the cessation was only temporary, the broker-dealer would not regain eligibility for the exemption unless it resumed market-making activities on a bona fide basis, i. e. . the broker-dealer cannot re-register as a market maker simply to liquidate its inventory. [May 23, 2007]

Section 206. Section 16(e)

Section 207. Section 16(f)

Section 208. Section 16(g)

Section 209. Rule 16a-1 – Definition of Terms

209.01 For purposes of the various ownership tests of Rule 16a-1, a limited liability company should be treated consistently as a general partnership, limited partnership or a corporation, depending on which form of organization it more closely resembles. [May 23, 2007]

209.02 Following a company's buy-back of its stock, a person who previously owned less than 10 percent of the company's stock may own more than 10 percent of the stock without having purchased additional shares. If, before the buy-back, the person is aware that the buy-back will occur and will have this result on his or her holdings, the person should file a Form 3 within 10 days after the buy-back. If the person does not have advance awareness of the buy-back and/or its consequences, he or she would need to determine whether he or she is a more than 10 percent beneficial owner and satisfy any obligation to file a Form 3 within ten days after information in the company's most recent quarterly, annual or current report indicates the amount of securities outstanding following the buy-back. [May 23, 2007]

209.03 In connection with termination of employment, an officer was awarded options that would become exercisable (in installments) when the issuer's stock reached and maintained specified price levels for a period of 30 days, conditioned on the terminated officer's continued provision of services as a consultant. These options would be derivative securities under Rule 16a-1(c) and thereby subject to Section 16 upon grant because their exercisability would not be subject to conditions (other than the passage of time and continued employment) that are not tied to the market price of an equity security of the issuer. Cf. Certilman Balin Adler & Hyman (April 20, 1992). [May 23, 2007]

209.04 Rule 16a-1(c)(3) excludes from "derivative security" rights or obligations to surrender a security, or have a security withheld, upon the receipt or exercise of a derivative security or the receipt or vesting of equity securities, in order to satisfy the exercise price or tax withholding consequences of receipt, exercise or vesting. The federal state, local and foreign taxes that may be paid through the withholding, tendering back or delivery of previously owned shares may exceed minimum withholding requirements as along as the amount withheld does not exceed the participant's estimated federal state, local and foreign tax obligations attributable to the underlying transaction. Such amount may include capital gains tax on the shares that were surrendered or withheld in settlement of the tax-withholding right or exercising the derivative security. [May 23, 2007]

209.05 A caller contemplated writing a short put option, whereby the counterparty would have the right to put the security to the writer at any point after execution of the contract. Provided that the counterparty who is "long" the put option retains its discretion as to whether and when to exercise the put option, then the writer of the put option is not deemed to beneficially own the securities underlying the put option because the right to receive the underlying securities is dependent upon factors that are not within the control of the writer of the put option. Thus, in calculating its beneficial ownership for purposes of Section 16, the party that is short the put option should not count the underlying securities. [May 23, 2007]

Section 210. Rule 16a-2 – Persons Subject to Section 16

Section 211. Rule 16a-3 – Reporting Transactions and Holdings

211.01 A Discretionary Transaction in a phantom stock account that is exempt pursuant to Rule 16b-3(f) is reportable under Rule 16a-3(f)(1) on Table II of Form 4 on a single line using Code "I." [May 23, 2007]

211.02 Any issuer that maintains a corporate Web site must post on that Web site by the end of the business day after filing any Form 3, 4 or 5 under Section 16(a) as to the equity securities of that issuer, and must keep each such form accessible on that website for at least a 12-month period in accordance with Section 16(a)(4)(C) and Rule 16a-3(k). In a bank holding company, the bank subsidiary maintains a corporate Web site, but the bank holding company does not. The staff advised that the subsidiary Web site should be considered a corporate Web site for purposes of these posting requirements. [May 23, 2007]

211.03 One public company will acquire another public company. After the merger, the acquiring company will shut down the Web site of the acquired company. Under Rule 16a-3(k), any issuer that maintains a Web site is required to post Section 16 forms on its Web site. Because the acquired company will no longer exist, and its Web site will be shut down, the staff would not object if the acquiring company stopped posting the pre-acquisition Section 16 reports of the acquired company. [May 23, 2007]

Section 212. Rule 16a-4 – Derivative Securities

Section 213. Rule 16a-5 – Odd-Lot Dealers

Final Section 16 Reporting and Short Swing Profit Rules: Final Section 16 Rules Are User Friendly

This article analyzes the practical impact of the new Section16 rules on the planning of executive compensation for officers and directors. The new rules eliminate many of the requirements and uncertainties that consumed an inordinate amount of time for the executive compensation planner. Perhaps the greatest benefit of the new rules is that they virtually eliminate one of the major regulatory considerations involved in any executive compensation decision, the Section16 reporting and short-swing profit recovery rules.

Old Requirements Eliminated

The new rules eliminate many of the reporting requirements and exemption conditions of current Rule 16b-3.

The following transactions are exempt from reporting requirements:

transactions pursuant to the exemption for Tax Conditioned Plans, such as 401(k) plans, excess benefit plans and employee stock purchase plans;

transactions pursuant to dividend or interest reinvestment plans and domestic relations orders;

transactions that change only the form of beneficial ownership, e. g., distributions of stock from a trust or an employee benefit plan;

cancellations or expirations of stock options without value; y

exempt transactions by a person who has ceased to be an insider.

Under the new rules, exercises and conversions of derivative securities, i. e., stock options and stock appreciation rights ("SARs") must be reported on Form4. Non-exempt transactions must also be reported on Form4. Gifts, stock option grants and employer stock fund switching transactions are reportable on Form5, with earlier reporting on Form4 permitted.

The new reporting rules are effective for transactions effected on and after August15, 1996. However, the reporting exemption for Tax Conditioned Plans only applies if the company has elected to comply with new Rule 16b-3, which has a phase-in period for compliance ending on November 1, 1996.

Phantom stock or stock units, i. e., "cash only instruments," become derivative securities under the new rules subject to reporting on August15, 1996. However, phantom stock and stock units granted before August15, 1996 are generally exempt from the new reporting rules.

The following requirements of current Rule 16b-3 have been eliminated:

Written Plan Condition. The new exemption focuses on transactions between officers and directors and the issuer and there is no longer a need for a written plan. Although the written plan requirement of Rule 16b-3 has been eliminated, a plan is still required by the Internal Revenue Code or ERISA in the following circumstances:

incentive stock options;

section 423 employee stock purchase plans;

401(k) plans, ESOPs and profit sharing plans; y

excess benefit plans

The Prohibition on Transfer of Stock Options . Almost all stock plans prohibit the transfer of stock options except pursuant to a qualified domestic relations order ("QDRO"). This prohibition is required by the incentive stock option rules and current Rule 16b-3. Under the new rules, this prohibition may be liberalized to permit the grant of fully transferable nonstatutory stock options, and to permit transfers pursuant to "domestic relations orders," as defined under the Internal Revenue Code or ERISA, that do not qualify as QDROs.

The gift of stock options has become an increasingly popular income, estate and gift tax planning tool, and this change will facilitate such gifts, e. g., gifts to charities may increase. For income tax purposes, an option that is fully transferable and fully exercisable on the date of grant should have a "readily ascertainable value" even if the option is not actively traded on an established market. The taxable value of the grant of a transferable option will likely be determined under a Black Scholes or other accepted valuation model. If the IRS agrees that a fully transferable option has a "readily ascertainable value," that value is taxable income to the executive, to be determined on the date of grant, and the employer-issuer will have an equivalent deduction. There should be no further taxation until the donee sells the shares and then the excess of the sale price over the executive's basis in the shares, i. e., the amount the executive included in income at the time of the grant, should qualify as capital gain for the donee. Executives will want to transfer options out of their estates by timing their gifts to take maximum advantage of the $10,000 per donee exclusion.

The grant of a transferable option is an exempt transaction under the Approval Exemption, described below, and is reportable on Form5. Currently, Form S-8 is unavailable for donees. Therefore, an issuer should consider Form S-8 registration and possible proxy disclosure issues ( e. g., how stockholders will react to options that may be exercised by persons other than the executive or his or her family members) before granting fully transferable stock options.

Stockholder Approval . Stockholder approval of a plan or a plan amendment that (i)increases shares subject to the plan, (ii)changes the class of eligible executives, or (iii)materially increases benefits, will no longer be required as a condition of the new Rule 16b-3 exemption. The deletion of this requirement is a major benefit for tax qualified plans and for amendments to stock plans that increase benefits. However, stockholder approval of the adoption of a plan and plan amendments to increase available shares or change the class of covered individuals is still generally required for stock plans subject to stock exchange requirements, incentive stock options and qualified employee stock purchase plans. In addition, Section 162(m) of the Internal Revenue Code requires stockholder approval of the adoption or amendment of individual award limits or the establishment or amendment of the material terms of a performance goal. As a result, stockholder approval will still generally be sought, but not for the purpose of obtaining a Rule 16b-3 exemption which previously was the major motivating reason.

Disinterested Administration . Current Rule 16b-3 requires that a plan or arrangement be administered by a committee of at least two "disinterested directors." A director is disinterested if the director has not received a discretionary grant of a derivative or equity security during the 12 months preceding the date of service on the committee. The new rules replace the disinterested director requirement with a "Non-Employee Director" requirement, discussed below, that does not prohibit the receipt of discretionary awards. This renders the "formula plan" for outside directors, a familiar fixture of executive compensation, obsolete for Section16 purposes. However, as a matter of convenience, if not corporate governance, it is unlikely that these plans will soon disappear. Formula plans readily solve the somewhat thorny question of how much equity each outside director deserves. It is likely, however, that formula plans will be amended to permit committee members (and if necessary, all outside directors) to receive discretionary grants.

Advance Six-Month and Window Period Election Requirements . Under current Rule 16b-3, in order for certain transactions to be exempt, they must be made pursuant to an irrevocable election made at least sixmonths in advance of the transaction or in advance of the transaction during a 10-day window period following the issuer's quarterly earnings release. These advance election requirements applied to the exercise of SARs for cash, investment fund switching in tax qualified plans and withholding rights for taxes or the exercise price of an award. The advance election requirements were very difficult to understand and administer. Under the new rules, withholding rights do not constitute a separate derivative security, and SARs and fund switching are exempted under much less complicated provisions. However, for SARs, many insider trading policies will still require that the exercise of the SAR for cash occur in a window period.

The Six-Month Holding Period Requirement . Current Rule 16b-3 requires that the grant of an equity security will only be exempt if the security is held by the officer or director for six months from the date of grant, or in the case of a derivative security, e. g., a stock option, six months must pass before the sale of the underlying security. Although the new rules preserve the six-month holding period as a way to exempt an acquisition, they also add two alternative conditions that do not require the holding period. Under the new rules, the grant of an equity security or derivative security will also be exempt if it is simply approved in advance or ratified (see "Approval Exemption" below).

The substitution of the Approval Exemption for the nettlesome six-month holding period requirement is most welcomed by executive compensation planners, who will no longer need to spend time worrying about such things as: (i)Internal Revenue Code section 83(b) elections when options are exercised within six months of the date of grant; (ii)amendments to awards that under the current rules would result in the cancellation and re-grant of the award (and the commencement of a new six-month holding period); and (iii)when awards become derivative securities for purposes of the six month rule if they have an exercise or conversion feature that is not based on the price of the underlying security. The cancellation/re-grant issue was especially problematic in the case of mergers where the new award or option must be exercised within three months of termination of employment.

The New Exemptions

Under the new rules, transactions will be exempt if they satisfy one of the following simple and straightforward exemptions:

Tax Conditioned Plans

Under the current rules, the reporting and liability provisions of Sections 16(a) and (b) were a nightmare for tax qualified plans, such as 401(k) plans, stock bonus plans and ESOPs and qualified section 423 stock purchase plans. Sections 16(a) and (b) generally did not apply to a cash-only "excess benefit plan" that was operated in conjunction with a tax qualified plan.

The new rules exempt from reporting and short-swing profit liability almost all transactions under "Tax Conditioned Plans." A Tax Conditioned Plan is defined as a:

Qualified Plan;

Excess Benefit Plan; o

Stock Purchase Plan.

A "Qualified Plan" is any plan, whether or not tax qualified, that satisfies the coverage rules under the Internal Revenue Code for qualified plans. An "Excess Benefit Plan" is an employee benefit plan that is operated in conjunction with a Qualified Plan and provides benefits in excess of those permissible under the Qualified Plan, e. g., a "supplemental 401(k) plan." A "Stock Purchase Plan" is either a section423 qualified stock purchase plan or a nonqualified stock purchase plan that satisfies the coverage requirements for Qualified Plans. Typical transactions which will be completely exempt without regard to any requirements include:

purchases of stock or derivative securities with plan contributions;

dispositions pursuant to domestic relations orders;

distributions in the event of death, disability, retirement or termination of employment;

investment diversification or distributions required by the Internal Revenue Code, e. g., excess contributions under 401(k) or 401(m); y

purchases of employee stock purchase plan stock.

The only transactions in Qualified Plans and Excess Benefit Plans that will not be exempt pursuant to the exemption for Tax Conditioned Plans are investment fund transfers in and out of employer stock funds, in-service cash withdrawals and participant directed loans from employer stock funds.

Many employee benefit plans, whether or not they are Qualified Plans or Excess Benefit Plans, permit participants to transfer in and out of employer stock funds and elect to receive cash withdrawals or loans from such funds. Under the new rules, any such transaction will be exempt from Section 16(b) if it is effected pursuant to an election made at least six months following the date of the most recent "opposite-way" election under any plan of the company. For example, a cash withdrawal would be exempt under the new rules as long as a participanthad not elected a transfer into an employer fund within the preceding six months. Issuers will want to revise their Section16 insider trading policies to reflect this new requirement.

The Approval Exemption: The Committee Rules

The last exemption covers all other executive compensation transactions between officers and directors and issuers that are not covered by the previous two exemptions. This exemption, which principally relies on advance approval or ratification, will be the workhorse for stock plans and cash-only plan transactions. Fortunately, the advance approval requirement is quite easily implemented.

The Approval Exemption. The Approval Exemption exempts an officer's or director's acquisition of equity or derivative securities from the issuer if:

(i) the acquisition is approved in advance by the board of directors or a committee of the board comprised of two or more "Non-Employee Directors;"

(ii) the acquisition is approved by stockholders in advance or ratified at the next stockholders' meeting; o

(iii) the equity security or derivative security is held for six months before the disposition of the equity security.

Dispositions to the issuer are exempt if the requirements of paragraphs (i) or (ii) above are satisfied.

The Approval Exemption will exempt most typical stock plan or cash-only plan transactions including:

the grant of options (including transferable options), SARs and phantom stock;

the exercise of options, SARs and phantom stock and the exercise of withholding rights;

the cancellation, expiration or surrender of options, SARs and phantom stock; y

deferral elections and distributions from cash-only plans.

A "cashless exercise" involving a broker's sale of shares to the public is still a nonexempt sale.

The new rules also state that the scope of advance approval can be quite broad. For example, if the grant of an award contemplates subsequent transactions, including participant directed transactions, e. g., award exercises, re-load grants, surrenders or deferrals, etc. the subsequent transactions will not require additional approval. This rule should result in the more thoughtful and comprehensive drafting of approving resolutions. Approval of specific transactions is not, however, required if the terms and conditions of such transactions are set forth in a formula plan that has been approved.

The Non-Employee Director Committee. In practice, almost all of the above transactions will be approved in advance by the new "Non-Employee Director" Committee. The two-person non-employee director committee will replace the committee of at least two "disinterested directors." The definition of non-employee director is very similar to the definition of "outside director" for purposes of exempting transactions under the $1 million deduction limitation of section 162(m) of the Internal Revenue Code. This similarity will make the appointment of the committee much easier.

A non-employee director is a director who:

(i) is not an officer or otherwise employed by the issuer or a parent or a subsidiary (same as section 162(m) except that former officers and certain former employees are barred under section 162(m));

(ii) does not receive compensation, directly or indirectly, from the issuer or a parent or subsidiary for services as a consultant or in any capacity other than as a director, except for an amount that does not exceed the amount which requires proxy disclosure, i. e., in excess of $60,000 (section 162(m) prohibits any direct or indirect remuneration); y

(iii) does not have an interest in any transaction or has not engaged in a business relationship for which proxy disclosure is required (these are not section 162(m) requirements).

The planning of executive compensation in stock plans, and in phantom stock and other cash-only plans, will be much easier under the Approval Exemption. Transactions with issuers will be exempt as long as the committee does what it has always done, approve the transaction in advance. Because the scope of the committee's approval can be very broad, many transactions can simply be approved at the time of the initial grant of the award.

The new rules are streamlined and will eliminate much of the uncertainty that has clouded executive compensation planning. The Tax Conditioned Plan, Discretionary Transaction, Advance Approval and Reporting Exemptions are welcomed insofar as they do not require many changes in the manner in which executive compensation transactions would be executed even in the absence of the SEC's current rules.

The following chart demonstrates the reporting and liability rules for various typical executive compensation transactions. In addition, a list of action-items for issuers to consider is attached.

Transacción

Reporting Requirement/Transaction Code

Profit Recapture

Purchase, but exempt under 16b-3(d) if (i)advance approval is obtained from the full board or non-employee director committee, (ii)shareholders approve in advance or ratify the transaction at the next following annual meeting, or (iii)the option or shares are held for six months. The exemption provided by any of these three provisions is referred to herein as the "Approval Exemption Requirement."

Repricing

Yes: Form 5. Surrender of old option and grant of new option reported as separate transactions.

Sale and purchase, but both are exempt if one of the three requirements of the Approval Exemption is satisfied. Sales of derivative securities are only exempt under the first two requirements of the Approval Exemption (16b-3(e)); the six-month holding period does not work.

Exercise with Cash

Yes: Form 4. Reported as disposition of option and purchase of stock.

Code M, or X if Rule 16b-6 is used because Rule 16b-3 is unavailable.

Sale and purchase, but both are exempt under 16b-3 if one of the three requirements of the Approval Exemption is met. Alternatively, Rule 16b-6 may instead be relied on for the exercise if the option is in the money.

Note that six-month tax deferral under IRC §83(c)(3) is eliminated if the grant is exempt under the Approval Exemption by virtue of advance approval.

Stock Swap to Pay Exercise Price

Yes: Form 4. Reported as disposition of option, purchase of stock and disposition of "swapped" valores.

Exempt if either of the first two requirements of the Approval Exemption are satisfied at the time of grant or prior to the surrender of shares.

Stock Withholding to Pay Exercise Price and/or Taxes

Yes: Form4. Reported as disposition of option, purchase of stock and disposition of "withheld" valores.

Exempt if either of the first two requirements of the Approval Exemption are satisfied at the time of grant or prior to the withholding of shares. The stock withholding right is no longer considered a separate security.

Same Day Sale, i. e., Broker Assisted Exercise

Yes: Form4. Reported as disposition of option, purchase of stock and sale of stock to public.

Codes M (or X) and S.

The Exercise is exempt under the Approval Exemption either at the time of grant or prior to exercise. The sale of shares is not exempt.

Expiration of Option (Without Receiving Value)

No: Exempt under 16a-4(d).

Sale, but exempt under 16b-6(d) if no value received, or if one of the first two requirements of the Approval Exemption is satisfied.

Transfer of Option

Yes: Form4. Form5 if transfer is exempt.

Sale of derivative security not exempt, bona fide gift is exempt.

Sale of Option Shares to the Public

Yes: Form 4.

Sale of shares is not exempt and can be matched with any other nonexempt purchase (but generally not with the option exercise itself).

Inheritance of Option

Yes: Form 5.

Purchase, but exempt under 16b-5.

Purchase, but exempt under 16b-3 if one of the three requirements of the Approval Exemption is satisfied.

Ejercicio

Yes: Form 4. Reported as disposition of SAR, purchase of stock and sale of stock.

For stock: Sale and purchase, but both are exempt under 16b-6 or the Approval Exemption.

For cash: Treated like exercise for stock, plus simultaneous sale of shares. All transactions are exempt if one of the first two requirements of the Approval Exemption is satisfied.

Cash Exercise of Limited SARs Upon Actual Change in Control

Yes: Form 4.

Same as cash exercise of regular SAR.

Sale of Shares to the Public

Yes: Form 4.

Sale of shares is not exempt and can be matched with any other nonexempt purchase.

Grant of Shares

Yes: Form 5.

Purchase, but exempt under 16b-3 if one of the three requirements of the Approval Exemption is satisfied.

Vesting of Shares

No.

Non-event.

Forfeiture of Shares

Yes: Form 5.

Exempt sale (Rule 16b-3(e)) if one of the first two requirements of the Approval Exemption is satisfied at time of grant.

Stock Withholding

Yes: Form 5.

Exempt if either of the first two requirements of the Approval Exemption are satisfied either at the time of grant or prior to withholding.

Sale of Shares to the Public

Yes: Form 4.

Sale of shares is not exempt and can be matched with any other nonexempt purchase.

Grant of Shares, Fund Switching and Cash Distributions

Yes: Form5.

Codes A, D and I.

These plans now involve derivative securities, and the grant and award and participant directed transactions, i. e., purchases and sales, that occur under these plans must find an exemption. The two sources of exemption are the Approval Exemption and the exemption for Discretionary Transactions, i. e., "fund switching" and cash withdrawals.

Start of Purchase Period

No: Right to purchase stock not considered an equity security at all if purchase price not fixed.

Exempt under the Tax Conditioned Plan Exemption.

Purchase of Shares

No: Exempt under 16a-3.

Exempt under the 16b-3(c) exemptions for Tax Conditioned Plans.

Sale of Shares

Yes: Form 4.

Sale of shares is not exempt and can be matched with any other nonexempt purchase.

Investment of New Money in Stock Fund (Employee Contribution (including loan repayments) and Employer Match)

No: Exempt under 16a-3.

Exempt under the 16b-3(c) exemption for "Tax Conditioned Plans."

Transfer of Old Money Into Stock Fund

Yes: Form 5.

Exempt under 16b-3(f) if effected pursuant to an election made at least 6months following the date of the most recent election to transfer old money out of the stock fund or to take a cash distribution or a loan under any plan of the sponsor.

Transfer of Old Money out of Stock Fund

Yes: Form 5.

Exempt under 16b-3(f) if effected pursuant to an election made at least 6months following the date of the most recent election to transfer old money into the stock fund under any plan of the sponsor.

In-Service Withdrawal From Stock Fund in Stock

Yes: Form 5.

Exempt under 16a-13.

In-Service Withdrawal From Stock Fund in Cash or Participant Loan from a Segregated Participant Loan Fund

Yes: Form 5.

Exempt under 16b-3(f) if effected pursuant to an election made at least 6months following the date of the most recent election to transfer old money into the stock fund under any plan of the sponsor.

Termination or Disability Distribution From Stock Fund in Stock

No: Exempt under 16b-3.

Exempt under 16a-13.

Termination or Disability Distribution From Stock Fund in Cash

No: Exempt under 16b-3.

Exempt under the 16b-3(c) exemption for Tax Conditioned Plans.

Vesting

No.

Non-event.

Disposition of Stock Pursuant to QDRO

No: Exempt under 16a-12.

Exempt under Rule 16a-12.

1. Effective Date of Compliance. If a company has a Tax Conditioned Plan or a cash-only plan it will want to elect to comply by August15, 1996 to take advantage of the more liberal rules. Even if the company only has a stock option plan, it will want to elect to comply by August15 (notwithstanding the phase-in period until November1, 1996), unless it has a problem with assembling a Non-Employee Director Committee. An election to comply with the new rules with respect to one plan (except a cash-only plan) applies to all plans.

2. Tax Conditioned Plans . Establish a policy for Discretionary Transactions. Delete any language from current insider trading policy or plan documents, agreements or election forms that reflect the requirements of the old rules.

Employee Stock Purchase Plans. Many insiders have signed irrevocable elections to not change payroll withholding rates and to not withdraw from the plan in order to avoid a six-month holding period under current rules. These elections are no longer necessary for purchase periods that begin after August15, 1996, if the issuer decides to comply with the rules beginning on that date. In addition, six-month suspension rules for insiders who cease participation are no longer necessary. If an officer has a "standing election" to not change his or her contribution rate and not to withdraw, that election should now be revoked. The revocation should take effect six months from the date of the filing with the company.

Disinterested Administration. Check for and eliminate language regarding "disinterested administration." Replace with general language regarding "administration of the plan by the full board or a committee that will satisfy Rule 16b-3 with respect to grants to executive officers and directors."

Stockholder Approval. Eliminate language that references old Rule 16b-3 requirements for stockholder approval of material amendments and replace with language that requires stockholder approval, "to the extent required by applicable law, regulation or rule." Depending on your plan, you may need stockholders to approve any such change.

Stock Withholding for Exercises or Taxes. Delete language in plans or agreements regarding old Rule 16b-3 requirements, e. g., irrevocable elections, window period requirements, etc.

SARs. Delete language in plans or agreements regarding old Rule 16b-3 requirements, e. g., irrevocable elections, window period requirements, etc.

Anti-assignment Provisions. Make certain that transfers pursuant to "domestic relations orders," as defined in the Internal Revenue Code or ERISA, are permitted and add an exception to the general assignment prohibition permitting the committee to grant awards (but not ISOs) that executives may transfer without restriction, e. g., gifts of NSOs.

4. Non-Employee Directors. Make certain that the committee that administers the plan or arrangement consists of at least two "non-employee directors." These rules are very similar to the rules for "outside directors" under section 162(m) of the Internal Revenue Code. In drafting committee resolutions for typical grant transactions, e. g., a stock option, issuers should make certain that the committee approves all transactions that may originate out of the initial grant transaction, e. g., the exercise of an option and withholding and surrender rights or the deferral of the distribution of a grant of phantom stock.

5. Phantom Stock and Stock Units. The stock-based awards under these cash-only plans are now considered derivative securities subject to Sections 16(a) and (b). The good news is that all of the typical transactions under these plans will be exempt if the simple requirements of one of the exemptions under the Approval Exemption are satisfied. The new reporting rules apply to grants of cash-only awards on and after August15, 1996. Because of the reporting effective date, most companies will elect to comply with the Approval Exemption for new grants on August15, 1996.

Sección 16

What is hte 'Section 16'

The Section 16 is a section of the Securities Exchange Act of 1934 that is used to describe the various regulatory filing responsibilities that must be met by directors, officers and principal stockholders. According to Section 16, every person who is directly or indirectly the beneficial owner of more than 10% of the company, or who is a director or an officer of the issuer of such a security, shall file the statements required by this subsection with the Securities and Exchange Commission (SEC).

BREAKING DOWN 'Section 16'

Insiders affiliated with a public company. or any owners of more than 10%, are required to electronically file Form 3 with the SEC no later than 10 days after the individual becomes affiliated with the company. If there is a material change in the holdings of the company's insiders, they are required to file Form 4 with the SEC. Also, pursuant to Section 16, Form 5 must be filed by an insider who has conducted an insider transaction during the year if it was not previously reported on Form 4.

A debt ratio and profitability ratio used to determine how easily a company can pay interest on outstanding debt.

An account that can be found in the assets portion of a company's balance sheet. La buena voluntad a menudo puede surgir cuando una empresa.

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such.

A derivative contract through which two parties exchange financial instruments. Estos instrumentos pueden ser casi cualquier cosa.

Learn what EBITDA is, watch a short video to learn more and with further reading we teach you how to calculate it using MS.

PERFORMANCE-VESTED STOCK OPTION (PVO)

SunTrust Banks, Inc. (“SunTrust”), a Georgia corporation, pursuant to action of the Compensation Committee (“Committee”) of its Board of Directors and in accordance with the SunTrust Banks, Inc. 2009 Stock Plan (“Plan”), has granted a Performance-Vested Stock Option (“PVO”) to purchase shares of SunTrust Common Stock, $1.00 par value (“Stock”), upon the following terms as an incentive for Optionee to promote the interests of SunTrust and its Subsidiaries:

The percentage of the PVO that vests if SunTrust’s TSR Percentile on the Vesting Date is between the “Threshold” and “Target; Maximum” Performance Levels shall be determined by linear interpolation. The Committee shall determine the portion of the PVO that shall vest and become exercisable by multiplying the “Percentage of PVO That Vests,” set forth above, by the number of shares subject to this Option Agreement.

& # 167; 3. ACCELERATED VESTING; TERMINATION OF EMPLOYMENT. Some or all of this PVO may vest early and become exercisable as a result of the Optionee’s termination of employment with SunTrust and all its Subsidiaries prior to the Vesting Date, as described below in § 3(a), § 3(b), § 3(c) or § 3(d). If prior to the Vesting Date, the Optionee’s employment with SunTrust and its Subsidiaries terminates for any reason other than those described below, this PVO shall immediately and automatically without any action on the part of the Optionee or SunTrust terminate and be completely forfeited on the date of such termination of the Optionee’s employment.

(a) If the Optionee’s employment with SunTrust terminates prior to the Vesting Date and the date of a Change in Control, as a result of the Optionee’s (i) death, or (ii) Disability, a portion of the PVO shall vest and become exercisable on the date the Optionee’s employment terminates. The portion of the PVO, if any, that vests will be based on the portion of the PVO that would have vested if the Performance Period ended on such date (based on the actual Performance Level achieved (or the Target Performance Level, if such termination occurs less than one (1) year after the Grant Date)). Such vested portion of the PVO shall remain exercisable for the period described in § 4 (b). In the event of such death of Disability, any portion of the PVO that does not vest pursuant to this § 3(a) shall terminate and be completely forfeited on such date.

(b) If the Optionee’s employment with SunTrust terminates prior to the Vesting Date and the date of a Change in Control, as a result of the Optionee’s Retirement, the PVO shall vest and become exercisable with respect to a pro-rata number of shares of Stock on the last day of the Performance Period, if any, based on the Optionee’s service completed from the Grant Date through the date of such Optionee’s actual retirement date. Such vested portion of the PVO shall remain exercisable for the period described in § 4(c).

(c) If the Optionee’s employment with SunTrust is involuntarily terminated prior to the Vesting Date and the date of a Change in Control, by reason of a reduction in force which results in the Optionee’s eligibility for payment of a severance benefit pursuant to the terms of the SunTrust Banks, Inc. Severance Pay Plan or any successor to such plan, the PVO shall vest and become exercisable with respect to a pro-rata number of shares of Stock at the end of the Performance Period, if any, based on the Optionee’s service completed from the Grant Date through the date of such termination. Such vested portion of the PVO shall remain exercisable for the three month (3) period following the Vesting Date.

(d) In the event a Change in Control occurs prior to the Vesting Date and on or prior to the Optionee’s termination of employment, upon the earlier of: (i) the Vesting Date, provided that the Optionee has remained in continuous employment with SunTrust or a Subsidiary from the Grant Date through the Vesting Date; or (ii) the date of the Optionee’s termination of employment with SunTrust and its Subsidiaries as a result of: (A) an involuntary termination by SunTrust that does not constitute a Termination for Cause; (B) the Optionee’s death or Disability; or (C) a voluntary termination by the Optionee as a result of Retirement or a Termination for Good Reason; the PVO shall vest and become exercisable with respect to the following number of shares of Stock: (1) the number of shares that would have vested (if any) if the Performance Period ended on the date of the Change in Control (based on the actual Performance Level achieved through the date of the Change in Control) multiplied by a fraction, the numerator of which shall be the number of days from the Grant Date through the date of such Change in Control, and the denominator of which shall be the total number of days in the original Performance Period; plus (2) the number of shares that would have vested assuming SunTrust’s achievement of the Target Performance Level multiplied by a fraction, the numerator of which shall be the number of days from the date of such Change in Control through the last day of the original Performance Period, and the denominator of which shall be the total number of days in the original Performance Period. Such vested portion of the PVO shall remain exercisable for the period described in § 4(d). In the event of such Change in Control, any portion of the PVO that does not vest pursuant to this § 3(d) shall terminate and be completely forfeited on the earlier of the Vesting Date or the date of termination of the Optionee’s employment.

Notwithstanding anything herein to the contrary, if the Optionee is subject to the terms of a Change in Control Agreement on the date of a Change in Control that provides for more generous vesting, such vesting provisions of the Change in Control Agreement shall govern.

(e) For purposes of § 3(b) and 3(c) above, the PVO shall vest with respect to the pro-rata number of shares of Stock equal to the product of: (i) the number of shares that would have vested based on the actual Performance Level achieved as of the Vesting Date; multiplied by (ii) a fraction, the numerator of which is equal to the number of days from the Grant Date through the date of such termination of employment, and the denominator of which is equal to the number of days in the Performance Period. Fractional shares shall be disregarded. In the event of such pro-rata vesting described above, any portion of the PVO that does not vest pursuant to this § 3(e) shall terminate and be completely forfeited on such date.

& # 167; 4. EXPIRATION. To the extent not previously exercised, this PVO shall expire and cease to be exercisable on the Expiration Date or if earlier, on the first of the following events to occur:

(a) Except as otherwise described in this § 4 or § 3(c), if Optionee’s employment with SunTrust and all its Subsidiaries terminates for any reason, then Optionee may, within the three (3) month period following such termination, but in no event after the Expiration Date, exercise this PVO to the extent Optionee was entitled to exercise this PVO at the date of such termination of employment.

(b) In the event Optionee’s termination of employment with SunTrust and all Subsidiaries is due to death or Disability, any portion of the PVO that becomes vested and exercisable pursuant to § 2 or § 3(a), to the extent not previously exercised, shall remain exercisable through the end of the one (1) year period which begins on the date of Optionee’s death or Disability, but in no event after the Expiration Date.

(c) In the event Optionee terminates employment with SunTrust and all its Subsidiaries due to Retirement, any portion of the PVO that becomes vested and exercisable pursuant to § 2 or § 3(b), to the extent not previously exercised, shall remain exercisable through the end of the five (5) year period which begins on the later of the Vesting Date or the date of such Retirement, but in no event after the Expiration Date.

(d) Any portion of the PVO that becomes vested and exercisable pursuant to § 3(d) shall remain exercisable for the duration of the Exercise Period.

(e) This PVO shall expire on the date it has been exercised in full under this Option Agreement.

(f) This PVO shall expire on the Expiration Date to the extent it has not then been exercised.

(g) Notwithstanding anything in this Option Agreement to the contrary, if Optionee’s employment with SunTrust or a Subsidiary is Terminated for Cause, the PVO shall terminate and expire in its entirety, and all rights under this Option Agreement shall be forfeited, as of the end of the day before the date of Optionee’s termination of employment, regardless of whether this PVO was then vested or non-vested, and under no circumstances shall Optionee be entitled to exercise all or any part of this PVO after such expiration.

& # 167; 5. METHOD OF EXERCISE. This PVO shall be exercised by properly completing and delivering the applicable form to the delegate specified by the Committee for option recordkeeping, indicating the number of shares of Stock to be purchased upon such exercise, together with the appropriate payment in full for the number of such shares to be exercised. Payment may be made in the form of a check made payable in accordance with the delegate’s payment instructions, or written confirmation of ownership of sufficient shares of previously acquired Stock or any combination of such payment methods as has been approved by the Committee. Such exercise shall be effective on the date such form and payment actually are delivered to SunTrust’s delegate; provided, however, if such form and payment are mailed to the delegate at the appropriate address by registered mail or by an overnight service, the related exercise shall be treated as effective on the date accepted for delivery by the post office or overnight mail service. Any previously acquired Stock which is designated as payment for the exercise shall be valued at its Fair Market Value (closing price) on the date the exercise is effective or, if the exercise is effective on a date other than a business day, at the Fair Market Value on the immediately preceding business day.

& # 167; 6. WITHHOLDING. The Committee shall have the right to reduce the number of shares of Stock actually transferred to the Optionee to satisfy the minimum applicable tax withholding requirements, and the Optionee shall have the right (absent any such action by the Committee and subject to satisfying the requirements under Rule 16b-3) to elect that the minimum applicable tax withholding requirements be satisfied through a reduction in the number of shares of Stock transferred to the Optionee.

& # 167; 7. NONTRANSFERABLE. No rights granted under this PVO shall be transferable by the Optionee other than by will or by the laws of descent and distribution.

& # 167; 8. EMPLOYMENT AND TERMINATION. Nothing in the Plan or this Option Agreement or any related material shall give the Optionee the right to continue in employment with SunTrust or a Subsidiary or adversely affect the right of SunTrust or a Subsidiary to terminate the Optionee’s employment with or without cause at any time.

& # 167; 9. SHAREHOLDER STATUS. The Optionee shall have no rights as a shareholder with respect to any shares of Stock under this Option Agreement until the Optionee has made payment in full for such shares and such shares have been duly issued and delivered to the Optionee, and no adjustment shall be made for dividends of any kind or description whatsoever respecting such Stock except as expressly set forth in the Plan.

& # 167; 10. OTHER LAWS. SunTrust shall have the right to refuse to issue or transfer any Stock under this Option Agreement if SunTrust acting in its absolute discretion determines that the issuance or transfer of such Stock might violate any applicable law or regulation, and any payment tendered in such event to exercise this option shall be promptly refunded to the Optionee.

& # 167; 11. SECURITIES REGISTRATION. SunTrust may request the Optionee to hold any shares of Stock received upon the exercise of all or part of this PVO for personal investment and not for purposes of resale or distribution to the public and the Optionee shall, if so requested by SunTrust, deliver a certified statement to that effect to SunTrust as a condition to the transfer of such Stock to the Optionee.

& # 167; 12. MISCELLANEOUS.

(a) TRANSFER OF EMPLOYMENT. A transfer of Optionee’s employment between or among SunTrust and Subsidiaries or between or among Subsidiaries shall not be deemed a termination of employment under this Option Agreement.

(b) CANCELLATION OF RIGHTS. Optionee’s rights under this Option Agreement may be canceled in accordance with the terms of the Plan.

(c) INCORPORATION OF PLAN. This Option Agreement shall be subject to all of the provisions, definitions, terms and conditions set forth in the Plan and any interpretations, rules and regulations promulgated by the Committee from time to time, all of which are incorporated by reference in this Option Agreement.

(d) GOVERNING LAW. The Plan and this Option Agreement shall be governed by the laws of the State of Georgia (without regard to its choice-of-law provisions), except to the extent superseded by federal law.

(e) NOTICES. Except as otherwise provided herein, any written notices provided for in this Option Agreement that are sent by mail shall be deemed received three (3) business days after mailing, but not later than the date of actual receipt. Notices shall be directed, if to Optionee, at Optionee’s address indicated by SunTrust’s records and, if to SunTrust, at SunTrust’s principal executive office.

(f) SEVERABILITY. If one or more of the provisions of this Option Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Option Agreement to be construed so as to foster the intent of this Option Agreement and the Plan.

(g) ENTIRE AGREEMENT. This Option Agreement (which incorporates the terms and conditions of the Plan) constitutes the entire agreement of the parties with respect to the subject matter hereof. This Option Agreement supersedes all prior discussions, negotiations, understandings, commitments and agreements with respect to such matters.

& # 167; 13. DEFINITIONS. Whenever the following terms are used in this Option Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

(a) CHANGE IN CONTROL AGREEMENT – means a change in control agreement by and between SunTrust and the Optionee.

(b) CODE – means the Internal Revenue Code of 1986, as amended.

(c) DISABILITY – means a disability within the meaning of Code Section 22(e)(3).

(d) PERFORMANCE LEVEL – means the level of performance achieved by SunTrust during a measurement period (generally, the Performance Period) based on the TSR Percentile for such period.

(e) PERFORMANCE PERIOD – means the period commencing January 1, 2009 and ending on December 31, 2011.

(f) RETIREMENT – means the voluntary termination of employment by the Optionee from SunTrust or its Subsidiaries on or after attaining age 55 and having completed five (5) or more years of service as determined in accordance with the terms of the SunTrust Retirement Plan. An Optionee who is vested in the SunTrust Retirement Plan benefit but terminates employment before attaining age 55 or completing at least five (5) years of service is not treated for purposes of this Option Agreement and the share of Stock subject to this PVO as terminating employment due to Retirement.

(g) SUNTRUST RETIREMENT PLAN – means the SunTrust Banks, Inc. Retirement Plan, as amended from time to time.

(h) TERMINATION FOR CAUSE OR TERMINATED FOR CAUSE – means a termination of employment which is made primarily because of (i) the Optionee’s willful and continued failure to perform his job duties in a satisfactory manner after written notice from SunTrust to Optionee and a thirty (30) day period in which to cure such failure, (ii) the Optionee’s conviction of a felony or engagement in a dishonest act, misappropriation of funds, embezzlement, criminal conduct or common law fraud, (iii) the Optionee’s material violation of the Code of Business Conduct and Ethics of SunTrust or the Code of Conduct of a Subsidiary, (iv) the Optionee’s engagement in an act that materially damages or materially prejudices SunTrust or any Subsidiary or the Optionee’s engagement in activities materially damaging to the property, business or reputation of SunTrust or any Subsidiary; or (v) the Optionee’s failure and refusal to comply in any material respect with the current and any future amended policies, standards and regulations of SunTrust, any Subsidiary and their regulatory agencies, if such failure continues after written notice from SunTrust to the Optionee and a thirty (30) day period in which to cure such failure, or the determination by any such governing agency that the Optionee may no longer serve as an officer of SunTrust or a Subsidiary.

Notwithstanding anything herein to the contrary, if the Optionee is subject to the terms of a Change in Control Agreement at the time of his termination of employment with SunTrust or a Subsidiary, solely for purposes this Option Agreement, “Cause” shall have the meaning provided in the Change in Control Agreement.

(i) TERMINATION FOR GOOD REASON – means a termination of employment made primarily because of (i) a failure to elect or reelect or to appoint or to reappoint Optionee to, or the removal of Optionee from, the position which he or she held with SunTrust prior to the Change in Control, (ii) a substantial change by the Board or supervising management in Optionee’s functions, duties or responsibilities, which change would cause Optionee’s position with SunTrust to become of less dignity, responsibility, importance or scope than the position held by Optionee prior to the Change in Control or (iii) a substantial reduction of Optionee’s annual compensation from the lesser of: (A) the level in effect prior to the Change in Control or (B) any level established thereafter with the consent of Optionee.

Notwithstanding anything herein to the contrary, if the Optionee is subject to the terms of a Change in Control Agreement at the time of his termination of employment with SunTrust or a Subsidiary, solely for purposes of this Option Agreement, “Good Reason” shall have the meaning provided in the Change in Control Agreement.

(j) TOTAL SHAREHOLDER RETURN or TSR – means a company’s total shareholder return, calculated based on the stock price appreciation during a specified measurement period plus the value of dividends paid on such stock during the measurement period (which shall be deemed to have been reinvested in the underlying company’s stock).

(k) TSR PERCENTILE – means the percentile rank of the TSR for SunTrust during the Performance Period relative to the TSR for the 24 companies listed on Appendix A (the “Peer Group”) during the Performance Period; provided, however, that for purposes of measuring the TSR Percentile: (i) the Committee reserves the right to make adjustments to the Peer Group based on developments that occur during the Performance Period, such as removing from the Peer Group, retroactively to the beginning of the Performance Period, any company no longer existing as an independent entity or which has announced it is being acquired; and (ii) the beginning and ending TSR values shall be calculated based on the average of the closing prices of the applicable company’s stock for the 20 trading days prior to and including the beginning or ending date, as applicable, of the Performance Period.

Peer Group - 24 Companies

Amended SEC Rules Under the Short-Swing Profit Rules of Section 16 of the Securities Exchange Act of 1934

On May 30, 1996, the Securities and Exchange Commission adopted amendments to its rules and forms regarding the filing of ownership reports by officers, directors, and 10% shareholders, and the exemption of certain transactions by those persons from the short-swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934 and related provisions of the Investment Company Act of 1940 and the Public Utility Holding Company Act of 1935.

The new rules, which essentially implement the SEC's 1995 proposals and elements of its 1994 proposals not addressed in 1995, generally broaden and simplify the reporting and liability exemptions for employee benefit transactions and certain other transactions. Eliminated are certain employee plan requirements, including the written plan requirement (including the requirement that a plan specify a maximum number of shares) and the prohibition on transfer of options and other derivative securities. In addition, the shareholder approval, disinterested administration and six-month holding requirements are eliminated, except as an alternative ground for exemption on a transaction-by-transaction basis.

The new rules are generally effective August 15, 1996. The existing phase-in period, permitting the use of "old" Rule 16b-3 (and certain portions of "old" Rule 16a-8), is extended until November 1, 1996. Issuers may also continue to rely on "current" Rule 16b-3 until that date. As with the current transition rule, an issuer must conform all plans to the new rules at the same time.

Highlights of changes from the current rules, taken from the SEC Release Nos. 34-37260 and 35-26524, are as follows:

A. Transactions Between an Issuer and its Directors or Officers

Generally, transactions between an issuer (including an employee benefit plan sponsored by an issuer) and its directors or officers will be exempt from Section 16(b) if they satisfy the applicable conditions of new Rule 16b-3, as set forth below:

Routine transactions pursuant to specified tax-conditioned plans will be exempt from Section 16(b) without further condition. Tax-conditioned plans include:

Qualified Plans - plans that satisfy the minimum coverage and participation rules applicable to tax-qualified retirement plans (IRC section 410 and 401(a)(26)), whether or not the plan is so qualified.

Stock Purchase Plans - plans that satisfy the minimum coverage and participation requirements applicable to tax-qualified employee stock purchase plans (IRC Sections 423(b)(3) and (5)) or tax-qualified retirement plans IRC Section 410), whether or not the plan is so qualified. (Thus, an employee stock purchase plan not qualified under IRC Section 423 is a tax-conditioned plan if it would satisfy the minimum coverage rules of IRC Section 410.)

Excess Benefit Plans - plans that work in conjunction with a Qualified Plan to provide only a benefit or contribution otherwise prohibited under the Qualified Plan due to limitations of the Internal Revenue Code.

Fund-switching transactions or volitional cash withdrawals from an issuer equity securities fund will be exempt if the election to engage in the transaction is at least six months after the last election to engage in such a transaction that was opposite-way (i. e. a previous acquisition if the transaction to be exempted is a disposition, and vice versa). These transactions need not be made during a quarterly window period. The six-month requirement does not apply to certain elections mandated by the Internal Revenue Code (e. g. retirement age diversification elections under an ESOP) or triggered by termination of employment.

Other acquisitions by an officer or director from the issuer, including grants, awards and participant-directed transactions, will be exempt upon satisfaction of any one of three alternative conditions:

approval of the transaction by the board of directors of the issuer or a committee of two or more Non-Employee Directors (defined to exclude directors with consulting or other compensation arrangements or relationships that must be disclosed in proxy statements under certain requirements Item 404 of Regulation S-K);

approval or ratification of the transaction by the holders of the majority of the issuer's securities; o

satisfaction of a six-month holding period following the date of acquisition.

Other dispositions by an officer or director to the issuer will be exempt if approved by the board of directors of the issuer, a committee of two or more Non-Employee Directors or the holders of the majority of the issuer's securities.

B. Derivative Securities

The current Section 16 exclusion from the definition of "derivative securities" for certain instruments based on the value of the issuer's equity securities but settled exclusively in cash is rescinded. However, these instruments are eligible for exemption pursuant to new Rule 16b-3, as described above. Cash-only instruments issued before August 15 that were excludable from the definition of "derivative security" under current Rule 16a-1(c)(3) will remain exempt after August 15 from the reporting requirements of Section 16(a) and a transaction on or after that date that is consistent with the conditions of the cash-only exclusion pursuant to which the security was issued also will not to be subject to Section 16.

Options granted to an underwriter in a registered public offering to satisfy over-allotments are expressly excluded from the definition of "derivative security."

Rights to withhold or surrender a security in satisfaction of the exercise price of a derivative security, or in satisfaction of the tax-withholding consequences applicable to the receipt, exercise or vesting of an issuer equity security (including a derivative security) are excluded from the definition of "derivative security."

C. Form 3, 4 and 5 Reporting

A number of transactions exempt from Section 16(b) that currently must be reported on Form 5 no longer will be required to be reported at all, among them:

Exempt transactions pursuant to tax-conditioned plans (other than fund-switching transactions and volitional cash withdrawals from an issuer equity securities fund);

Transactions pursuant to dividend or interest reinvestment plans and domestic relations orders;

Transactions that change only the form of beneficial ownership;

Certain transactions by a person who has ceased to be an insider; y

Expirations or cancellations of certain derivative securities.

Exercises and conversions of derivative securities, including employee stock options, whether or not exempt from Section 16(b), will be reported on Form 4.

All other exempt transactions and small acquisitions will be reported annually on Form 5, with earlier reporting on Form 4 permitted.

Reporting will be permitted on a joint basis when more than one person subject to Section 16 is deemed to be a beneficial owner of the same issuer equity securities.

A trust will be subject to Section 16 only if the trust is the beneficial owner of more than ten percent of a class of issuer equity securities registered pursuant to Section 12 of the Act. Current Rule 16a-8(a)(1)(ii), which makes a trust subject to Section 16 if the trustee otherwise is subject to Section 16 and exercises or shares investment control of issuer securities held by the trust and the trustee or a member of the trustee's immediate family has a pecuniary interest in such issuer securities, is rescinded. Other obligations applicable to trusts, trustees, beneficiaries and settlors pursuant to current Rule 16a-8 are not affected by this change.

Insiders' obligation to report equity swap transactions is reiterated and clarified, and a new reporting code is added for equity swaps.

D. Proxy Disclosure

Item 405 of Regulations S-K and S-B is revised to clarify the nature of the issuer's obligation to review insiders' filings in order to determine whether there are any delinquent reports that require disclosure. The issuer may rely on Forms 3, 4 and 5 furnished to it, as well as written representations by an insider that no Form 5 is required. However, the issuer is obligated to consider the absence of certain forms, e. g. the absence of a Form 3 and, unless the issuer has received a written representation that none is required, the absence of a Form 5.

Item 405 disclosure will be required to be placed under a separate caption entitled "Section 16(a) Beneficial Ownership Reporting Compliance."

E. Other Issues

The exemption for the reinvestment of dividends and interest pursuant to dividend and interest reinvestment plans is revised to eliminate the requirement that the plan be made available on the same terms to all holders of the class of securities.

A new exemption is provided for transactions pursuant to domestic relations orders.

The exemption for stock splits, stock dividends and pro rata rights is expanded to exempt stock dividends paid in the securities of a different issuer, such as spinoff distributions.

A transaction that occurs after a person ceases to be an officer or director will be subject to Section 16 only if it is not otherwise exempt from Section 16(b) and is executed within six months of an opposite-way transaction subject to Section 16(b) that occurred while the person was an officer or director.

Home > Tax Issues > Substantial risk of forfeiture guidance clarifies when Section 16 short-swing profit liability can defer taxation of equity compensation awards

Substantial risk of forfeiture guidance clarifies when Section 16 short-swing profit liability can defer taxation of equity compensation awards

Legend had it at my law school that one day, a lost student walked into a torts class and asked the professor if this class was wills, trusts, and estates. The torts professor replied, “We haven’t gotten that far yet.” A dry sense of humor on the professor’s part? Quizás. His point, however, was that the law can be a seamless web, with one area of law often having an impact on another. This point often is true with respect to the tax and securities laws.

We blogged previously that the IRS and Treasury issued final regulations under Code Section 83 to “clarify” the definition of “substantial risk of forfeiture” with respect to restricted stock (and other property) grants. One of the clarifications was that transfer restrictions, in and of themselves, do not constitute a substantial risk of forfeiture. For taxation to be deferred on restricted stock grants, the stock must be both non-transferrable and subject to a substantial risk of forfeiture. An example might help illustrate this point. Suppose that a company grants its CEO restricted stock that vests on the fifth anniversary of the date of grant, provided that the CEO has been continuously employed through that date. Also suppose that the CEO satisfies this vesting condition, but on the vesting date, the company’s insider trading policy prohibits the CEO from selling the shares for several months. The CEO would be taxed on the value of the shares on the vesting date, despite the fact that the CEO is unable to sell the shares.

The Code Section 83 regulations, both before and after the clarification, contain an important exception to the non-transferability rule. This exception arises mostly with stock option grants, rather than restricted stock grants, even though restricted stock grants are more often impacted by Code Section 83. That exception is the subject of this blog.

Section 16 liability

The exception relates to Section 16(b) of the Securities Exchange Act of 1934 (“Section 16(b)”), which provides that any profit realized by an insider on a “short-swing” transaction must be disgorged to the company upon demand by the company or a stockholder acting on the company’s behalf. A “short-swing” transaction is a non-exempt purchase and sale, or sale and purchase, of the company’s equity securities within a period of less than six months. When a public company grants a stock option that is not made under an applicable Section 16(b) exemption, the grant is considered a non-exempt “purchase.” The shares underlying the option generally are subject to Section 16(b)’s restrictions for six months from the date of grant. Any sale of shares within six months of the grant date could be matched with this non-exempt “purchase” and violate Section 16(b).

Substantial risk of forfeiture related to Section 16 liability

Basic notions of fairness would suggest that if a sale of shares would subject somebody to potential SEC penalties, taxation on those shares should be delayed until the risk of liability lapses. The Code Section 83 regulations have always recognized this point. They also continue to provide that if an insider may not sell shares of stock previously acquired in a non-exempt transaction within the past six months because of potential liability under Section 16(b), the shares are subject to a substantial risk of forfeiture. The risk of forfeiture does not lapse, and, thus, the grantee will not realize taxable income until six months after the date in which he or she acquired the shares.

Clarification of the substantial risk of forfeiture guidance

One question from the prior regulations was whether a subsequent non-exempt purchase could further extend this substantial risk of forfeiture. A new example in the final regulations explains that the IRS and Treasury do not respect this strategy. The example states that any options granted in a non-exempt manner will be considered subject to a substantial risk of forfeiture only for the first six months after the date of grant. For example, suppose a company grants its CEO stock options, in a non-exempt manner, on April 1, 2014, that are fully and immediately vested. The CEO will not be able to sell the underlying shares until Oct. 1, 2014, because of potential Section 16(b) liability. As such, despite the fact that the options are fully vested in April, they will be subject to a substantial risk of forfeiture until Oct. 1, 2014. What if the CEO acquired additional shares in September in a non-exempt purchase? Could that further defer the substantial risk of forfeiture (and thus the taxable event) until 2015? The clarification in the regulations says no, it will not. The risk of forfeiture relating to Section 16(b) liability still lapses on Oct. 1, 2014.

What this clarification really means is that the risk of disgorging any profits under Section 16(b) generally will not have any impact on the substantial risk of forfeiture analysis. That is because most equity awards have a vesting period (either service or performance-based) of longer than six months. In the prior example, suppose the options granted in a non-exempt manner were not fully and immediately vested, but instead, vested in one third increments on each anniversary after the date of grant, through the third anniversary date. In that case, the options would be taxed when the CEO exercised the options. The only vesting date that would apply would be the time-based vesting requirements in the option agreement because regardless of how many additional non-exempt purchases of stock the executive made, the risk of forfeiture relating to Section 16(b) liability would apply only for 6 months after the date of grant.

Essentially, the IRS is eliminating any opportunity to abuse the Section 16(b) exception. It serves as yet another reminder that transfer restrictions, by themselves, cannot delay taxation. That is the case despite the fact that many efforts to comply with the securities laws often feel similar to a vesting condition on awards. As such, employers should make sure that their equity award grants contain a valid substantial risk of forfeiture in order to give their executives the opportunity to defer taxable income.

Special thanks to Jack Gravelle for his contributions to this article.

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Cashless Exercise

Resource type: Glossary Item

Status: Maintained

Jurisdiction: USA

A technique, sometimes called a same-day sale, that allows an employee to exercise his stock options ( www. practicallaw. com/0-505-8646) without having to pay cash to cover the exercise price. The employee delivers a notice to exercise the option together with instructions to sell some or all of the shares acquired on exercise, including the sale of enough shares to cover the cost of the exercise price. The company delivers the shares to a broker who sells enough shares to cover the cost of the required tax withholding and broker's commissions, as well as the exercise price. The balance is paid to the employee in shares or in cash, per the employee's notice.

When the Sarbanes-Oxley Act of 2002 ( www. practicallaw. com/8-382-3784) (the Act) was enacted, there was some uncertainty whether this technique would result in the kind of personal loan to executive officers and directors that the Act prohibits. Many practitioners have concluded that the cashless exercise does not violate the Act. Therefore, many companies continue to permit this method of exercise, even for their executive officers and directors. However, some other companies take a more conservative approach and prohibit their executive officers and directors from using this exercise method.

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Policy on Trading Blackout Periods; Benefit Plans; and Section 16 Reporting

POLICY ON TRADING BLACKOUT PERIODS; BENEFIT PLANS; AND SECTION 16 REPORTING

This Policy was unanimously adopted by the Board of Directors of ERHC Energy Inc on August 16, 2010. It applies to all employees, consultants, directors, and officers of the Company.

ERHC Energy, Inc (the "Company") has adopted this Policy on Trading Blackout Periods, Benefit Plans and Section 16 Reporting to apply to each employee, consultant, director, and officer of the Company ("Insiders") and to guide the Insiders with regard to their trading activity in stock of the Company and stock of the vendors and suppliers of the Company. The Company reserves the right to amend or rescind this Policy or any portion of it at any time and to adopt different policies and procedures at any time. This Policy must be strictly followed. Your attention is also drawn to ERHC's Insider Trading Policy which should, where the context permits, be read and complied with in conjunction with this Policy.

Persons Covered. This Policy on Trading Blackout Periods, Benefit Plans and Section 16 Reporting (this "Policy") applies to all directors, officers, associates, employees, agents and consultants of ERHC Energy, Inc. (the "Company") and any subsidiaries and affiliated companies. In this Policy, references to "you" incluir:

your family members who reside with you;

anyone else who lives in your household;

any family members who do not live in your household but whose transactions in securities are directed by you or are subject to your influence or control (such as parents or children who consult with you before they trade in securities);

any person to whom you have disclosed material, nonpublic information; y

any person acting on your behalf or on behalf of any individual listed above.

You are responsible for making sure that the purchase or sale of any security covered by this Policy by any such person complies with this Policy.

Securities Covered. Although it is most likely that the "material, nonpublic information" you possess will relate to the common stock of the Company, the Company may from time to time issue other securities that are publicly traded and, therefore, subject to this Policy. In addition, this Policy applies to purchases and sales of the securities of other entities, including customers or suppliers of the Company and entities with which the Company may be negotiating major transactions (such as an acquisition, investment or sale of assets). Information that is not material to the Company may nevertheless be material to those entities.

Statement of Policy

"BLACK OUT" PERIODS

A "black out" period is a period during which you may not execute transactions in Company securities. Please bear in mind that even if a black out period is not in effect, at no time may you trade in Company securities if you are aware of material, nonpublic information about the Company. For example, if the Company releases its quarterly financial results and you are aware of other material, nonpublic information not disclosed in the financial results, you may not trade in Company securities.

Quarterly Financial Results Black Out Periods. You may not buy or sell Company securities at any time from the last day of each fiscal quarter or fiscal year of the Company through to and including the two (2) full business day period following the public release of the financial results for such fiscal quarter or year (for example, by means of a press release, a publicly accessible conference call or a governmental filing).

For example, the second quarter of 2010 will end on June 30, 2010. If the Company issues its financial results for the second quarter of 2010 on August 15,2010, you may not purchase or sell the Company's common stock between June 30, 2010 and August 18, 2010. In accordance with this Policy, the Company will from time to time advise interested parties of the expected timing of its financial results.

Event-Specific Black Out Periods. The Company reserves the right to impose trading blackout periods from time to time when, in the judgment of the Company, a black out period is warranted. A black out period may be imposed for any reason, including the existence of nonpublic, material information about the Company, the anticipated issuance of interim financial results guidance or other material public announcements. The existence of an event-specific black out period may not be announced, or may be announced only to those who are aware of the transaction or event giving rise to the blackout period. If you are made aware of the existence of an event-specific black out period, you should not disclose the existence of such black out period to any other person. Individuals that are subject to event-specific blackout periods will be contacted when these periods are instituted from time to time.

Definition of Material Information and Non-public Information

Material Information This policy makes reference to “material information.” In this policy, “material information” is any information relating to the business and affairs of the Company if it is likely that a reasonable investor would consider such information to be important in making a decision to buy, sell or hold a Covered Security or where the information results in, or would reasonably be expected to result in, a significant change in the market price or value of any of the Covered Securities. Material information can be positive or negative and can relate to virtually any aspect of the Company’s business or to any type of security, debt or equity.

Examples of material information include (but are not limited to) facts concerning:

a) a significant acquisition, disposition or merger, a new issue of securities or significant change in capital structure,

b) a significant change in financing arrangements of the Company,

c) a significant change in expected financial results in the near future (such as in the next fiscal quarter),

d) significant operational events or incidents,

e) changes in ownership that may affect control of the Company,

f) significant changes in management or the Board of Directors of the Company,

g) changes in the nature the Company’s business and major litigation developments,

h) any substantial change in industry circumstances or competitive conditions that could significantly affect the Company’s financial results or prospects for growth.

Moreover, material information does not have to be related to the Company’s business. For example, the contents of a forthcoming newspaper column or investment newsletter that is expected to affect the market price of the Company’s securities can be material.

Non-public Information Material information is “non-public” if it has non been generally disclosed. Information is considered to have been generally disclosed if: (i) the information has been disseminated in a manner calculated to effectively reach the marketplace, and (ii) public investors have been given a reasonable amount of time to analyze the information. For the purposes of this policy, information will be considered public; i. e. no longer non-public, after information has been generally disclosed by means of a broadly disseminated press release and the trading has closed on the first full trading day following such press release.

If you are unsure whether the information that you possess is material or non-public, the President & Chief Executive Officer, the Controller, the Corporate Secretary or Legal Counsel of the Company should be consulted before trading in any securities of ERHC.

Pension Fund Black Out Periods. The Sarbanes-Oxley Act of 2002 prohibits all purchases, sales or transfers of Company securities by directors and officers of the Company during a "pension fund black out period." A pension fund black out period exists whenever 50% or more of the participants in a Company benefit plan are unable to conduct transactions in their Company common stock accounts for more than three (3) consecutive business days. These blackout periods typically occur when there is a change in the benefit plan's trustee, record keeper or investment manager. Individuals that are subject to these blackout periods will be contacted when these periods are instituted from time to time.

Hardship Exceptions. If you have an unexpected and urgent need to sell Company securities in order to generate cash you may, in appropriate circumstances, be permitted to sell Company securities during a financial results black out period. Hardship exceptions may be granted only by the Company's Chief Executive Officer and must be requested at least two (2) business days in advance of the proposed transaction.

TRANSACTIONS UNDER COMPANY BENEFIT PLANS

The U. S. insider trading laws also restrict your ability to engage in certain transactions under the Company's benefit plans, as described below:

Stock Option Exercises. You may exercise stock options for cash. However, you may not sell the underlying shares of stock and you may not engage in a cashless exercise of a stock option through a broker (because this entails selling a portion of the underlying stock to cover the costs of exercise) while you possess material, non public information.

SECTION 16 REPORTING

Directors and officers of the Company must file periodic reports regarding their ownership of Company securities pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to disgorgement of "short-swing" profits pursuant to Section 16(b) of the Exchange Act. Violations of or failure to comply with these requirements can result in SEC enforcement action.

The Company's Board of Directors has adopted an Addendum to this Policy that applies to the directors and officers. Directors and officers must pre-clear all transactions in Company securities with the Company's Chief Executive Officer prior to executing such transactions. The Company will notify employees or officers if they are subject to Section 16.

POST - TERMINATION TRANSACTIONS

This Policy continues to apply to your transactions in Company securities even after you have terminated your employment with or services to the Company and/or its subsidiaries and affiliated companies. If you are aware of material, nonpublic information when your employment or service relationship terminates, you may not trade in Company securities until that information has been publicly released.

I have received a copy of the ERHC Energy Inc Policy on Trading Black Out Periods. I have read and understand the Policy. I will comply with the policies and procedures set forth in the Policy. I understand and agree that, if I am an employee/consultant of ERHC Energy Inc, or any of its subsidiaries, my failure to comply in all respects with ERHC Energy Inc's policies, including the Policy on Insider Trading, is a legitimate basis for termination for cause of my employment/engagement with ERHC Energy Inc, and any of its subsidiaries to which my employment/engagement now relates or may in the future relate.

Please check the space below if appropriate :

__ I have been notified that I am a member of the Insider Group, and I have carefully read and understand the additional restrictions that I am subject to pursuant to the Company's Policy on Insider Trading.

Date: _________ Signed: ______________

Name: ______________ (Please Print)

Questions Posed for Today's Webcast

Alan Dye on the Latest Section 16 Developments

Q&A and Practice Tips from the Expert

Wednesday, January 18, 2006

As reflected by the many questions posed daily on the electronic forums of Section16.net and Naspp. com, the issues that Section 16 filers face today vary widely in scope and complexity. While this program historically has been timed to allow filers to raise issues associated with filing Form 5 and disclosing delinquencies under S-K Item 405, the questions raised this year go well beyond those subjects. Several questions submitted raise Form 5 issues, though, so let’s start with a discussion of some Form 5 basics, including some common misconceptions about Form 5.

When Form 5 Is Required

Since the SEC amended Rule 16a-3 in 2003 to require that transactions exempted by Rule 16b-3 be reported on Form 4 rather than Form 5, relatively few transactions are eligible for reporting on Form 5. Lots of insiders still file Forms 5, either because they engaged in a transaction reportable on Form 5 or because they want to file a Form 5 voluntarily to report transactions that were exempt from reporting. Some filers may be filing Form 5 unnecessarily, in the mistaken belief that one is required. Here are the circumstances under which a Form 5 is required:

A Form 5 is required to be filed by any insider who engaged in a transaction during the fiscal year that has not previously been reported on Form 4 and that either (i) was exempt from Section 16(b) and permitted to be reported on Form 5 ( e. g . gifts) or (ii) should have been reported on Form 4, but was not.

A Form 5 is not required to be filed to report gifts or other Form 5 transactions that have already been reported.

A Form 5 is not required to be filed to update the insider’s holdings of shares under a 401(k) plan, dividend reinvestment plan, or employee stock purchase plan.

A Form 5 is not required to be filed to provide a list of all of the insider’s holdings of issuer securities, in Table I or Table II.

Automatic Adjustment to Conversion Price of Preferred Stock

A ten percent owner owns privately placed convertible preferred stock that is convertible into common stock of the issuer. The certificate of designation establishing the terms of the preferred stock provides that, if the issuer issues common stock at a price that is lower than the conversion price, the conversion price will be adjusted according to a formula intended to preserve the economic value of the preferred stock. The issuer plans to issue common stock at a lower price than the conversion price. Will the resulting amendment to the conversion price of the preferred stock require reporting on Form 4?

Adjustment of Options Following Stock Split or Spin-Off

An issuer effects a stock split or a spin-off of a subsidiary, resulting in an adjustment to outstanding stock options to increase the number of option shares and to decrease the exercise price per share. Assuming the stock split or spin-off does not have to be reported, how should the adjustment be reflected in a Form 4 filed to report the exercise of the option? Should a footnote be added to Columns 2, 5, 7 and 9 of Table II? Should a footnote be included in Table I?

Option Grant Date

We are confused about the Form 4 deadline for reporting an option grant. Is the Form 4 due two days after committee approval, or two days after notification of the grant is delivered to the insider?

Amendment of Vesting Terms of Outstanding Options

The Compensation Committee of our Board of Directors is planning to accelerate the vesting of all outstanding underwater options so that the options become exercisable immediately. Will the amendment require that we file Forms 4 for all affected insiders? Will we need to report the acceleration on Form 8-K?

Option Grants During Blackout Periods

Do you see any reason not to grant options to executives on an annual basis, at the same time each year, without regard for whether the company is in a blackout period? Would it be permissible to grant options earlier, out of the usual cycle, if the company knows that positive news is about to be announced?

Is an insider’s purchase of company stock in a brokerage account with dividends reinvested by the broker through open market purchases reportable on Form 4?

Insider’s Resignation as Trustee of GRAT

An insider is the trustee of a grantor retained annuity trust. Pursuant to the terms of the trust, upon payment of the last annuity payment, the insider’s trusteeship will terminate and a new trustee will be appointed until proceeds are distributed to the holders of the remainder interests. Can the insider's loss of beneficial ownership following termination of his trusteeship be reported on Form 5?

Appointment of New Attorney In Fact

A person within our company who is designated as attorney-in-fact for Section 16 filers has recently retired, and a new employee is taking over his Section 16 duties. Section 16 insiders are now being asked to sign another power of attorney to reflect the new employee’s authority to sign reports on their behalf. Do the original powers of attorney need to be revoked in writing to the SEC, or do we just need to attach the new power of attorney to each Form 4 as it becomes due?

Name Change by Attorney in Fact

I file and often sign the Forms 3, 4 and 5 for our insiders. My last name recently changed due to marriage. Is it necessary for me to have all Section 16 insiders execute a new power of attorney appointing me as attorney-in-fact in my new name?

Multiple Matching Transactions Under Section 16(b)

An insider sells 500 shares at $4.00 a share in January. In February, he purchases 500 shares at $2.00 a share. If, after the purchase in February, the insider voluntarily disgorges the full amount of the profit ($1,000) under Section 16(b), what happens if the insider purchases another 500 shares in March at $1.00 a share? Does the insider have to disgorge an additional $500?

We have a director emeritus who attends board meetings most of the time but who is no longer an insider. It has been our practice to continue filing Section 16 reports for this former director, even though we no longer consider him to be subject to Section 16. We recently filed one of his Forms 4 late. Is the company required to make Item 405 disclosure of the late filing?

Completing Column 9 of Table II

When reporting a transaction involving one of an insider’s many employee stock options, what number should be reported in Column 9 of Table II as the “number of derivative securities beneficially owned following the reported transaction”?

Reporting Restricted Stock Units in Table I

Is a restricted stock unit a derivative security that should be reported in Table II, or is it acceptable to report RSUs in Table I?

What if the insider defers receipt of the underlying stock upon vesting?

Performance-Based Restricted Stock Units

Three years ago we granted performance-based RSUs to executives, with vesting based on our achieving specified targets for revenue growth and similar measures over a three-year period. Prior to the end of that period, participants were able to elect to receive their payout in cash, stock, or RSUs. For participants who elected to receive RSUs, the RSUs will be fully vested and will be payable only in cash and only upon the participant’s termination of employment. Dividends will accrue on the RSUs and will be paid in cash at the same time the RSUs are paid out.

Are the vested RSUs granted reportable even though they are fully vested and settle only in cash?

Are the dividends accrued on these RSUs reportable?

When the Six-Month Holding Period Begins for RSUs

When does the six month holding period begin under Rule 16b-3(d)(3) in connection with restricted stock units--the date of grant (as with restricted stock) or the date of vesting?

Insider’s Transfer of Stock to Controlled Charitable Foundation

One of our insiders has established a 501(c)(3) charitable foundation and has transferred some of his directly owned shares to the foundation. He, his wife and the trust advisors are the co-trustees of the new foundation. It's not clear to me whether I should treat this as a gift or instead as a change in form of beneficial ownership.

Specific Approval of Tax Withholding Transactions

Our company has issued restricted stock and restricted stock units to several Section 16 insiders. The awards may vest during a closed trading window. We would like to permit shares to be tendered for taxes, but we do not want to run into any short-swing issues. The awards were approved by a committee of two or more non-employee directors, and the plan under which they were granted provides that the plan administrator may, in its discretion, allow any or all grantees to have shares withheld upon vesting in satisfaction of all or part of their taxes. Do you think this wording is sufficient to allow reliance on Rule 16b-3(e) to exempt the withholding?

Incorrect Designation of ISO in Form 4

We recently filed a Form 4 to report the grant of an employee stock option that was part ISO and part NQSO. The number of shares underlying the option was reported correctly, but we incorrectly stated the breakdown between ISOs and NQSOs by 72 shares. Do we need to file an amended Form 4?

Model Form 145 says that the writing of a covered call by an insider is a sale of an option and therefore is reportable only in Table II of Form 4. The Model Form also states, however, that the writing of the call is deemed a sale of the securities underlying the option for purposes of Section 16(b). Model Form 146 then says that the counterparty’s exercise of the call is reportable as a disposition of the option and a sale of the underlying security. If writing the call was a sale of the underlying security, how can the exercise of the call be another sale of the same security, since an insider can’t sell the same security twice?

Filing the Power of Attorney

We signed and filed a Form 3 and two Forms 4 for an insider before we received his signed power of attorney. Do we need to amend each of the three reports to attach the power as an exhibit? One of the Forms 4 was filed before the Form 3.

Rule 10b5-1 Transactions

Are transactions effected for an insider’s account pursuant to a broker-administered Rule 10b5-1 plan subject to Section 16?

Directors by Deputization

Can a director by deputization rely on Rule 16b-3 to exempt an acquisition of securities from the issuer?

Insider’s Sale of Entity that Owns Issuer Stock

One of our insiders, a ten percent owner, holds some of our stock indirectly through a wholly owned subsidiary. If the insider sells the subsidiary, resulting in the insider’s disposition of our stock held by that subsidiary, will the sale be reportable on Form 4? If so, will the sale be subject to Section 16(b)?

Limited Partnership’s Pro Rata Distribution of Issuer Securities

An investment fund owns more than ten percent of our common stock. The general partner intends to distribute the shares to the partners (including the general partner) in a pro rata distribution based on their percentage interests in the partnership. Will the fund’s distribution be a “sale” by the partnership, matchable with any purchases by the partnership within less than six months?

Deemed Execution Date

Is it necessary to report a deemed execution date for an eligible transaction where the Form 4 is filed within two business days of the actual execution date? What if the actual and deemed execution dates are the same?

Early Item 405 Disclosure

Several of our insiders filed late Forms 4 during 2004, and we disclosed those reporting delinquencies in the proxy statement we filed for the 2005 meeting of shareholders. One of our insiders also filed a late Form 4 in February 2005, and we disclosed that delinquency in the 2005 proxy statement, even though we may not have had to. Do we need to disclose that delinquency again in our 2007 proxy statement? We have no other Item 405 disclosures this year and therefore would rather not include the disclosure if we don’t have to.

Former Insider’s Resumption of Insider Status

One of our vice-presidents was considered a Section 16 officer until 2002, when we re-evaluated our list of Section 16 officers and concluded that he should no longer be considered subject to Section 16. Since then, the vice-president’s policy-making function has been expanded, and we plan to designate him as a Section 16 insider at the next board meeting. The vice-president never filed an exit report indicating that he was no longer subject to Section 16. Do we need to file a new Form 3, or can we just resume filing Forms 4?

Is the conversion of hybrid preferred stock, which is convertible at a fixed price or, if lower, a floating price, exempt from Section 16(b) under Rule 16b-6(b), as the conversion of a derivative security?

Counting Two Business Days

Our compensation committee has scheduled a Saturday meeting to approve option grants. Will the Forms 4 to report the grants be due two business days after Saturday ( i. e. . Tuesday) or two business days after Monday ( i. e. . Wednesday)?

Multiple Gifts on Same Day

If a Section 16 filer makes four gifts of 100 shares of common stock on a given day, do I need to list each gift separately or can I just list it as a gift of 400 shares? Would it help to add a footnote?

Terms and Conditions/Privacy Policy |. Executive Press Executive Press, Inc. P. O. Box 1549 - Austin, TX 78767, Tel. (925) 685-5111, FAX (925) 930-9284, info@section16.net

This document contains the final regulations relating to options granted under an employee stock purchase plan as defined in section 423 of the Internal Revenue Code (Code). These final regulations affect certain taxpayers who participate in the transfer of stock pursuant to the exercise of options granted under an employee stock purchase plan. These final regulations provide guidance to assist taxpayers in complying with section 423 in addition to clarifying certain rules regarding options granted under an employee stock purchase plan. This document also contains final regulations under sections 421, 422 and 424 of the Code.

DATES:

Effective Date: These regulations are effective on November 17, 2009.

Applicability Date: These regulations apply as of January 1, 2010.

FOR FURTHER INFORMATION CONTACT:

Thomas Scholz or Ilya Enkishev at (202) 622-6030 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Fondo

This document contains final amendments to the Income Tax Regulations (26 CFR part 1) under sections 421, 422, 423 and 424 of the Code.

Section 423 was added to the Code by section 221(a) of the Revenue Act of 1964, Public Law 88-272 (78 Stat. 63 (1964)). Changes to the applicable law concerning section 423 were made by sections 1402(b)(1)(C) and 1402(b)(2) of the Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1731 and 1732-1733 (1976)); section 1001(b)(5) of the Deficit Reduction Act of 1984, Public Law 98-369 (98 Stat. 1011 (1984)); section 1114 of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2451 (1986)); and sections 11801(c)(9)(D)(i), (ii) and 11801(c)(9)(E) of the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508 (104 Stat. 1388-525 (1990)).

Regulations under section 423 were published in the Federal Register on June 23, 1966 (T. D. 6887, 1966-2 C. B. 129). These regulations were amended on September 27, 1979 (T. D. 7645, 1979-2 C. B. 198), October 31, 1980 (T. D. 7728, 1980-2 C. B. 236), and December 1, 1988 (T. D. 8235, 1989-1 C. B. 117). In Notice 2004-55, 2004-2 C. B. 319 (August 23, 2004)) (see §601.601(d)(2)(ii)( b )), the IRS and the Treasury Department requested comments concerning whether the existing regulations under section 423 should be amended, and if so, what issues should be addressed.

On July 29, 2008, the Treasury Department published a notice of proposed rulemaking (REG-106251-08, 2008-39 I. R.B. 774) in the Federal Register (73 FR 43875) under section 423. A public hearing on the proposed regulations was held on January 15, 2009. Written and electronic comments responding to the notice of proposed rulemaking were received. After consideration of these comments, the Treasury Department adopts the proposed regulations as final regulations, with the modifications set forth in this Treasury decision. The significant revisions are discussed in this preamble.

In general, the income tax treatment of the grant of an option to purchase stock in connection with the performance of services and of the transfer of stock pursuant to the exercise of the option is determined under section 83 and the regulations thereunder. However, section 421 provides special rules for determining the income tax treatment of the transfer of shares of stock pursuant to the exercise of an option if the requirements of sections 422(a) or 423(a), as applicable, are met. Section 422 applies to incentive stock options and section 423 applies to options granted under an employee stock purchase plan (collectively, statutory options).

Under section 421, if a share of stock is transferred to an individual pursuant to the exercise of a statutory option, there is no income at the time of exercise of the option with respect to the transfer and no deduction under section 162 is allowed to the employer corporation with respect to the transfer.

Section 423(a) provides that section 421 applies to the transfer of stock to an individual pursuant to the exercise of an option granted under an employee stock purchase plan if: (i) no disposition of the stock is made within two years from the date of grant of the option or within one year from the date of transfer of the share, and (ii) at all times during the period beginning on the date of grant and ending on the day three months before the exercise of the option, the individual is an employee of either the corporation granting the option or a parent or subsidiary of such corporation, or a corporation (or a parent or subsidiary of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) applies. Section 423(b) sets forth several requirements that must be met for a plan to qualify as an employee stock purchase plan. Section 423(c) provides a special rule that is applicable where the option exercise price is between 85 and 100 percent of the fair market value of the stock at the time the option was granted.

Explanation of Provisions

These final regulations provide a comprehensive set of rules governing stock options issued under an employee stock purchase plan and incorporate substantially all of the rules contained in the existing regulations under section 423. These final regulations are comprised of two sections: Section 1.423-1, applicability of section 421(a); and §1.423-2, employee stock purchase plan defined. The modifications to the proposed regulations that are included in these final regulations reflect consideration of the comments submitted by taxpayers.

1. General requirements

The proposed regulations provide that an employee stock purchase plan must meet the requirements of paragraphs (i) through (ix) of §1.423-2(a)(2) to qualify as an employee stock purchase plan under section 423(b). The proposed regulations also provide that the requirements of paragraphs (iii) through (ix) of §1.423-2(a)(2) may be satisfied by the terms of the plan or an offering made under the plan. The final regulations adopt these requirements of the proposed regulations, although the numerical designation of the requirements is modified. To emphasize that the requirements of paragraphs (iii) through (ix) of §1.423-2(a)(2) of the proposed regulations may be satisfied by the terms of the plan or an offering made under the plan, these final regulations separately list these requirements in §1.423-2(a)(3).

Commenters requested clarification of whether options with terms that are inconsistent with the terms of the plan will be eligible for the special tax treatment of section 421. As provided in §1.423-2(a)(3) of the proposed regulations, §1.423-2(a)(4) of these final regulations provides that, if the terms of an option are inconsistent with the terms of the employee stock purchase plan or an offering under the plan, then the option will not be treated as granted under an employee stock purchase plan. However, an option may still qualify for the special tax treatment of section 421, even if the terms of the plan are inconsistent with any of the requirements in §1.423-2(a)(3) of these final regulations, if the option is granted under an offering with terms that comply with the requirements of §1.423-2(a)(3). Example 2 of §1.423-2(e)(6) of these final regulations illustrates this principle.

2. Offerings under an employee stock purchase plan

These final regulations provide further guidance for employee stock purchase plans under which more than one offering is made. As set forth in §1.423-2(a)(1) of these final regulations, one or more offerings may be made under a plan and the offerings may be consecutive or overlapping. Further, pursuant to section 423(b) and its flush language, the terms of each offering need not be identical. Although the terms of each offering need not be identical, the terms of the plan and each offering together must satisfy the requirements of §1.423-2(a)(2) and (3) of these final regulations. For example, if overlapping offerings are made under an employee stock purchase plan, then each offering may contain different terms, provided that the terms of each offering (together with the plan) satisfy the requirements of §1.423-2(a)(3) of these final regulations. Furthermore, when a parent corporation adopts an employee stock purchase plan, it may establish separate offerings with different terms under the plan and designate which subsidiary corporations of the parent corporation may participate in a particular offering, provided that the terms of each offering (together with the plan) satisfy the requirements of §1.423-2(a)(3). The terms “parent corporation” and “subsidiary corporation” are defined in §1.424-1(f) of the regulations.

a. Employees covered by the plan

Paragraphs (i) through (iv) of §1.423-2(e)(1) of the proposed regulations and these final regulations set forth the categories of employees that may be excluded from coverage under an employee stock purchase plan or an offering under the plan. The proposed regulations provide that the exclusions for various categories of employees must be applied in an identical manner to all employees of every corporation whose employees are granted options under the plan. Commenters noted that the requirement of identical exclusions for all offerings under a plan constrains the ability to make future and overlapping offerings that are more (or less) inclusive than prior offerings under the plan. Commenters suggested that the final regulations should permit multiple offerings under a plan with different exclusions applicable to the one or more corporations whose employees participate in the particular offering under the plan.

These final regulations generally adopt the approach suggested by the commenters. Pursuant to these final regulations, whether the terms of a plan and offering satisfy the requirements of §1.423-2(e) is made on an offering-by-offering basis. The terms of each offering under a plan may be different, provided the plan and offering together satisfy the requirements of §1.423-2(a)(2) and (3) of these final regulations. With respect to satisfying the requirements of §1.423-2(e), the terms of each offering may provide different exclusions of employees, as permitted and within the limitations described in §1.423-2(e)(1), (2) and (3) of these final regulations. The exclusions established with respect to a particular offering must be applied in an identical manner to all employees of every corporation whose employees are granted options under that particular offering. Examples 7 and 8 of §1.423-2(e)(6) of these final regulations illustrate these principles.

Some commenters suggested that the final regulations permit employers to exclude from plan participation employees who are nonresident aliens and who receive no earned income that constitutes income from sources within the United States. Other commenters suggested that the final regulations permit employers to exclude from plan participation employees under a specified age. The IRS and the Treasury Department are aware of the complexities often associated with participation in an employee stock purchase plan by nonresident aliens and employees under a specified age, such as the age of majority. However, section 423 does not provide exclusions for nonresident aliens or employees under a specified age. Accordingly, the IRS and the Treasury Department are constrained by statutory authority from providing a general exclusion from plan participation for employees who are nonresident aliens or employees under a specified age.

One commenter suggested that the final regulations provide additional flexibility by permitting employers to exclude from plan participation highly compensated employees (HCEs) (within the meaning of section 414(q)) on any basis. Section 1.423-2(e)(2)(ii) of the proposed regulations provides that the terms of an employee stock purchase plan may exclude HCEs: (a) with compensation above a certain level, or (b) who are officers or subject to the disclosure requirements of section 16(a) of the Securities Exchange Act of 1934, provided the exclusion is applied in an identical manner to all HCEs of every corporation whose employees are granted options under the plan. These final regulations do not adopt the suggestion that HCEs may be excluded from participation in an employee stock purchase plan on any basis. Instead, these final regulations offer some additional flexibility by providing that, with respect to the exclusion of HCEs, the terms of each offering made under a plan need not be identical with respect to the HCEs, provided the HCEs are excluded as permitted and within the limitations described in §1.423-2(e)(2)(ii) of these final regulations.

segundo. Equal rights and privileges

Commenters further suggested that the final regulations provide flexibility by permitting employers to make multiple offerings with different rights and privileges applicable to the participants of each offering under a plan. These final regulations generally adopt the approach suggested by the commenters. Pursuant to these final regulations, the determination of whether the terms of an offering satisfy the requirements of §1.423-2(f) is made on an offering-by-offering basis. The terms of each offering under a plan may be different, provided the plan and offering together satisfy the requirements of §1.423-2(a)(2) and (3) of these final regulations. However, the rights and privileges established with respect to a particular offering must be applied in an identical manner to all employees of every corporation whose employees are granted options under that particular offering. Examples 4 and 5 of §1.423-2(f)(7) of these final regulations illustrate these principles.

3. Maximum number of shares that may be purchased by an employee

Commenters asked whether the designation of a maximum number of shares that may be purchased by an employee during the offering is necessary in order for the first day of the offering period to be the date of grant. Consistent with the proposed regulations, §1.423-2(h)(3) of these final regulations provides that the date of grant will be the first day of an offering period if the terms of an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering. Similarly, the date of grant will be the first day of an offering if the terms of the plan or offering require the application of a formula to establish, on the first day of the offering, the maximum number of shares that may be purchased by each employee during the offering.

However, §1.423-2(h)(3) of these final regulations does not require that an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering or incorporate a formula to establish a maximum number of shares that may be purchased by each employee during the offering. If the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exercise will be the date of grant of the option. As discussed in the preamble to the proposed regulations, the $25,000 limit under section 423(b)(8) and the limit on the aggregate number of shares that may be issued under an employee stock purchase plan are not sufficient to establish the maximum number of shares that can be purchased by an employee under an option so that the date of grant will be the first day of the offering. Examples 1, 2, 3 and 4 in §1.423-2(h)(4) of these final regulations illustrate these principles.

Commenters also asked whether any particular number of shares is necessary to satisfy the requirement to designate a maximum number of shares that may be purchased during the offering in order for the first day of the offering period to be the date of grant. No particular number of shares is necessary to satisfy this requirement and establish the first day of the offering period as the date of grant for the option. These final regulations adopt §1.423-2(h)(3) of the proposed regulations to provide that the designation of any maximum number of shares is sufficient to establish the first day of the offering period as the date of grant for the option.

4. Annual $25,000 limitation

Section 423(b)(8) provides that an employee stock purchase plan must, by its terms, provide that no employee may be permitted to accrue the right to purchase stock under all the employee stock purchase plans of his or her employer corporation and its related corporations at a rate which exceeds $25,000 in fair market value of the stock (determined on the date of grant) for each calendar year in which an option granted to the employee is outstanding. Section 423(b)(8)(A) provides that the right to purchase stock under an option accrues when the option first becomes exercisable.

In drafting the proposed regulations, the Treasury Department and the IRS were aware that taxpayers were interpreting the $25,000 limitation inconsistently. Certain taxpayers interpreted section 423(b)(8) to mean that the limit increases by $25,000 for each calendar year during which the option is outstanding and exercisable; other taxpayers interpreted the sections to mean that such limit increases for each calendar year during which the option is simply outstanding. Consistent with comments received by the Treasury Department and the IRS in response to Notice 2004-55, 2004-2 C. B. 319 (August 23, 2004)), (see §601.601(d)(2)(ii)( b )), the proposed regulations adopted an approach that was generally consistent with the $100,000 limitation for incentive stock options and interpreted section 423(b)(8) to mean that the limit increases by $25,000 for each calendar year during which the option is outstanding and exercisable.

In response to the proposed regulations, several commenters suggested that the Treasury Department and the IRS reconsider the calculation of the $25,000 limitation in section 423(b)(8). Commenters suggested that the regulations adopt an approach that permits an option to accrue at a rate of $25,000 for each calendar year that the option is simply outstanding. Specifically, even though section 423(b)(8)(A) provides that the right to purchase stock actually accrues when the option first becomes exercisable during a calendar year, the first sentence of section 423(b)(8) provides that the limit on accruals is $25,000 “for each year in which such option is outstanding.” Upon further consideration and in response to the foregoing comments, these final regulations modify §1.423-2(i) of the proposed regulations to provide that the limit increases by $25,000 for each calendar year that an option is outstanding. Example 5 in §1.423-2(i)(5) of these final regulations has been modified to illustrate this principle.

5. Stockholder approval requirements

To qualify as an employee stock purchase plan, section 423(b)(2) requires that the plan be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted. These final regulations clarify that new stockholder approval is required if there is a change in the shares with respect to which options are issued or a change in the granting corporation. In particular, these final regulations clarify that the stockholders of a subsidiary corporation include the parent corporation and any other stockholders of the subsidiary. Accordingly, these final regulations adopt Example 1(iii) in §1.423-2(c)(5) and Example 1(iii) in §1.422-2(b)(6) of the proposed regulations.

One commenter to the proposed regulations suggested that a conforming change be made to Example 9(iii) in §1.424-1(a)(10) which addresses the substitution of options in the context of an acquisition. Example 9(iii) in §1.424-1(a)(10), as previously set forth in the regulations, requires the stockholders of an acquiring company to approve an amendment of the option plan of an acquired corporate subsidiary to issue parent stock instead of subsidiary stock. The commenter proposed that the example be amended to require the acquiring company (instead of its stockholders) to approve the amendment of the option plan to issue parent stock instead of subsidiary stock. This amendment is consistent with Example 1(iii) in §1.423-2(c)(5) and Example 1(iii) in §1.422-2(b)(6) of these final regulations. Accordingly, Example 9(iii) in §1.424-1(a)(10) of these final regulations has been modified to reflect the adoption of the commenter’s suggestion.

Effective/Applicability Date

These regulations apply as of January 1, 2010, and will apply to any statutory option granted on or after that date. Taxpayers may rely on these final regulations for the treatment of any statutory option granted prior to January 1, 2010.

§1.421-1 Meaning and use of certain terms .

(c) Time and date of granting option . (1) For purposes of this section and §§1.421-2 through 1.424-1, the language “the date of the granting of the option” and “the time such option is granted,” and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. Except as set forth in §1.423-2(h)(2), a corporate action constituting an offer of stock for sale is not considered complete until the date on which the maximum number of shares that can be purchased under the option and the minimum option price are fixed or determinable.

(j) Effective/applicability date —(1) In general . Except for paragraph (c)(1) of this section, the regulations under this section are effective on August 3, 2004. Paragraph (c)(1) of this section is effective on November 17, 2009. Paragraph (c)(1) of this section applies to statutory options granted on or after January 1, 2010.

Par. 3. Section 1.422-2, paragraph (b)(6), Example 1 (iii) is revised to read as follows:

§1.422-2 Incentive stock options defined .

(iii) Assume the same facts as in paragraph (i) of this Example 1 . except that the plan was adopted on January 1, 2010. Assume further that the plan was approved by the stockholders of S (in this case, P) on March 1, 2010. On January 1, 2012, S changes the plan to provide that incentive stock options for P stock will be granted to S employees under the plan. Because there is a change in the stock available for grant under the plan, the change is considered the adoption of a new plan that must be approved by the stockholder of S (in this case, P) within 12 months before or after January 1, 2012.

Par. 4. Section 1.422-5, paragraph (f)(1) is revised to read as follows:

§1.422-5 Permissible provisions .

(f) Effective/applicability date —(1) In general . Except for §1.422-2(b)(6) Example 1 (iii), the regulations under this section are effective on August 3, 2004. Section 1.422-2(b)(6) Example 1 (iii) is effective on November 17, 2009. Section 1.422-2(b)(6) Example 1 (iii) applies to statutory options granted on or after January 1, 2010.

Par. 5. Section 1.423-1 is revised to read as follows:

§1.423-1 Applicability of section 421(a) .

(a) General rule . Subject to the provisions of section 423(c) and §1.423-2(k), the special rules of income tax treatment provided in section 421(a) apply with respect to the transfer of a share of stock to an individual pursuant to the individual’s exercise of an option granted under an employee stock purchase plan, as defined in §1.423-2, if the following conditions are satisfied—

(1) The individual makes no disposition of such share before the later of the expiration of the two-year period from the date of the grant of the option pursuant to which such share was transferred or the expiration of the one-year period from the date of transfer of such share to the individual; y

(2) At all times during the period beginning on the date of the grant of the option and ending on the day three months before the date of exercise, the individual was an employee of the corporation granting the option, a related corporation, or a corporation (or a related corporation) substituting or assuming the stock option in a transaction to which section 424(a) applies.

(b) Cross-references . For rules relating to the requisite employment relationship, see §1.421-1(h). For rules relating to the effect of a disqualifying disposition, see section 421(b) and §1.421-2(b). For the definition of the term “disposition,” see section 424(c) and §1.424-1(c). For the definition of the term “related corporation,” see §1.421-1(i).

(c) Effective/applicability date . The regulations under this section are effective on November 17, 2009. The regulations under this section apply to options granted under an employee stock purchase plan on or after January 1, 2010.

Par. 6. Section 1.423-2 is revised to read as follows:

§1.423-2 Employee stock purchase plan defined .

(a) In general —(1) The term “employee stock purchase plan” means a plan that meets the requirements of paragraphs (a)(2) and (a)(3) of this section. If the terms of the plan do not satisfy the requirements of paragraph (a)(3) of this section, then such requirements may be satisfied by the terms of an offering made under the plan. However, where the requirements of paragraph (a)(3) of this section are satisfied by the terms of an offering, such requirements will be treated as satisfied only with respect to options exercised under that offering. One or more offerings may be made under an employee stock purchase plan. Offerings may be consecutive or overlapping, and the terms of each offering need not be identical provided the terms of the plan and the offering together satisfy the requirements of paragraphs (a)(2) and (a)(3) of this section. The plan and the terms of an offering must be in writing or electronic form, provided that such writing or electronic form is adequate to establish the terms of the plan or offering, as applicable.

(2) To satisfy the requirements of this paragraph (a)(2) and §1.423-1, the plan must meet both of the following requirements—

(i) The plan must provide that options can be granted only to employees of the employer corporation or of a related corporation (as defined in paragraph (i) of §1.421-1) to purchase stock in any such corporation (see paragraph (b) of this section); y

(ii) The plan must be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted (see paragraph (c) of this section).

(3) To satisfy the requirements of this paragraph (a)(3) and §1.423-1, the terms of the plan or offering must meet all of the following requirements—

(i) An employee cannot be granted an option if, immediately after the option is granted, the employee owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or of a related corporation (see paragraph (d) of this section);

(ii) Options must be granted to all employees of any corporation whose employees are granted any options by reason of their employment by the corporation (see paragraph (e) of this section);

(iii) All employees granted options must have the same rights and privileges (see paragraph (f) of this section);

(iv) The option price cannot be less than the lesser of—

(A) An amount equal to 85 percent of the fair market value of the stock at the time the option is granted, or

(B) An amount not less than 85 percent of the fair market value of the stock at the time the option is exercised (see paragraph (g) of this section).

(v) Options cannot be exercised after the expiration of—

(A) Five years from the date the option is granted if, under the terms of such plan, the option price cannot be less than 85 percent of the fair market value of the stock at the time the option is exercised, or

(B) Twenty-seven months from the date the option is granted, if the option price is not determined in the manner described in paragraph (a)(3)(v)(A) of this section (see paragraph (h) of this section).

(vi) No employee may be granted an option that permits the employee’s rights to purchase stock under all employee stock purchase plans of the employer corporation and its related corporations to accrue at a rate that exceeds $25,000 of fair market value of the stock (determined at the time the option is granted) for each calendar year in which the option is outstanding at any time (see paragraph (i) of this section); y

(vii) Options are not transferable by the optionee other than by will or the laws of descent and distribution, and are exercisable, during the lifetime of the optionee, only by the optionee (see paragraph (j) of this section).

(4) The determination of whether a particular option is an option granted under an employee stock purchase plan is made at the time the option is granted. If the terms of an option are inconsistent with the terms of the employee stock purchase plan or the offering under the plan pursuant to which the option is granted, the option will not be treated as granted under an employee stock purchase plan. If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section. Accordingly, none of the options granted under the offering will be eligible for the special tax treatment of section 421. However, if an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an individual who is not entitled to the grant of an option under the terms of the plan or offering, the option will not be treated as an option granted under an employee stock purchase plan but the grant of the option will not disqualify the options granted under the plan or offering. If, at the time of grant, an option qualifies as an option granted under an employee stock purchase plan, but after the time of grant one or more of the requirements of paragraph (a)(3) of this section is not satisfied with respect to the option, the option will not be treated as granted under an employee stock purchase plan but this failure to comply with the terms of the option will not disqualify the other options granted under the plan or offering.

(5) Examples . The following examples illustrate the principles of paragraph (a):

Ejemplo 1 . Corporation A operates an employee stock purchase plan under which options for A stock are granted to employees of A. The terms of an offering provide that the option price will be 90 percent of the fair market value of A stock on the date of exercise. A grants an option under the offering to Employee Z, an employee of A. The terms of the option provide that the option price will be 85 percent of the fair market value of A stock on the date of exercise. Because the terms of Z’s option are inconsistent with the terms of the offering, the option granted to Z will not be treated as an option granted under the employee stock purchase plan. Further, unless Z is granted an option under the offering that qualifies as an option granted under the employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section and none of the options granted under the offering will be eligible for the special tax treatment of section 421.

Example 2 . Corporation B operates an employee stock purchase plan that provides that options for B stock may only be granted to employees of B. Under the terms of the plan, options may not be granted to consultants and other non-employees. B grants an option to Consultant Y, a consultant of B. Because Y is ineligible to receive an option under the plan because Y is not an employee, the grant of the option to Y is inconsistent with the terms of the plan and the option granted to Y will not be treated as an option granted under the employee stock purchase plan. However, the grant of the option to Y will not disqualify the options granted under the plan or any offering because Y was not entitled to the grant of an option under the plan.

Example 3 . Corporation C operates an employee stock purchase plan under which options for C stock are granted to employees of C. C grants an option pursuant to an offering under the plan to Employee X, an employee of C who is a highly compensated employee. The terms of the employee stock purchase plan exclude highly compensated employees from participation in the plan. Because X is ineligible to receive an option under the plan by reason of X’s exclusion from participation in the plan, the option granted to X will not be treated as an option granted under the employee stock purchase plan. However, the grant of the option to X will not disqualify the options granted under the plan or offering because X was not entitled to the grant of an option under the plan.

Example 4 . Corporation D operates an employee stock purchase plan under which options for D stock are granted to employees of D. D grants an option pursuant to an offering under the plan to Employee W, an employee of D. The terms of the option provide that the option price will be 90 percent of the fair market value of D stock on the date of exercise. On the date of exercise, W pays only 85 percent of the fair market value of D stock. Because the terms of W’s option are not satisfied, the option granted to W will not be treated as an option granted under the employee stock purchase plan. However, the failure to comply with the terms of the option granted to W will not disqualify the options granted under the plan or offering.

(b) Options restricted to employees . An employee stock purchase plan must provide that options can be granted only to employees of the employer corporation (or employees of its related corporations) to purchase stock in the employer corporation (or one of its related corporations). If such a provision is not included in the terms of the plan, the plan will not be an employee stock purchase plan and options granted under the plan will not qualify for the special tax treatment of section 421. For rules relating to the employment requirement, see §1.421-1(h).

(c) Stockholder approval —(1) An employee stock purchase plan must be approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted. The approval of the stockholders must comply with all applicable provisions of the corporate charter and bylaws and of applicable State law prescribing the method and degree of stockholder approval required for the issuance of corporate stock or options. If the applicable State law does not prescribe a method and degree of stockholder approval, then an employee stock purchase plan must be approved—

(i) By a majority of the votes cast at a duly held stockholder’s meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the plan; o

(ii) By a method and in a degree that would be treated as adequate under applicable State law in the case of an action requiring stockholder approval (such as, an action on which stockholders would be entitled to vote if the action were taken at a duly held stockholders’ meeting).

(2) For purposes of the stockholder approval required by this paragraph (c), ordinarily, a plan is adopted when it is approved by the granting corporation’s board of directors, and the date of the board’s action is the reference point for determining whether stockholder approval occurs within the applicable 24-month period. However, if the board’s action is subject to a condition (such as stockholder approval) or the happening of a particular event, the plan is adopted on the date the condition is met or the event occurs, unless the board’s resolution fixes the date of adoption as the date of the board’s action.

(3) An employee stock purchase plan, as adopted and approved, must designate the maximum aggregate number of shares that may be issued under the plan, and the corporations or class of corporations whose employees may be offered options under the plan. A plan that merely provides that the number of shares that may be issued under the plan may not exceed a stated percentage of the shares outstanding at the time of each offering or grant under the plan does not satisfy the requirements of this paragraph (c)(3). However, the maximum aggregate number of shares that may be issued under the plan may be stated in terms of a percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan. The plan may specify that the maximum aggregate number of shares available for grants under the plan may increase annually by a specified percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan. A plan that provides that the maximum aggregate number of shares that may be issued as options under the plan may change based on any other specific circumstances satisfies the requirements of this paragraph only if the stockholders approve an immediately determinable maximum number of shares that may be issued under the plan in any event. If there is more than one employee stock purchase plan under which options may be granted and stockholders of the granting corporation merely approve a maximum aggregate number of shares that are available for issuance under the plans, the stockholder approval requirements described in paragraph (c)(1) of this section are not satisfied. A separate maximum aggregate number of shares available for issuance pursuant to options must be specified and approved for each plan.

(4) Once an employee stock purchase plan is approved by the stockholders of the granting corporation, the plan need not be reapproved by the stockholders of the granting corporation unless the plan is amended or changed in a manner that is considered the adoption of a new plan, in which case the plan must be reapproved within the prescribed 24-month period. Any increase in the aggregate number of shares that may be issued under the plan (other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split) will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. Similarly, a change in the designation of corporations whose employees may be offered options under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period unless the plan provides that designations of participating corporations may be made from time to time from among a group consisting of the granting corporation and its related corporations. The group from among which such changes and designations are permitted without additional stockholder approval may include corporations having become parents or subsidiaries of the granting corporation after the adoption and approval of the plan. In addition, a change in the granting corporation or the stock available for purchase under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. Any other changes in the terms of an employee stock purchase plan are not considered the adoption of a new plan and, thus, do not require stockholder approval.

(5) Examples . The following examples illustrate the principles of this paragraph (c):

Ejemplo 1 . (i) Corporation E is a subsidiary of Corporation F, a publicly traded corporation. On January 1, 2010, E adopts an employee stock purchase plan under which options for E stock are granted to E employees.

(ii) To meet the requirements of paragraph (c)(1) of this section, the plan must be approved by the stockholders of E (in this case, F) within 12 months before or after January 1, 2010.

(iii) Assume the same facts as in paragraph (i) of this Example 1 . except that the plan was approved by the stockholders of E (in this case, F) on March 1, 2010. On January 1, 2012, E changes the plan to provide that options for F stock will be granted to E employees under the plan. Because there is a change in the stock available for grant under the plan, under paragraph (c)(4) of this section, the change is considered the adoption of a new plan that must be approved by the stockholders of E (in this case, F) within 12 months before or after January 1, 2012.

Example 2 . (i) Assume the same facts as in paragraph (i) of Example 1 . except that on March 15, 2011, F completely disposes of its interest in E. Thereafter, E continues to grant options for E stock to E employees under the plan.

(ii) The new E options are granted under a plan that meets the stockholder approval requirements of paragraph (c)(1) of this section without regard to whether E seeks approval of the plan from the stockholders of E after F disposes of its interest in E.

(iii) Assume the same facts as in paragraph (i) of this Example 2 . except that under the plan as adopted on January 1, 2010, only options for F stock are granted to E employees. Assume further that, after F disposes of its interest in E, E changes the plan to provide for the grant of options for E stock to E employees. Because there is a change in the stock available for purchase or grant under the plan, under paragraph (c)(4) of this section, the stockholders of E must approve the plan within 12 months before or after the change to the plan to meet the stockholder approval requirements of paragraph (c) of this section.

Example 3 . (i) Corporation G maintains an employee stock purchase plan providing options for G stock. Corporation H does not maintain an employee stock purchase plan. On May 15, 2010, G and H consolidate under State law to form one corporation. The new corporation is named Corporation H. The consolidation agreement describes the G plan, including the maximum aggregate number of shares available for issuance under the plan after the consolidation. Additionally, the consolidation agreement states that the plan will be continued by H after the consolidation. The consolidation agreement is approved by the stockholders of G and H on May 1, 2010. H assumes the plan formerly maintained by G and continues to grant options under the plan to all eligible employees, but the options are for H stock.

(ii) Because there is a change in the granting corporation (from G to H) and the stock available for purchase, under paragraph (c)(4) of this section, H is considered to have adopted a new plan. Because the plan is fully described in the consolidation agreement, including the maximum aggregate number of shares available for issuance under the plan, the approval of the consolidation agreement by the stockholders constitutes approval of the plan. Thus, the stockholder approval of the consolidation agreement satisfies the stockholder approval requirements of paragraph (c)(1) of this section, and the plan is considered to be adopted by H and approved by its stockholders on May 1, 2010.

Example 4 . Corporation I adopts an employee stock purchase plan on November 1, 2010. On that date, there are two million shares of I stock outstanding. The plan provides that the maximum aggregate number of shares that may be issued under the plan may not exceed 15 percent of the number of shares of I stock outstanding on November 1, 2010. Because the maximum aggregate number of shares that may be issued under the plan is designated in the plan, the requirements of paragraph (c)(3) of this section are met.

Example 5 . (i) Corporation J adopts an employee stock purchase plan on March 15, 2010. The plan provides that the maximum aggregate number of shares of J stock available for issuance under the plan is 50,000, increased on each anniversary date of the adoption of the plan by 5 percent of the then outstanding shares. Because the maximum aggregate number of shares is not designated under the plan, the requirements of paragraph (c)(3) of this section are not met.

(ii) Assume the same facts as in paragraph (i) of this Example 5 . except that the plan provides that the maximum aggregate number of shares available under the plan is the lesser of (a) 50,000 shares, increased each anniversary date of the adoption of the plan by 5 percent of the then-outstanding shares, or (b) 200,000 shares. Because the maximum aggregate number of shares that may be issued under the plan is designated as the lesser of two numbers, one of which provides an immediately determinable maximum aggregate number of shares that may be issued under the plan in any event, the requirements of paragraph (c)(3) of this section are met.

(d) Options granted to certain shareholders —(1) An employee stock purchase plan or offering must, by its terms, provide that an employee cannot be granted an option if the employee, immediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or a related corporation. In determining whether the stock ownership of an employee equals or exceeds this 5 percent limit, the rules of section 424(d) (relating to attribution of stock ownership) shall apply, and stock that the employee may purchase under outstanding options (whether or not the options qualify for the special tax treatment afforded by section 421(a)) shall be treated as stock owned by the employee. An option is outstanding for purposes of this paragraph (d) although under its terms it may be exercised only in installments or after the expiration of a fixed period of time. If an option is granted to an employee whose stock ownership (as determined under this paragraph (d)) exceeds the limitation set forth in this paragraph (d), no portion of the option will be treated as having been granted under an employee stock purchase plan.

(2) The determination of the percentage of the total combined voting power or value of all classes of stock of the employer corporation (or a related corporation) that is owned by the employee is made by comparing the voting power or value of the shares owned (or treated as owned) by the employee to the aggregate voting power or value of all shares actually issued and outstanding immediately after the grant of the option to the employee. The aggregate voting power or value of all shares actually issued and outstanding immediately after the grant of the option does not include the voting power or value of treasury shares or shares authorized for issue under outstanding options held by the employee or any other person.

(3) Examples . The following examples illustrate the principles of this paragraph (d):

Ejemplo 1 . Employee V, an employee of Corporation K, owns 6,000 shares of K common stock, the only class of K stock outstanding. K has 100,000 shares of its common stock outstanding. Because V owns 6 percent of the combined voting power or value of all classes of K stock, K cannot grant an option to V under K’s employee stock purchase plan. If V’s father and brother each owned 3,000 shares of K stock and V did not own any K stock, then the result would be the same because, under section 424(d), an individual is treated as owning stock held by the person’s father and brother. Similarly, the result would be the same if, instead of actually owning 6,000 shares, V merely held an option on 6,000 shares of K stock, irrespective of whether the transfer of stock under the option could qualify for the special tax treatment of section 421, because this paragraph (d) provides that stock the employee may purchase under outstanding options is treated as stock owned by such employee.

Example 2 . Assume the same facts as in Example 1 . except that K is a 50 percent subsidiary corporation of Corporation L. Irrespective of whether V owns any L stock, V cannot receive an option from L under L’s employee stock purchase plan because he owns 5 percent of the total combined voting power of all classes of stock of a subsidiary of L, in this example, K. An employee who owns (or is treated as owning) stock in excess of the limitation of this paragraph (d), in any corporation in a group of related corporations, consisting of a parent and its subsidiary corporations, cannot receive an option under an employee stock purchase plan from any corporation in the group.

Example 3 . Employee U is an employee of Corporation M. M has only one class of stock, of which 100,000 shares are issued and outstanding. Assuming U does not own (and is not treated as owning) any stock in M or in any related corporation of M, M may grant an option to U under its employee stock purchase plan for 4,999 shares, because immediately after the grant of the option, U would not own 5 percent or more of the combined voting power or value of all classes of M stock actually issued and outstanding at such time. The 4,999 shares that U would be treated as owning under this paragraph (d) would not be added to the 100,000 shares actually issued and outstanding immediately after the grant for purposes of determining whether U’s stock ownership exceeds the limitation of this paragraph (d).

Example 4 . Assume the same facts as in Example 3 but instead of an option for 4,999 shares, M grants U an option, purportedly under its employee stock purchase plan, for 5,000 shares. No portion of this option will be treated as granted under an employee stock purchase plan because U’s stock ownership exceeds the limitation of this paragraph (d).

(e) Employees covered by plan —(1) Subject to the provisions of this paragraph (e) and the limitations of paragraphs (d), (f) and (i) of this section, an employee stock purchase plan or offering must, by its terms, provide that options are to be granted to all employees of any corporation whose employees are granted any of such options by reason of their employment by that corporation, except that one or more of the following categories of employees may be excluded from the coverage of the plan or offering—

(i) Employees who have been employed less than two years;

(ii) Employees whose customary employment is 20 hours or less per week;

(iii) Employees whose customary employment is for not more than five months in any calendar year; y

(iv) Highly compensated employees (within the meaning of section 414(q)).

(2) A plan or offering does not fail to satisfy the coverage provision of paragraph (e)(1) of this section in the following circumstances—

(i) The plan or offering excludes employees who have completed a shorter period of service or whose customary employment is for fewer hours per week or fewer months in a calendar year than is specified in paragraphs (e)(1)(i), (ii) and (iii) of this section, provided the exclusion is applied in an identical manner to all employees of every corporation whose employees are granted options under the plan or offering.

(ii) The plan or offering excludes highly compensated employees (within the meaning of section 414(q)) with compensation above a certain level or who are officers or subject to the disclosure requirements of section 16(a) of the Securities Exchange Act of 1934, provided the exclusion is applied in an identical manner to all highly compensated employees of every corporation whose employees are granted options under the plan or offering.

(3) Notwithstanding paragraph (e)(1) of this section, employees who are citizens or residents of a foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of section 7701(b)(1)(A))) may be excluded from the coverage of an employee stock purchase plan or offering under the following circumstances—

(i) The grant of an option under the plan or offering to a citizen or resident of the foreign jurisdiction is prohibited under the laws of such jurisdiction; o

(ii) Compliance with the laws of the foreign jurisdiction would cause the plan or offering to violate the requirements of section 423.

(4) No option granted under a plan or offering that excludes from participation any employees, other than those who may be excluded under this paragraph (e), and those barred from participation by reason of paragraphs (d), (f) and (i) of this section, can be regarded as having been granted under an employee stock purchase plan. If an option is not granted to any employee who is entitled to the grant of an option under the terms of the plan or offering, none of the options granted under such offering will be treated as having been granted under an employee stock purchase plan. However, a plan that, by its terms, permits all eligible employees to elect to participate in an offering will not violate the requirements of this paragraph solely because eligible employees who elect not to participate in the offering are not granted options pursuant to such offering.

(5) For purposes of this paragraph (e), the existence of the employment relationship between an individual and the corporation participating under the plan will be determined under §1.421-1(h).

(6) Examples . The following examples illustrate the principles of this paragraph (e):

Ejemplo 1 . Corporation N has a stock purchase plan that meets all the requirements of paragraphs (a)(2) and (a)(3) of this section except that options are not required to be granted to employees whose weekly rate of pay is less than $1,000. As a matter of corporate practice, however, N grants options under its plan to all employees, irrespective of their weekly rate of pay. Even though N’s plan is operated in compliance with the requirements of this paragraph (e), N’s plan is not an employee stock purchase plan because the terms of the plan exclude a category of employees that is not permitted under this paragraph (e).

Example 2 . Assume the same facts as in Example 1 . except that the first offering under N’s plan provides that options will be granted to all employees of N. The terms of the first offering will be treated as part of the terms of N’s plan, but only for purposes of the first offering. Because the terms of the first offering satisfy the requirements of this paragraph (e), stock transferred pursuant to options exercised under the first offering will be treated as stock transferred pursuant to the exercise of options granted under an employee stock purchase plan for purposes of section 421.

Example 3 . Corporation O has a stock purchase plan that excludes from participation all employees who have been employed less than one year. Assuming all other requirements of paragraphs (a)(2) and (a)(3) of this section are satisfied, O’s plan qualifies as an employee stock purchase plan under section 423.

Example 4 . Corporation P has a stock purchase plan that excludes from participation clerical employees who have been employed less than two years. However, non-clerical employees with less than two years of service are permitted to participate in the plan. P’s plan is not an employee stock purchase plan because the exclusion of employees who have been employed less than two years applies only to certain employees of P and is not applied in an identical manner to all employees of P. If, instead, P’s plan excludes from participation all employees (both clerical and non-clerical) who have been employed less than two years, then P’s plan would qualify as an employee stock purchase plan under section 423 assuming all other requirements of paragraphs (a)(2) and (a)(3) of this section are satisfied.

Example 5 . Corporation Q has a stock purchase plan that excludes from participation all officers who are highly compensated employees (within the meaning of section 414(q)). Assuming all other requirements of paragraphs (a)(2) and (a)(3) of this section are satisfied, Q’s plan qualifies as an employee stock purchase plan under section 423.

Example 6 . Corporation R maintains an employee stock purchase plan that excludes from participation all highly compensated employees (within the meaning of section 414(q)), except highly compensated employees who are officers of R. R’s plan is not an employee stock purchase plan because the exclusion of all highly compensated employees except highly compensated employees who are officers of R is not a permissible exclusion under paragraph (e)(2)(ii) of this section.

Example 7 . Corporation S is the parent corporation of Subsidiary YY and Subsidiary ZZ. S maintains an employee stock purchase plan with both YY and ZZ participating in the same offering under the plan. Under the terms of the offering under the plan, all employees of YY and ZZ are permitted to participate in the plan with the exception of ZZ’s highly compensated employees with annual compensation greater than $300,000. None of the options granted under the offering will be considered granted under an employee stock purchase plan because the exclusion of highly compensated employees with annual compensation greater than $300,000 is not applied in an identical manner to all employees of YY and ZZ granted options in the same offering.

Example 8 . Assume the same facts as in Example 7 . except that Corporation S establishes separate offerings under the plan for YY and ZZ. Under the terms of the separate offering for YY, all employees of YY are permitted to participate in the plan. Under the terms of the separate offering established for ZZ, all employees of ZZ are permitted to participate in the plan with the exception of ZZ’s highly compensated employees with annual compensation greater than $300,000. The options granted under the separate offering for YY will be considered granted under an employee stock purchase plan. Further, the options granted under the separate offering for ZZ will be considered granted under an employee stock purchase plan because the exclusion of highly compensated employees with annual compensation greater than $300,000 is applied in an identical manner to all employees of ZZ granted options in the same offering.

Example 9 . The laws of Country A require that options granted to residents of Country A be transferable during the lifetime of the option recipient. Corporation T has a stock purchase plan that excludes residents of Country A from participation in the plan. Because compliance with the laws of Country A would cause options granted to residents of Country A to violate paragraph (j) of this section, T may exclude residents of Country A from participation in the plan. Assuming all other requirements of paragraph (a)(2) of this section are satisfied, T’s plan qualifies as an employee stock purchase plan under section 423.

(f) Equal rights and privileges —(1) Except as otherwise provided in paragraphs (f)(2) through (f)(6) of this section, an employee stock purchase plan or offering must, by its terms, provide that all employees granted options under the plan or offering shall have the same rights and privileges. Thus, the provisions applying to one option under an offering (such as the provisions relating to the method of payment for the stock and the determination of the purchase price per share) must apply to all other options under the offering in the same manner. If all the options granted under a plan or offering do not, by their terms, give the respective optionees the same rights and privileges, none of the options will be treated as having been granted under an employee stock purchase plan for purposes of section 421.

(2) The requirements of this paragraph (f) do not prevent the maximum amount of stock that an employee may purchase from being determined on the basis of a uniform relationship to the total compensation, or the basic or regular rate of compensation, of all employees.

(3) A plan or offering will not fail to satisfy the requirements of this paragraph (f) because the plan or offering provides that no employee may purchase more than a maximum amount of stock fixed under the plan or offering.

(4) A plan or offering will not fail to satisfy the requirements of this paragraph (f) if, in order to comply with the laws of a foreign jurisdiction, the terms of an option granted under a plan or offering to citizens or residents of such foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of section 7701(b)(1)(A))) are less favorable than the terms of options granted under the same plan or offering to employees resident in the United States.

(5)(i) Except as provided in this paragraph and paragraph (f)(5)(ii) of this section, a plan or offering permitting one or more employees to carry forward amounts that were withheld but not applied toward the purchase of stock under an earlier plan or offering and apply the amounts towards the purchase of additional stock under a subsequent plan or offering will be a violation of the equal rights and privileges under paragraph (f)(1) of this section. However, the carry forward of amounts withheld but not applied toward the purchase of stock under an earlier plan or offering will not violate the equal rights and privileges requirement of paragraph (f)(1) of this section, if all other employees participating in the current plan or offering are permitted to make direct payments toward the purchase of shares under a subsequent plan or offering in an amount equal to the excess of the greatest amount which any employee is allowed to carry forward from an earlier plan or offering over the amount, if any, the employee will carry forward from an earlier plan or offering.

(ii) A plan or offering will not fail to satisfy the requirements of this section merely because employees are permitted to carry forward amounts representing a fractional share, that were withheld but not applied toward the purchase of stock under an earlier plan or offering and apply the amounts toward the purchase of additional stock under a subsequent plan or offering.

(6) Paragraph (f) does not prohibit the delaying of the grant of an option to any employee who is barred from being granted an option solely by reason of the employee’s failing to meet a minimum service requirement set forth in paragraph (e)(1) of this section until the employee meets such requirement.

(7) Examples . The following examples illustrate the principles of this paragraph (f):

Ejemplo 1 . Corporation U has an employee stock purchase plan that provides that the maximum amount of stock that each employee may purchase under the offering is one share for each $100 of annual gross pay. The plan meets the requirements of this paragraph (f).

Example 2 . Corporation V has an employee stock purchase plan that provides that the maximum amount of stock that each employee may purchase under the offering is one share for each $100 of annual gross pay up to and including $10,000, and two shares for each $100 of annual gross pay in excess of $10,000. The plan will not meet the requirements of this paragraph (f) because the amount of stock that may be purchased under the plan is not based on a uniform relationship to the total compensation of all employees.

Example 3 . Corporation W has an employee stock purchase plan that provides that options to purchase stock in an amount equal to ten percent of an employee’s annual salary at a price equal to 85 percent of the fair market value on the first day of the offering will be granted to all employees other than those who have been employed less than 18 months. In addition, the plan provides that employees who have not yet met the minimum service requirements on the first day of the offering will be granted similar options on the date the 18 month service requirement has been attained. The plan meets the requirements of this paragraph (f).

Example 4 . Corporation X is the parent corporation of Subsidiary AA, Subsidiary BB and Subsidiary CC. X maintains an employee stock purchase plan with AA, BB and CC participating in the same offering under the plan. Under the terms of the offering under the plan, options to purchase stock at a price equal to 90 percent of the fair market value at the time the option is exercised will be granted to all employees. Certain employees of AA are residents of Country B. The laws of Country B provide that options granted to employees who are residents of Country B must have a purchase price not less than 95 percent of the fair market value at the time the option is exercised. The plan will not fail to satisfy the requirements of this paragraph (f) merely because the residents of Country B are granted options under the plan to purchase stock at a price equal to 95 percent of the fair market value at the time the option is exercised.

Example 5 . Assume the same facts as in Example 4 . except that Corporation X establishes two separate offerings under the plan: a separate offering for the employees of AA and a separate offering for the employees of BB and CC. Under the separate offering for the employees of BB and CC, options are granted to all employees with an exercise price equal to 90 percent of the fair market value at the time the option is exercised. Under the separate offering for the employees of AA, options are granted to all employees with an exercise price equal to 95 percent of the fair market value at the time the option is exercised. The plan does not violate the equal rights and privileges requirement of this paragraph (f) merely because the exercise price of options granted under one offering is less than the exercise price of options granted under a separate offering.

Example 6 . Corporation Y maintains an employee stock purchase plan. Employee T is employed by Y. T is granted an option under the current offering to purchase a maximum of 100 shares of Y stock at an option price equal to 85 percent of the fair market value of the stock at exercise. The plan permits the carry forward of withheld but unused amounts from an earlier offering. Prior to the exercise date, $2000 of T’s salary has been withheld and is available to be applied toward the purchase of Y stock. On the exercise date, the fair market value of Y stock is $20 per share. T is able to purchase 100 shares of Y stock at $17 per share for an aggregate purchase price of $1700. T can carry forward $300 to the subsequent offering. Each employee in the subsequent offering other than T will be permitted to make direct payments toward the purchase of shares under the subsequent offering in a maximum amount of $300 less any amount the employee has carried forward from an earlier offering. The plan does not violate the equal rights and privileges requirement of this paragraph (f).

(g) Option price —(1) An employee stock purchase plan or offering must, by its terms, provide that the option price will not be less than the lesser of—

(i) An amount equal to 85 percent of the fair market value of the stock at the time the option is granted, or

(ii) An amount that under the terms of the option may not be less than 85 percent of the fair market value of the stock at the time the option is exercised.

(2) For purposes of determining the option price, the fair market value of the stock may be determined in any reasonable manner, including the valuation methods permitted under §20.2031-2. However, the option price must meet the minimum pricing requirements of this paragraph (g). For general rules relating to the option price, see §1.421-1(e). For rules relating to the determination of when an option is granted, see §§1.421-1(c) and 1.423-2(h)(2). Any option that does not meet the minimum pricing requirements of this paragraph (g) will not be treated as an option granted under an employee stock purchase plan irrespective of whether the plan or offering satisfies those requirements. If an option that does not meet the minimum pricing requirements is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under such offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section. Accordingly, none of the options granted under the offering will be eligible for the special tax treatment of section 421.

(3) The option price may be stated either as a percentage or as a dollar amount. If the option price is stated as a dollar amount, then the requirement of this paragraph (g) can only be met by a plan or offering in which the price is fixed at not less than 85 percent of the fair market value of the stock at the time the option is granted. If the fixed price is less than 85 percent of the fair market value of the stock at grant, then the option cannot meet the requirement of this paragraph (g) even if a decline in the fair market value of the stock results in such fixed price being not less than 85 percent of the fair market value of the stock at the time the option is exercised, because that result was not certain to occur under the terms of the option.

(4) Examples . The following examples illustrate the principles of this paragraph (g):

Ejemplo 1 . Corporation Z has an employee stock purchase plan that provides that the option price will be 85 percent of the fair market value of the stock on the first day of the offering (which is the date of grant in this case), or 85 percent of the fair market value of the stock at exercise, whichever amount is the lesser. Upon the exercise of an option issued under Z’s plan, Z agrees to accept an option price that is less than the minimum amount allowable under the terms of such plan. Notwithstanding that the option was issued under an employee stock purchase plan, the transfer of stock pursuant to the exercise of such option does not satisfy the requirement of this paragraph (g) and cannot qualify for the special tax treatment of section 421.

Example 2 . Corporation AA has an employee stock purchase plan that provides that the option price is set at 85 percent of the fair market value of AA stock at exercise, but not less than $80 per share. On the first day of the offering (which is the date of grant in this case), the fair market value of AA stock is $100 per share. The option satisfies the requirement of this paragraph (g), and can qualify for the special tax treatment of section 421.

Example 3 . Assume the same facts as in Example 2 . except that the option price is set at 85 percent of the fair market value of AA stock at exercise, but not more than $80 per share. This option cannot satisfy the requirement of this paragraph (g) irrespective of whether, at the time the option is exercised, 85 percent of the fair market value of AA stock is $80 or less.

(h) Option period —(1) An employee stock purchase plan or offering must, by its terms, provide that options granted under the plan cannot be exercised after the expiration of 27 months from the date of grant unless, under the terms of the plan or offering, the option price is not less than 85 percent of the fair market value of the stock at the time of the exercise of the option. If the option price is not less than 85 percent of the fair market value of the stock at the time the option is exercised, then the option period provided under the plan must not exceed five years from the date of grant. If the requirements of this paragraph (h) are not met by the terms of the plan or offering, then options issued under such plan or offering will not be treated as options granted under an employee stock purchase plan irrespective of whether the options, by their terms, are exercisable beyond the period allowable under this paragraph (h). An option that provides that the option price is not less than 85 percent of the fair market value of the stock at exercise may have an option period of 5 years irrespective of whether the fair market value of the stock at exercise is more or less than the fair market value of the stock at grant. However, if the option provides that the option price is 85 percent of the fair market value of the stock at exercise, but not more than some other fixed amount determined in accordance with the provisions of paragraph (g) of this section, then irrespective of the price paid on exercise, the option period must not be more than 27 months.

(2) Section 1.421-1(c) provides that, for purposes of §§1.421-1 through 1.424-1, the language “the date of the granting of the option” and the “time such option is granted,” and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. With respect to options granted under an employee stock purchase plan, the principles of §1.421-1(c) shall be applied without regard to the requirement that the minimum option price must be fixed or determinable in order for the corporate action constituting an offer of stock to be considered complete.

(3) The date of grant will be the first day of an offering if the terms of an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering. Similarly, the date of grant will be the first day of an offering if the terms of the plan or offering require the application of a formula to establish, on the first day of the offering, the maximum number of shares that may be purchased by each employee during the offering. It is not required that an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering or incorporate a formula to establish a maximum number of shares that may be purchased by each employee during the offering. If the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exercise will be the date of grant of the option.

(4) Examples . The following examples illustrate the principles of this paragraph (h):

Ejemplo 1 . (i) Corporation BB has an employee stock purchase plan that provides that the option price will be the lesser of 85 percent of the fair market value of the stock on the first day of an offering or 85 percent of the fair market value of the stock on the last day of the offering. Options are exercised on the last day of the offering. One million shares of BB stock are reserved for issuance under the plan. The plan provides that no employee may be permitted to purchase stock under the plan at a rate that exceeds $25,000 in fair market value of the BB stock (determined on the date of grant) for each calendar year during which an option granted to the employee is outstanding. The terms of each option granted under an offering provide that a maximum of 500 shares may be purchased by the option recipient during the offering. Because the maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offering, the date of grant for the option is the first day of the offering.

(ii) Assume the same facts as in paragraph (i) of Example 1 . except that BB’s plan excludes all employees who have been employed less than 18 months. The plan provides that employees who have not yet met the minimum service requirements on the first day of an offering will be granted an option on the date the 18-month service requirement has been attained. With respect to those employees who have been employed less than 18 months on the first day of an offering, the date of grant for the option is the date the 18-month service requirement has been attained.

Example 2 . Assume the same facts as in paragraph (i) of Example 1 . except that the terms of each option granted do not provide that a maximum of 500 shares may be purchased by the option recipient during the offering. Notwithstanding the fixed number of shares reserved for issuance under the plan and the $25,000 limitation set forth in the plan, the maximum number of shares that can be purchased under the option is not fixed or determinable until the last day of the offering when the option is exercised. Therefore the date of grant for the option is the last day of the offering when the option is exercised.

Example 3 . Corporation CC has an employee stock purchase plan that provides that the option price will be 85 percent of the fair market value of the stock on the last day of the offering. Options are exercised on the last day of the offering. Each offering under the plan begins on January 1 and ends on December 31 of the same calendar year. The terms of each option granted under an offering provide that the maximum number of shares that may be purchased by any employee during the offering equals $25,000 divided by the fair market value of the stock on the first day of the offering. The maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offering and therefore the date of grant for the option is the first day of the offering.

Example 4 . Assume the same facts as in Example 3 except that the terms of each option granted under an offering provide that the maximum number of shares that may be purchased by any employee during the offering equals 10 percent of the employee’s annual salary (determined as of January 1 of the year in which the offering commences) divided by the fair market value of the stock on the first day of the offering. The maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offering and therefore the date of grant for the option is the first day of the offering.

(i) Annual $25,000 limitation —(1) An employee stock purchase plan or offering must, by its terms, provide that no employee may be permitted to purchase stock under all the employee stock purchase plans of the employer corporation and its related corporations at a rate that exceeds $25,000 in fair market value of the stock (determined at the time the option is granted) for each calendar year in which any option granted to the employee is outstanding at any time. In applying the foregoing limitation—

(i) The right to purchase stock under an option accrues when the option (or any portion thereof) first becomes exercisable during the calendar year;

(ii) The right to purchase stock under an option accrues at the rate provided in the option, but in no case may such rate exceed $25,000 of fair market value of such stock (determined at the time such option is granted) for any one calendar year; y

(iii) A right to purchase stock that has accrued under one option granted pursuant to the plan may not be carried over to any other option.

(2) If an option is granted under an employee stock purchase plan that satisfies the requirement of this paragraph (i), but the option gives the optionee the right to buy stock in excess of the maximum rate allowable under this paragraph (i), then no portion of the option will be treated as having been granted under an employee stock purchase plan. Furthermore, if the option was granted to an employee entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, then the offering will not meet the requirements of paragraph (e) of this section. Accordingly, none of the options granted under the offering will be eligible for the special tax treatment of section 421.

(3) The limitation of this paragraph (i) applies only to options granted under employee stock purchase plans and does not limit the amount of stock that an employee may purchase under incentive stock options (as defined in section 422(b)) or any other stock options except those to which section 423 applies. Stock purchased under options to which section 423 does not apply will not limit the amount that an employee may purchase under an employee stock purchase plan, except for purposes of the 5-percent stock ownership provision of paragraph (d) of this section.

(4) Under the limitation of this paragraph (i), an employee may purchase up to $25,000 of stock (based on the fair market value of the stock at the time the option was granted) in each calendar year during which an option granted to the employee under an employee stock purchase plan is outstanding. Alternatively, an employee may purchase more than $25,000 of stock (based on the fair market value of such stock at the time the option was granted) in a calendar year, so long as the total amount of stock that the employee purchases does not exceed $25,000 in fair market value of the stock (determined at the time the option was granted) for each calendar year in which any option was outstanding. If, in any calendar year, the employee holds two or more outstanding options granted under employee stock purchase plans of the employer corporation, or a related corporation, then the employee’s purchases of stock attributable to that year under all options granted under employee stock purchase plans must not exceed $25,000 in fair market value of the stock (determined at the time the options were granted). Under an employee stock purchase plan, an employee may not purchase stock in anticipation that the option will be outstanding in some future year. Thus, the employee may purchase only the amount of stock that does not exceed the limitation of this paragraph (i) for the year of the purchase and for preceding years during which the option was outstanding. Thus, the amount of stock that may be purchased under an option depends on the number of years in which the option is actually outstanding. The amount of stock that may be purchased under an employee stock purchase plan may not be increased by reason of the failure to grant an option in an earlier year under such plan, or by reason of the failure to exercise an earlier option. For example, if an option is granted to an individual and expires without having been exercised at all, then the failure to exercise the option does not increase the amount of stock which such individual may be permitted to purchase under an option granted in a year following the year of such expiration. If an option granted under an employee stock purchase plan is outstanding in more than one calendar year, then stock purchased pursuant to the exercise of such an option will be applied first, to the extent allowable under this paragraph (i), against the $25,000 limitation for the earliest year in which the option was outstanding, then, against the $25,000 limitation for each succeeding year, in order.

(5) Examples . The following examples illustrate the principles of this paragraph (i):

Ejemplo 1 . Assume that Corporation DD maintains an employee stock purchase plan and that Employee S is employed by DD. On June 1, 2010, DD grants S an option under the plan to purchase a total of 750 shares of DD stock at $85 per share. On that date, the fair market value of DD stock is $100 per share. The option provides that it may be exercised at any time but cannot be exercised after May 31, 2012. Under this paragraph (i), the option must not permit S to purchase more than 250 shares of DD stock during the calendar year 2010, because 250 shares are equal to $25,000 in fair market value of DD stock determined at the time of grant. During the calendar year 2011, S may purchase under the option an amount of DD stock equal to the difference between $50,000 in fair market value of DD stock (determined at the time the option was granted) and the fair market value of DD stock (determined at the time of grant of the option) purchased during the year 2010. During the calendar year 2012, S may purchase an amount of DD stock equal to the difference between $75,000 in fair market value of the stock (determined at the time of grant of the option) and the total amount of the fair market value of the stock (determined at the time of grant of the option) purchased under the option during the calendar years 2010 and 2011. S may purchase $25,000 of stock for the year 2010, and $25,000 of stock for the year 2012, although the option was outstanding for only a part of each of such years. However, S may not be granted another option under an employee stock purchase plan of DD or a related corporation to purchase stock of DD or a related corporation during the calendar years 2010, 2011, and 2012, so long as the option granted June 1, 2010, is outstanding.

Example 2 . Assume the same facts as in Example 1 . except that the option granted to S in 2010 is terminated in 2011 without any part of the option having been exercised, and that subsequent to the termination and during 2011, S is granted another option under DD’s employee stock purchase plan. Under that option, S may be permitted to purchase $25,000 of stock for 2011. The failure of S to exercise the option granted to S in 2010, does not increase the amount of stock that S may be permitted to purchase under the option granted to S in 2011.

Example 3 . Assume the same facts as in Example 1 . except that, on May 31, 2012, S exercised the option granted to S in 2010, and purchased 600 shares of DD stock. Five hundred shares, the maximum amount of stock that could have been purchased in 2011, under the option, are treated as having been purchased for the years 2010 and 2011. Only 100 shares of the stock are treated as having been purchased for 2012. After S’s exercise of the option on May 31, 2012, S is granted another option under DD’s employee stock purchase plan. S may be permitted under the new option to purchase for 2012 stock having a fair market value of no more than $15,000 at the time the new option is granted.

Example 4 . Corporation EE maintains an employee stock purchase plan and Employee R is employed by EE. On August 1, 2010, EE grants R an option under the plan to purchase 150 shares of EE stock at $85 per share during each of the calendar years 2010, 2011, and 2012. On that date, the fair market value of EE stock is $100 per share. The option provides that it may be exercised at any time during years 2010, 2011, and 2012. Because this option permits R to purchase only $15,000 of EE’s stock for each year the option is outstanding, R could be granted another option by EE, or by a related corporation, in year 2010, permitting R to purchase an additional $10,000 of stock during each of the calendar years 2010, 2011, and 2012.

Example 5 . Corporation FF maintains an employee stock purchase plan and Employee Q is employed by FF. On September 1, 2010, FF grants Q an option under the plan that will be automatically exercised on August 31, 2011, and August 31, 2012. The terms of the option provide that no more than 150 shares may be purchased on each date that the option is automatically exercised. On August 31, 2011, Q may purchase under the option an amount of FF stock equal to $50,000 in fair market value of FF stock (determined at the time the option was granted). On August 31, 2012, Q may purchase under the option an amount of FF stock equal to the difference between $75,000 in fair market value of FF stock (determined at the time the option was granted) and the fair market value of FF stock (determined at the time of grant of the option) purchased during year 2011.

(j) Restriction on transferability . An employee stock purchase plan or offering must, by its terms, provide that options granted under the plan are not transferable by the optionee other than by will or the laws of descent and distribution, and must be exercisable, during the optionee’s lifetime, only by the optionee. For general rules relating to the restriction on transferability required by this paragraph (j), see §1.421-1(b)(2). For a limited exception to the requirement of this paragraph (j), see section 424(h)(3).

(k) Special rule where option price is between 85 percent and 100 percent of value of stock —(1)(i) If all the conditions necessary for the application of section 421(a) exist, this paragraph (k) provides additional rules that are applicable in cases where, at the time the option is granted, the option price per share is less than 100 percent (but not less than 85 percent) of the fair market value of the share. In that case, upon the disposition of the share by the employee after the expiration of the two-year and the one-year holding periods, or upon the employee’s death while owning the share (whether occurring before or after the expiration of such periods), there shall be included in the employee’s gross income as compensation (and not as gain upon the sale or exchange of a capital asset) the lesser of—

(a) The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time the option was granted, or

(b) The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time of such disposition or death.

(ii) For purposes of applying the rules of this paragraph (k), if the option price is not fixed or determinable at the time the option is granted, the option price will be computed as if the option had been exercised at such time. The amount of compensation resulting from the application of this paragraph (k) shall be included in the employee’s gross income for the taxable year in which the disposition occurs, or for the taxable year closing with the employee’s death, whichever event results in the application of this paragraph (k).

(iii) The application of the special rules provided in this paragraph (k) shall not affect the rules provided in section 421(a) with respect to the employee exercising the option, the employer corporation, or a related corporation. Thus, notwithstanding the inclusion of an amount as compensation in the gross income of an employee, as provided in this paragraph (k), no income results to the employee at the time the stock is transferred to the employee, and no deduction under section 162 is allowable at any time to the employer corporation or a related corporation with respect to such amount.

(iv) If, during the employee’s lifetime, the employee exercises an option granted under an employee stock purchase plan, but the employee dies before the stock is transferred to the employee pursuant to the exercise of the option, then for the purpose of sections 421 and 423, on the employee’s death, the stock is deemed to be transferred immediately to the employee, and immediately thereafter, the employee is deemed to have transferred the stock to the employee’s executor, administrator, trustee, beneficiary by operation of law, heir, or legatee, as the case may be.

(2) If the special rules provided in this paragraph (k) are applicable to the disposition of a share of stock by an employee, then the basis of the share in the employee’s hands at the time of the disposition, determined under section 1011, shall be increased by an amount equal to the amount includible as compensation in the employee’s gross income under this paragraph (k). However, the basis of a share of stock acquired after the death of an employee by the exercise of an option granted to the employee under an employee stock purchase plan shall be determined in accordance with the rules of section 421(c) and §1.421-2(c). If the special rules provided in this paragraph (k) are applicable to a share of stock upon the death of an employee, then the basis of the share in the hands of the estate or the person receiving the stock by bequest or inheritance shall be determined under section 1014, and shall not be increased by reason of the inclusion upon the decedent’s death of any amount in the decedent’s gross income under this paragraph (k). See Example (9) of this paragraph (k) with respect to the determination of basis of the share in the hands of a surviving joint owner.

(3) Examples . The following examples illustrate the principles of this paragraph (k):

Ejemplo 1 . On June 1, 2010, Corporation GG grants to Employee P, an employee of GG, an option under GG’s employee stock purchase plan to purchase a share of GG stock for $85. The fair market value of GG stock on such date is $100 per share. On June 1, 2011, P exercises the option and on that date GG transfers the share of stock to P. On January 1, 2013, P sells the share for $150, its fair market value on that date. P’s income tax return is filed on the basis of the calendar year. The income tax consequences to P and GG are as follows—

(i) Compensation in the amount of $15 is includible in P’s gross income for the year 2013, the year of the disposition of the share. The $15 represents the difference between the option price ($85) and the fair market value of the share on the date the option was granted ($100), because the value is less than the fair market value of the share on the date of disposition ($150). For the purpose of computing P’s gain or loss on the sale of the share, P’s cost basis of $85 is increased by $15, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $100. Because the share was sold for $150, P realizes a gain of $50, which is treated as long-term capital gain; y

(ii) GG is not entitled to any deduction under section 162 at any time with respect to the share transferred to P.

Example 2 . Assume the same facts as in Example 1 . except that P sells the share of GG stock on January 1, 2014, for $75, its fair market value on that date. Because $75 is less than the option price ($85), no amount in respect of the sale is includible as compensation in P’s gross income for the year 2014. P’s basis for determining gain or loss on the sale is $85. Because P sold the share for $75, P realized a loss of $10 on the sale that is treated as a long-term capital loss.

Example 3 . Assume the same facts as in Example 1 . except that the option provides that the option price shall be 90 percent of the fair market value of the stock on the day the option is exercised. On June 1, 2011, when the option is exercised, the fair market value of the stock is $120 per share so that P pays $108 for the share of the stock. Compensation in the amount of $10 is includible in P’s gross income for the year 2013, the year of the disposition of the share. This is determined in the following manner: the excess of the fair market value of the stock at the time of the disposition ($150) over the price paid for the share ($108) is $42; and the excess of the fair market value of the stock at the time the option was granted ($100) over the option price, computed as if the option had been exercised at such time ($90), is $10. Accordingly, $10, the lesser, is includible in gross income. In this situation, P’s cost basis of $108 is increased by $10, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $118. Because the share was sold for $150, P realizes a gain of $32 that is treated as long-term capital gain.

Example 4 . Assume the same facts as in Example 1 . except that the option provides that the option price shall be the lesser of 95 percent of the fair market value of the stock on the first day of the offering period and 95 percent of the fair market value of the stock on the day the option is exercised. On June 1, 2011, when the option is exercised, the fair market value of the stock is $120 per share. P pays $95 for the share of the stock. Compensation in the amount of $5 is includible in P’s gross income for the year 2013, the year of the disposition of the share. This is determined in the following manner: the excess of the fair market value of the stock at the time of the disposition ($150) over the price paid for the share ($95) is $55; and the excess of the fair market value of the stock at the time the option was granted ($100) over the option price, computed as if the option had been exercised at such time ($95), is $5. Accordingly, $5, the lesser, is includible in gross income. In this situation, P’s cost basis of $95 is increased by $5, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $100. Because the share was sold for $150, P realizes a gain of $50 that is treated as long-term capital gain.

Example 5 . Assume the same facts as in Example 1 . except that instead of selling the share on January 1, 2013, P makes a gift of the share on that day. In that case $15 is includible as compensation in P’s gross income for 2013. P’s cost basis of $85 is increased by $15, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $100, which becomes the donee’s basis, as of the time of the gift, for determining gain or loss.

Example 6 . Assume the same facts as in Example 2 . except that instead of selling the share on January 1, 2014, P makes a gift of the share on that date. Because the fair market value of the share on that day ($75) is less than the option price ($85), no amount in respect of the disposition by way of gift is includible as compensation in P’s gross income for 2014. P’s basis for the share is $85, which becomes the donee’s basis, as of the time of the gift, for the purpose of determining gain. The donee’s basis for the purpose of determining loss, determined under section 1015(a), is $75 (fair market value of the share at the date of gift).

Example 7 . Assume the same facts as in Example 1 . except that after acquiring the share of stock on June 1, 2011, P dies on August 1, 2012, at which time the share has a fair market value of $150. Compensation in the amount of $15 is includible in P’s gross income for the taxable year closing with P’s death, $15 being the difference between the option price ($85) and the fair market value of the share when the option was granted ($100), because such value is less than the fair market value at date of death ($150). The basis of the share in the hands of P’s estate is determined under section 1014 without regard to the $15 includible in the decedent’s gross income.

Example 8 . Assume the same facts as in Example 7 . except that P dies on August 1, 2011, at which time the share has a fair market value of $150. Although P’s death occurred within one year after the transfer of the share to P, the income tax consequences are the same as in Example 7 .

Example 9 . Assume the same facts as in Example 1 . except that the share of stock was issued in the names of P and P’s spouse jointly with right of survivorship, and that P and P’s spouse sold the share on June 15, 2012, for $150, its fair market value on that date. Compensation in the amount of $15 is includible in P’s gross income for the year 2012, the year of the disposition of the share. The basis of the share in the hands of P and P’s spouse for the purpose of determining gain or loss on the sale is $100, that is, the cost of $85 increased by the amount of $15 includible as compensation in P’s gross income. The gain of $50 on the sale is treated as long-term capital gain, and is divided equally between P and P’s spouse.

Example 10 . Assume the same facts as in Example 1 . except that the share of stock was issued in the names of P and P’s spouse jointly with right of survivorship, and that P predeceased P’s spouse on August 1, 2012, at which time the share had a fair market value of $150. Compensation in the amount of $15 is includible in P’s gross income for the taxable year closing with his death. See Example 7 . The basis of the share in the hands of P’s spouse as survivor is determined under section 1014 without regard to the $15 includible in the decedent’s gross income.

Example 11 . Assume the same facts as in Example 10 . except that P’s spouse predeceased P on July 1, 2012. Section 423(c) does not apply in respect of the death of P’s spouse. Upon the subsequent death of P on August 1, 2012, the income tax consequences in respect of P’s taxable year closing with the date of P’s death, and in respect of the basis of the share in the hands of P’s estate, are the same as in Example 7 . If P had sold the share on July 15, 2012 (after the death of P’s spouse), for $150, its fair market value at that time, the income tax consequences would be the same as in Example 1 .

(l) Effective/applicability date . The regulations under this section are effective on November 17, 2009. These regulations apply to options granted under an employee stock purchase plan on or after January 1, 2010.

Par. 6. Section 1.424-1, paragraphs (a)(10) Example 9 (iii) and (g)(1) are revised to read as follows:

§1.424-1 Definition and special rules applicable to statutory options .

Section 162(m) Compliance

IRS Focus on Section 162(m) Compliance

Common Section 162(m) Violations

How Inadvertent Section 162(m) Violations Occur

Why You Should Designate a 162(m) Compliance Person

Section 162(m) Compliance Checklist

Other Section 162(m) Practice Pointers

Media Articles on Section 162(m)

Video Webcast Panel: The IRS Focus on Executive Compensation: What It Means For You

Section 162(m) Disclosure Practice Area

IRS Focus on Section 162(m) Compliance

As of late 2004, the IRS was wrapping up an executive compensation audit pilot program in which it found Section 162(m) violations surprisingly common among the two dozen large-cap companies that it audited. As a result, we understand that the IRS has targeted 162(m) non-compliance as a focus area for future audits. Section 162(m) disallows a public company’s deductions for compensation in excess of $1 million per year for its CEO and its next four highest-paid officers unless the compensation meets the requirements for "performance-based compensation" paid under shareholder-approved plans.

Common 162(m) compliance problems include: options granted under a non-shareholder approved plan; restricted stock (or restricted stock units), where neither the award nor the vesting is tied to objective, pre-established performance criteria; failure by the compensation committee to certify in writing prior to payment that the performance goals have been satisfied; or failure to timely set the performance goals — e. g., not set within the first 90 days of a one-year performance period. Read more in IRS Cracks Down on Corporate Deductions Taken for Executive Compensation in Excess of $1 Million.

Tim Sparks, President of Compensia, notes these common Section 162(m) violations:

Options granted under a non-shareholder approved plan. For example, options may be granted to a new officer under an "inducement" plan that has not been approved by shareholders.

Options granted under a plan in excess of the plan’s periodic ( e. g. annual)grant limit.

Bonus or other incentive payments (including option grants) made under a pre-IPO plan that was not timely approved (or re-approved) as required following the IPO.

Restricted stock (or restricted stock units) or other full value awards, where neither the grant nor the vesting is tied to objective, pre-established performance criteria under a shareholder approved plan.

Bonus or other incentive payments made under a plan that gives the compensation committee authority to change performance measures that was not re-approved by shareholders on or before the fifth year following the year of prior shareholder approval.

Non-performance-based compensation exceeds $1 million in a year. This may result where the officer’s base salary is high and (i) the bonus plan is not "performance-based," (ii) there’s a restricted stock vesting event or a payout under a deferred compensation or restricted stock unit arrangement, or (iii) as a result of significant perquisites.

The compensation committee changes the performance targets or otherwise exercises impermissible discretion under the plan.

The compensation committee includes someone who does not meet the technical requirements to be an "outside director."

Discretionary authority ( e. g. option grants) is exercised other than by a qualifying compensation committee (by the full Board, for example).

The compensation committee fails to certify in writing prior to payment that the performance goals have been satisfied.

The performance goals are not set soon enough – e. g. . not set within the first 90 days of a one-year performance period.

How Inadvertent Section 162(m) Violations Occur

Tim Sparks, President of Compensia, also notes that Compensation Committees may not be aware that certain elements of their company’s executive compensation program are not fully deductible. As a result, Compensation Committees may be making executive compensation decisions without taking the full cost of those decisions into account.

Section 162(m) of the Internal Revenue Code imposes a limit on the deductibility of compensation paid to top executives of public companies. The limit does not apply to compensation that qualifies as "performance-based" as defined in Section 162(m). Significantly, the limit does not apply to compensation attributable to most employee stock options.

In anticipation of Section 162(m), which took effect on January 1, 1994, most companies thoroughly reviewed their compensation programs to assess the impact of Section 162(m). Many companies concluded that the limit did not apply to them since their executive pay consisted of cash compensation that was below the limit and stock options. Other companies took steps to mitigate the impact of Section 162(m) by, among other things, structuring compensation programs to qualify as "performance based."

Since 1994, cash compensation at public companies has increased significantly and many companies have begun to expand their long-term incentive programs beyond traditional stock options. In addition, compensation programs that were initially structured to qualify as "performance-based" may no longer qualify. As a result, companies may be paying compensation that is non-deductible under Section 162(m). Compensation Committees may not be aware of this additional cost. Worse yet, companies may be taking tax deductions in violation of Section 162(m).

There are several common patterns that can lead to inadvertent non-deductibility under Section 162(m). The sheer increase in cash compensation over the past 10 years can result in compensation that exceeds the $1,000,000 per year deduction limit. Or, companies with bonus plans tied to objective, financial performance metrics may mistakenly believe that the plan meets the technical requirements of Section 162(m). Other companies that qualified their bonus plans when Section 162(m) first took effect may have forfeited that qualification by failing to renew shareholder approval of the plan. or otherwise violating the requirements of Section 162(m). This could occur, for example, where the plan gives the Compensation Committee wide latitude in picking the financial metrics to be used in determining bonus payouts. Under the Section 162(m) regulations, such a plan must be re-approved by the shareholders every five years. Qualification might also be lost if a plan has been materially amended without shareholder approval.

Companies that have begun to grant full value shares (restricted stock, restricted stock units) may also discover that the tax deduction associated with those grants is limited. Unless the grant or vesting of those awards fits the technical requirements of "performance-based" under Section 162(m), such amounts would be subject to the deduction limit. This could occur, for example, where the company grants restricted stock that vests based on continued employment, even if the grant includes accelerated vesting tied to performance.

Compensation Committees need to understand the Section 162(m) consequences of each element of the company’s executive pay program to fully understand the program’s true cost. Moreover, Committees should ensure that the company’s policy with regard to Section 162(m), as reflected in the proxy, accurately and thoroughly addresses each element of the company’s executive pay program. Finally, as part of its internal controls, companies should include an examination of tax deductibility under Section 162(m).

Why You Should Designate a 162(m) Compliance Person

Many companies make technical foot-faults in attempting to qualify compensation as performance-based under Internal Revenue Code Section 162(m) – the $1 million executive compensation deduction limit. The Internal Revenue Service recently completed an executive compensation audit of 24 public companies. As a result, the IRS has apparently decided that 162(m) non-compliance is a significant problem and has targeted it as a focus area for future audits.

Non-compliance can arise in a number of ways, including:

Sometimes the company does not understand that executive grants need to be made by a compensation committee consisting of outside directors, and not the entire board;

Sometimes the composition of the Compensation Committee is flawed, as when a former officer of the Company is a member;

Sometimes grants can be made in excess of plan limits;

Sometimes the requirements for ongoing shareholder approval, such as when the private-to-public exception expires, are not properly observed;

Sometimes imputed income from perquisites can drive total non-performance-based compensation over $1 million;

Sometimes management does not like the inflexibility of a negative discretion only bonus plan, and the plan is modified without consulting the plan documents or properly considering the 162(m) consequences; y

Sometimes the requirement for written certification prior to payment is not observed.

Because qualifying compensation as performance-based is technical and requires an attention to detail, companies should seriously consider appointing an employee with over-all responsibility for understanding and monitoring 162(m) compliance. This could be someone in the company’s legal department. Additionally, the appointed person should be given the requisite authority to properly discharge his or her new duties, including the ability to attend compensation committee meetings in which 162(m)-related business is being conducted.

Ideally, the Compensation Committee would also appoint at least one member with responsibility for 162(m) compliance, who would co-ordinate with the company’s 162(m) compliance person.

It is also a good idea to schedule some time on the Compensation Committee’s agenda every couple of years for a presentation/refresher on 162(m) and the requirements to qualify compensation as performance-based thereunder.

Media Articles on Section 162(m)

"As CEOs Miss Goals, Goalposts Moves," Jesse Drucker, Wall Street Journal (7/7/04) (available for purchase)

"IRS Expanding Audits of Corporate Executives' Tax Returns," Mary Dalrymple, Detroit News (AP) (4/10/04)

"Executive Compensation Practices at Large Companies Audited by IRS," MorningJournal. com (AP) (12/5/03)

Video Webcast Panel: The IRS Focus on Executive Compensation: What It Means For You

What compensation problem areas the IRS is now targeting

How compensation committees can ensure that these problems don’t exist for them

What actions compensation committees can take to avoid Section 162(m) violations

This article is reprinted with permission from the July 31, 1996 edition of New York Law Journal. © 1996 NLP IP Company.

The SEC's New Rule 16b-3

EFFECTIVE AUG. 15, the Securities and Exchange Commission significantly changes the conditions that must be met under Rule 16b-3 for an exemption to apply from the insider rules, as applicable to officers and directors, under §16(b) of the Securities Exchange Act of 1934 (Exchange Act). 1 (References to Rule 16b-3 as it takes effect Aug. 15 will be to "new Rule 16b-3," and references to Rule 16b-3 as currently in effect will be to "current Rule 16b-3.")

After highlighting the more important changes, this column summarizes the basic rules under new Rule 16b-3. It does not discuss concurrent changes made by the SEC in the reporting requirements pursuant to §16(a) of the Exchange Act.

For nearly 50 years, officers and directors of public corporations have looked to Rule 16b-3 as the primary basis for exemption from the profit recapture provisions of §16(b). During that period, Rule 16b-3 has gone through a number of revisions.

The revision prior to the new promulgation occurred in 1991. 2 That revision not only substantially modified Rule 16b-3 but affected the §16 rules across the board. The 1991 revision was made as a result of a comprehensive review of the rules that the SEC undertook in response to developments in the trading of derivative securities, the growth of complex and diverse employee benefit plans and a rise in filing deficiencies. Among other things, the 1991 revision changed the treatment of options and other derivative securities so that the acquisition of a derivative security would be deemed the significant event, not the exercise.

Notwithstanding the 1991 modifications, the SEC was under substantial pressure to further reduce the complexities of the rules under §16. In August 1994 the SEC proposed substantial changes in the rules, primarily with respect to employee benefit plan transactions. 3

Rule 16b-3, even after the 1991 changes, involved numerous compliance issues regarding eligibility for an exemption from the penalties of §16(b). These included a number of problems associated with tax-qualified and other broad-based plans.

In October 1995, while the 1994 proposals were pending, the SEC proposed an alternative set of amendments to the §16 rules. 4 The new promulgation (adopted May 31, 1996) very much tracks the 1995 proposals in respect of Rule 16b-3. It eliminates, or modifies significantly, a number of requirements for an exemption imposed under current Rule 16b-3. (The 1995 proposals were the subject of a prior column (New York Law Journal, Dec. 1, 1995.) Following are highlights of major changes.

Optional Shareholder Approval

Shareholder approval of a plan no longer is required as a condition to obtaining an exemption (although it remains an optional means of qualifying for an exemption as discussed below). Other concerns, such as corporate law, tax law and stock exchange requirements, nonetheless, may call for shareholder approval.

New York State corporation law, for example, requires shareholder approval of options and certain other rights granted to officers, directors and employees. 5 The New York Stock Exchange, the American Stock Exchange and NASDAQ each has shareholder approval requirements applicable to stock-related plans. 6

Federal income tax considerations are another reason shareholder approval of a plan may be needed. Section 162(m) of the Internal Revenue Code of 1986 limits to $1 million the deduction for most non-performance based compensation paid to the very top officers of publicly held corporations (ordinarily the top five "named executive officers" in the proxy statement). To qualify as performance based, a plan must meet certain requirements including shareholder approval. Code §422, covering incentive stock options, also contains a shareholder approval requirement.

Under current Rule 16b-3 a grant or award must be pursuant to a written plan containing, among other things, a maximum limit on the number of shares that can be granted pursuant to the plan. This will no longer be required. Among the benefits of the new rule will be the flexibility it provides in negotiating individual arrangements with senior level executives. On the other hand, other considerations may call for a written plan. Both the performance-based plan exception under Code §162(m) (already noted above in connection with shareholder approval) and the incentive stock option provisions of Code §422 (also noted above) contemplate written plans. Other legal considerations, as noted in paragraph 1, also may call for a written plan.

Administration of a plan under current Rule 16b-3 must be by directors who are "disinterested persons." Under new Rule 16b-3, to the extent a committee of directors is relevant to the exemption (see discussion under Basic Rules below), the directors must be "non-employee directors." For the definitions of "non-employee director" under New Rule 16b-3 and "disinterested person" under current Rule 16b-3, see box below.

In certain respects, "non-employee director" is a less limiting definition that "disinterested person." A recently retired officer can now serve as a "non-employee director" without regard to the fact he received a grant or award of "equity securities" within one year prior to becoming a "non-employee director." (But see comment and the box below if the issuer also seeks to qualify a plan as performance-based under Code §162[m].)

In addition, under the new rule, a "non-employee director" may receive awards of "equity securities" as compensation for serving as a director. (He can even participate in that decision himself without creating a problem under new Rule 16b-3. There may be corporate governance reasons unrelated to Rule 16b-3 for his not doing so.)

On the other hand, there are new requirements such as those relating to Items 404(a) and 404(b) of Regulation S-K that make it more difficult to meet the new test. For example, it will disqualify some professional advisors who serve on boards of directors from qualifying as "non-employee directors." In particular, lawyers and investment bankers (who are subject to special disclosure requirements under Items 404[b][4] and [b][5], respectively) will in many instances be precluded from serving as "non-employee directors." On the other hand, the availability of an exemption under Rule 16b-3 is no longer dependent on the definition of the directors eligible to administer the plan; an exemption may be obtained on other grounds, as discussed below.

For those companies intending to qualify a plan for the performance award plan exception from Code §162(m), careful attention must be given to the difference between the definition of "outside director" under Code §162(m) and the definition of "non-employee director" under new Rule 16b-3. For example, under Treasury Regulation §1.162.27(e)(3)(C) a former officer of "the publicly held corporation" cannot qualify as an "outside director." See the box below for a summary of the term "outside director" under Treasury Regulation §1.162-27(e)(3)(C).

Stock Option Transfer

Current Rule 16b-3(a)(2) prohibits transferability of stock options. New Rule 16b-3 eliminates this prohibition. Among the benefits of the new rule will be the opportunity to transfer options to family members. It even opens the possibility of transfers to third parties, including transfers to third parties, including transfers for consideration (if an issuer concluded that such transfers were not contrary to the interests of the corporation and its shareholders).

Before implementing transferability of options, issuers should give careful consideration to federal securities law issues. For purposes of the Exchange Act, a gift by an executive to a family member should be exempt under Rule 16b-5. On the other hand, if the executive sells an option there may be a disposition that can be matched against a purchase for purposes of §16(b). In addition, there are registration issues under the Securities Act of 1933. Current Form S-8, the short form registration for employee plans, provides that an option must be non-transferable in order to be registerable pursuant to it. 7

Current Rule 16b-3(c)(1) conditions the exemption for an option (or grant of other "equity security" of the issuer) upon its being held for six months. New Rule 16b-3 eliminates this requirement.

It does provide, as noted further below, that a holding for six months from date of award or grant is one of the alternative bases for obtaining an exemption from §16. It is not, however, any longer a requirement for exemption.

"Cash only" SARs, stock units or other stock equivalents are subject to the new Rule 16b-3. (This has been accomplished by modifying current Rule 16a-1(c), which excluded such rights from the definition of "derivative security.") The requirement of a window period for cash settlement of an SAR has been eliminated.

The remainder of the column will discuss the basic rules of new Rule 16b-3. New Rule 16b-3 introduces rules governing four different types of situations involving transactions between an issuer and its officers and directors: * grants, awards and other acquisitions * dispositions (to the issuer) * transactions involving tax-qualified and certain other broad-based plans and * "discretionary transactions"

Basically the new rule provides that "a grant award or other acquisitions from the issuer" (except for "discretionary transactions" -- see below) will be exempt from §16(b) if any one of the following alternative conditions is met: 8 (i) Approval is given by the board of directors of the issuer or by a committee composed of two or more "non-employee directors"; 9 (ii) The transaction is approved or ratified by shareholders; 10 (iii) The equity securities acquired are held for at least six months following the date of acquisition. 11

On the other hand, such a transaction must be distinguished from a transaction covered by one of the other exemptions. One of those other exemptions is the tax-qualified plan, or other broad-based plan, exemption. The "discretionary exemption that may apply. If the transaction comes within the "discretionary transaction" definition, exemption must be obtained pursuant to the requirements of this exemption, or not at all. As discussed in the text of the column, the discretionary transaction exemption is directed at transactions involving two or more funds in which a participant may invest (such an an issuer stock fund, a bond fund or a money market fund) and, typically, switch investments among funds. The release describes these transactions as "fund-switching transactions."

To satisfy either clause (i) or (ii) above as a basis for exemption, the transaction must be specifically approved. This means that each award transaction as to each recipient of an award must b e approved by the board, by the committee or by the shareholders, as the case may be.

Note 3 to new rule 16b-3 states that the rule requires the approval of "each specific transaction." It also says that such requirements "are not satisfied by approval of a plan in its entirety except for the approval of a plan pursuant to which the terms and conditions of each transaction are fixed in advance, such a formula plan." 12

This means that a general approval of a plan by shareholders will no longer itself provide the necessary approval for an exemption under Rule 16b-3. On the other hand, if specific approval is based on action by the board or action by a committee, approval as to the specifics of a transaction will likely involve a procedure in line with prior practices of an issuer (i. e. shareholder approval of the plan with specific awards being made by the board or by the administering committee).

One problem posed by the new procedures is that if there is a material modification in the terms of a transaction previously approved with the specificity required by Note 3 to new Rule 16b-3, reapproval may be required in order to continue the exemption provided by clause (i) or (ii) above. (Of course, holding of the security for the requisite six-month period is an alternative method, as described in clause (iii) above, for compliance with the new exemption requirements.)

A second problem involves grants made under current Rule 16b-3 that have not been the subject of a qualifying specific approval as required by new Rule 16b-3 and therefore are not in compliance with new Rule 16b-3. (There is no grandfather clause in this respect in new Rule 16b-3.) At a recent conference, a member of the staff of the SEC indicated that in such a case a new approval under clause (i) or (ii) (or compliance with the six-month waiting period) may be necessary to enjoy exemption under new Rule 16b-3. 13

Note 3 to new Rule 16b-3, already noted above, also comments on subsequent transactions provided for in the original transaction. "Where the terms of a subsequent transaction (such as the exercise price of an option, or the provision of an exercise or tax withholding right) are provided for in a transaction as initially approved. such subsequent transaction shall not require further specific approval." 14

Dispositions to Issuer

The new rule exempts any disposition of equity securities to the issuer (exempt for "discretionary transactions" -- see below), provided that the approval requirements, described in connection with grants and awards above, are met in respect of the disposition. In this connection, however, the rule provides that the terms of the disposition must be approved in advance. 15

Among the types of transactions that will benefit from this new provision are dispositions * to pay withholding taxes * to pay the exercise price of a stock option * for estate planning purposes * in connection with (prior to) a merger

As also noted above, if a tax withholding or other disposition is provided for in the original transaction, as originally approved, separate approval is not later required as to such disposition. dieciséis

Various broad-based plans are provided specific exemption (except for "discretionary transactions" -- see below). In this category are: * "qualified plans" * "excess benefit plans" * "stock purchase plans"

Tax-qualified plans. This category includes thrift plans, savings plans and 401(k) plans as well as any employee benefit plan that "satisfies the coverage and participation requirements of sections 410 and 401(a)(26)" of the Code. 17

Excess benefit plans. New Rule 16b-3 defines an "excess benefit plan" for purposes of this exemption as follows: An employee benefit plan that is operated in conjunction with a Qualified Plan, and provides only the benefits or contributions that would be provided under a Qualified Plan but for any benefit or contribution limitations set forth in the [Code]. & Quot; 18

Stock purchase plans. "Stock purchase plan" is defined as "an employee benefit plan that satisfies the coverage and participation requirements of §§423(b)(3) and 423(b)(5), or §410, of the [Code]. & Quot; 19 Such a plan typically provides for payroll deductions and a purchase price at a discount from market price (at time of purchase).

New Rule 16b-3 provides a special exemption for so-called "discretionary transactions." Such transactions are specifically excluded from the three other categories of exemptions described above. As described earlier in the column, a "discretionary transaction" typically is one pursuant to a plan in which a participant is given the opportunity by the issuer to invest in, switch into and cash out of various investment funds. The release describes the circumstances of concern to the SEC as follows:

Fund-switching transactions involving an issuer equity securities fund and cash distributions from these funds may present opportunities for abuse because the investment decision is similar to that involved in a market transaction. Moreover, the plan may buy and sell issuer equity securities in the market in order to effect these transactions, so that the real party on the other side of the transaction is not the issuer but instead a market participant. 20

New Rule 16b-3(b)(1) specifically defines a "discretionary transaction" como sigue:

A Discretionary Transaction shall mean a transaction pursuant to an employee benefit plan that: (i) Is at the volition of a plan participant; (ii) is not made in connection with the participant's death, disability, retirement or termination of employment; (iii) is not required to be made available to a plan participant pursuant to a provision of the Internal Revenue Code; and (iv) Results in either an intraplan transfer involving an issuer equity securities fund, or a cash distribution funded by a volitional disposition of an issuer equity security. 21

In order to qualify for exemption under new Rule 16b-3(f), a discretionary transaction must occur at least six months after a discretionary transaction that is in the "opposite way," a term used in the release but not in the new Rule itself). "Opposite way," for this purpose means an acquisition as opposed to a disposition and vice versa. The test applies to any such transaction even if it occurs pursuant to a different plan from that of the transaction in question.

The new rules take effect Aug. 15, but issuers can take advantage of a phase-in period, if they choose, until Nov. 1, in order to comply with requirements of new Rule 16b-3. To come within the new Rule 16b-3 exemption, the issuer must choose to comply as to all plans (with certain minor exceptions). 22 There is no formal election to be made to use new Rule 16b-3 during this period according to the SEC staff; it simply will be based on compliance "in fact." 23 Care must be taken that amendments to existing plans and grants comply with applicable provisions of those plans and grants.

Three "Director Status" Tests Compared: Current Rule 16b-3, New Rule 16b-3, Code Section 162(m)

Current Rule 16b-3(c)(2)(i) "Disinterested Person" Prueba

New Rule 16b-3(b)(3)(i) "Non-Employee Director" Prueba

Code §162 (m) (Treas. Reg. §1.162-27(e)(3)(C)) "Outside Director" Prueba

Plan must be administered solely by directors who are "disinterested persons."

A "disinterested person" for this purpose must be a director who while serving as an administrator of the plan in question and "during the one year prior to service as an administrator" is not "granted or awarded equity securities [of the issuer] pursuant to the plan or any other plan of the issuer or any of its affiliates" excepto por

* participation in a "formula plan"or in any capacity other than as a within the meaning of Rule 6b-3(c)(2)(ii);

* participation in an "ongoing securities acquisition plan under Rule 16b-3(d)(2)(i);"

* election to receive an annual retainer fee in cash or "an equivalent amount of securities" or a combination thereof; y

* participation in a plan, other than the plan in question, pursuant to which equity securities of the issuer are awarded

To be eligible as a "non-employee director" who can take part in approving grants or awards of equity securities of the issuer so as to exempt them under new Rule 16b-3, a director must not

* currently be employed by, or be an officer (whether or not an employee) of, the issuer, or the parent or a subsidiary of the issuer;

* receive compensation from the issuer, or the parent or a subsidiary of the issuer, for service as a consultant, director, except for an amount not required to be reported under Item 404(a) of Regulation S-K (generally an amount not greater than $ 60,000 in a given year);

* have an interest in any other transaction requiring disclosure under Item 404(a) of Regulation S-K; o

* have a business relationship requiring disclosure under Item 404(b) of Regulation S-K (except in the case of law firms and investment banks, generally a situation in which the amount involved exceeds five percent of the consolidated gross revenue of either the issuer or the other entity)

(Note: special rules apply to closed-end investment companies.)

For an award to qualify as a "performance-based" award by a publicly held corporation certain steps must be taken in respect of the award committee of "outside directors." An "outside director" must not

* be a former employee of the publicly held corporation receiving compensation for prior services (other than under a tax-qualified retirementplan);

* be a current employee of the publicly held corporation;

* be a former officer of the publicly held corporation

* receive remuneration, directly or indirectly, from the publicly held corporation in any capacity other than as a director.

1 Release No. 34-37260, 61 Fed. Reg. 30,376 (June 14, 1996).

2 Release No. 34-28869, 56 Fed. Reg. 7242 (Feb. 21, 1991).

3 Release No. 34-34514, 59 Fed. Reg. 42449 (Aug. 17, 1994). A related release a month later concerned the issue of whether compensatory cash-only instruments based on the value of the issuer's equity securities should continue to be excluded from §16 liability. Release No. 34-34681 59 Fed. Reg. 48579, (Sept. 22, 1994).

4 Release No. 34-36356, 60 Fed. Reg. 53832 (Oct. 17, 1995).

5 N. Y. Bus. Corp. Law §505(d).

6 New York Stock Exchange Listed Company Manual §312.03; American Stock Exchange Company Guide §711; National Association of Securities Dealers Inc. Manual -- The NASDAQ Stock Market Rule 4460(i).

7 General Instruction A(1)(a) to Form S-8 permits the registration of non-transferable employee stock options that allow transfers pursuant to the laws of decedent and distribution.

8 New Rule 16b-3 does not clarify what is meant by "grant, award or other transaction." The release does indicate that grants of stock options and restricted stock, as one would expect, are examples of "grant and award" actas. The release indicates that "other transactions" may include one that "requires the participant to exercise investment discretion as to either the timing of the transaction or the assets into which the investment is made." 61 Fed. Reg. at 20380. Such a transaction may include, for example, an exercise of an option or an elective deferral of bonus in the form of deferred stock or the equivalent.

9 The adopting release states that approval by the board of directors or a committee thereof must be obtained in advance, while new Rule 16b-3(d)(1) is silent on the timing of the approval by the board or committee. In contrast to acquisitions, Rule 16b-3(e) specifically provides that a disposition to the issuer must be approved in advance. See footnote 15.

10 New Rule 16b-3(d)(2) permits shareholder ratification as the basis of exemption for acquisitions from the issuer if obtained by the date of the next annual shareholders' meeting.

11 New Rule 16b-3(d)(3) provides that holding the security granted for six months is another basis for exemption from §16(b) liability, provided that in the case of a derivative security, the six-month period is measured from the acquisition date of the derivative security to the disposition date of the derivative security or "its underlying equity security." Securities are not treated fungibly for this purpose and exemption premised on the six-month holding period will not be nullified by dispositions of other issuer equity securities.

12 61 Fed. Reg. 30394 For this purpose "formula plan" is explained by the release (see release footnote 71) as meaning a "formula plan" under staff interpretations of current Rule 16b-3(c)(2)(ii).

13 Approval of grants that were exempt under the current rules may not have had the specificity required under the new rules for approval of future transactions (such as dispositions to issuers), or, if the needed specifity was met, the "disinterested directors" may not meet the "non-employee director" requirements of the new rules. Although the initial grant exemption would not be jeopardized, future transactions such as dispositions to the issuer may require additional approval meeting the requirements of new Rule 16b-3. See also discussion in footnote 23 below.

15 New Rule 16b-3(e) provides that dispositions to the issuer "are approved in advance in the manner prescribed by either paragraph (d)(1) or paragraph (d)(2). & Quot; 61 Fed. Reg. at 30393.

16 Note 3 to new Rule 16b-3, 61 Fed. Reg. at 30394.

22 The adopting release to New Rule 16b-3 provides that during the transition period the new rule is available to "any transaction between an issuer and its officers or directors that occurs outside the scope of a formal plan or pursuant to a plan that permits only the issuance of cash-only instruments" without requiring that all other plans be adopted or converted to comply with new Rule 16b-3. 61 Fed. Reg. at 30390

23 Efforts to comply with new Rule 16b-3 are likely to raise a number of issues. For example, will the amendment of an award or grant, originally made under current Rule 16b-3, for the purpose of complying with, or taking advantage of, new Rule 16b-3, constitute a new grant or award for purpose of §16? The adopting release does not provide very much guidance in this respect. In a limited comment, footnote 169 of the release provides that, once an existing plan is converted to new Rule 16b-3, "the amendment of outstanding derivative securities to permit their transferability will not be deemed a cancellation of such securities and a grant of new securities for §16 purposes." 61 Fed. Reg. at 30390.

26 U. S. Code § 1256 - Section 1256 contracts marked to market

Section 1256 contracts marked to market

(a) General rule For purposes of this subtitle —

each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),

proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1),

(3) any gain or loss with respect to a section 1256 contract shall be treated as —

short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and

long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and

if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.

(b) Section 1256 contract defined

(1) In general For purposes of this section, the term “section 1256 contract” means —

any regulated futures contract,

any foreign currency contract,

(2) Exceptions The term “section 1256 contract” shall not include —

any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or

any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.

(c) Terminations, etc.

The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.

(2) Special rule where taxpayer takes delivery on or exercises part of straddle If —

2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and

the taxpayer takes delivery under or exercises any of such contracts,

then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.

(3) Fair market value taken into account

For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.

(d) Elections with respect to mixed straddles

The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.

(2) Time and manner

An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.

(3) Election revocable only with consent

An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.

(4) Mixed straddle For purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))—

at least 1 (but not all) of the positions of which are section 1256 contracts, and

with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.

(e) Mark to market not to apply to hedging transactions

(1) Section not to apply

Subsection (a) shall not apply in the case of a hedging transaction.

(2) Definition of hedging transaction

For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.

(3) Special rule for syndicates

Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate.

(B) Syndicate defined

For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 464(e)(2)).[1]

(C) Holdings attributable to active management For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 464(e)(2))—

for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity,

for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,

if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years,

if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or

if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes.

For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.

(4) Limitation on losses from hedging transactions

Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.

(ii) Carryover of disallowed loss

Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.

(B) Exception where economic loss

Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.

(C) Exception for certain hedging transactions

In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).

(D) Hedging loss The term “hedging loss” means the excess of —

the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over

income received or accrued by the taxpayer during such taxable year from such transactions.

(E) Unrecognized gain

The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).

(f) Special rules

(1) Denial of capital gains treatment for property identified as part of a hedging transaction

For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.

(2) Subsection (a)(3) not to apply to ordinary income property

Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss.

(3) Capital gain treatment for traders in section 1256 contracts

For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.

(B) Exception for certain hedging transactions

Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.

(C) Treatment of underlying property

For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.

(4) Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneurs In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))—

paragraph (3) of subsection (a) shall not apply to any such gain or loss, and

all such gains or losses shall be treated as short-term capital gains or losses, as the case may be.

(5) Special rule related to losses

Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).

(g) Definitions For purposes of this section —

(1) Regulated futures contracts defined The term “regulated futures contract” means a contract —

with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and

which is traded on or subject to the rules of a qualified board or exchange.

(2) Foreign currency contract defined

(A) Foreign currency contract The term “foreign currency contract” means a contract —

which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts,

which is traded in the interbank market, and

which is entered into at arm’s length at a price determined by reference to the price in the interbank market.

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes.

(3) Nonequity option

The term “nonequity option” means any listed option which is not an equity option.

(4) Dealer equity option The term “dealer equity option” means, with respect to an options dealer, any listed option which —

is an equity option,

is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and

is listed on the qualified board or exchange on which such options dealer is registered.

(5) Listed option

The term “listed option” means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange.

(6) Equity option The term “equity option” means any option —

to buy or sell stock, or

the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph).

The term “equity option” includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).

(7) Qualified board or exchange The term “qualified board or exchange” means —

a national securities exchange which is registered with the Securities and Exchange Commission,

a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or

any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section.

(8) Options dealer

The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.

(B) Persons trading in other markets

In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.

(9) Dealer securities futures contract

(A) In general The term “dealer securities futures contract” means, with respect to any dealer, any securities futures contract, and any option on such a contract, which —

is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and

is traded on a qualified board or exchange.

For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section.

(C) Securities futures contract

The term “securities futures contract” has the meaning given to such term by section 1234B.

[1] See References in Text note below.

References in Text

Section 3(a)(55) of the Securities Exchange Act of 1934, referred to in subsec. (g)(6)(B), is classified to section 78c(a)(55) of Title 15. Commerce and Trade.

The date of the enactment of this paragraph, referred to in subsec. (g)(6)(B), probably means the date of enactment of Pub. L. 106–554. which amended subsec. (g)(6) generally and which was approved Dec. 21, 2000 .

2010—Subsec. (segundo). Pub. L. 111–203 redesignated first sentence as par. (1), inserted heading, redesignated former pars. (1) to (5) as subpars. (A) to (E), respectively, of par. (1), added par. (2), and struck out concluding provisions which read as follows: “The term ‘section 1256 contract’ shall not include any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract.”

2005—Subsec. (f)(1). Pub. L. 109–135 substituted “subsection (e)(2)” for “subsection (e)(2)(C)”.

2004—Subsec. (g)(6). Pub. L. 108–311 added at end of concluding provisions “The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).”

2000—Subsec. (segundo). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)(A)], added par. (5) and concluding provisions.

Subsec. (f)(4). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(2)], inserted “and dealer securities futures contracts” after “dealer equity options” in heading and “, or dealer securities futures contracts,” after “dealer equity options” in introductory provisions.

Subsec. (g)(6). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(3)], amended heading and text of par. (6) generally. Prior to amendment, text read as follows:

“(A) In general .—Except as provided in subparagraph (B), the term ‘equity option’ means any option —

“(i) to buy or sell stock, or

“(ii) the value of which is determined directly or indirectly by reference to any stock (or group of stocks) or stock index.

“(B) Exception for certain options regulated by commodities futures trading commission .—The term ‘equity option’ does not include any option with respect to any group of stocks or stock index if —

“(i) there is in effect a designation by the Commodities Futures Trading Commission of a contract market for a contract based on such group of stocks or index, or

“(ii) the Secretary determines that such option meets the requirements of law for such a designation.”

1999—Subsec. (e)(2). Pub. L. 106–170 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “For purposes of this subsection, the term ‘hedging transaction’ means any transaction if—

“(A) such transaction is entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily —

“(i) to reduce risk of price change or currency fluctuations with respect to property which is held or to be held by the taxpayer, or

“(ii) to reduce risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer,

“(B) the gain or loss on such transactions is treated as ordinary income or loss, and

“(C) before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.”

1986—Subsec. (e)(4), (5). Pub. L. 99–514 redesignated par. (5) como (4) y eliminado el par anterior. (4), special rule for banks, which read as follows: “In the case of a bank (as defined in section 581), subparagraph (A) of paragraph (2) shall be applied without regard to clause (i) or (ii) thereof.”

1984—Pub. L. 98–369, § 102(e)(5). substituted “Section 1256 contracts” for “Regulated futures contracts” in section catchline.

Subsec. (a)(1), (3), (4). Pub. L. 98–369, § 102(a)(1). substituted “section 1256 contract” for “regulated futures contract” and “section 1256 contracts” for “regulated futures contracts” wherever appearing.

Subsec. (segundo). Pub. L. 98–369, § 102(a)(2). in par. (1), substituted “any regulated futures contract” for “with respect to which the amount required to be deposited and the amount which may be withdrawn depends on the system of marking to market; and”, in par. (2), substituted “any foreign currency contract,” for “which is traded on or subject to the rules of a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission or of any board of trade or exchange which the Secretary determines has rules adequate to carry out the purposes of this section. Such term includes any foreign currency contract.”, and added pars. (3) and (4).

Subsec. (C) (1). Pub. L. 98–369, § 102(a)(1)(A). (e)(1)(A), substituted “section 1256 contracts” for “regulated futures contracts”, and “by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse,” for “by taking or making delivery,”.

Subsec. (c)(2). Pub. L. 98–369, § 102(e)(1)(C). substituted “takes delivery on or exercises” for “takes delivery on” in heading.

Subsec. (C) (2) (A). Pub. L. 98–369, § 102(a)(1)(B). substituted “section 1256 contracts” for “regulated futures contracts”.

Subsec. (c)(2)(B). Pub. L. 98–369, § 102(e)(1)(B). substituted “takes delivery under or exercises” for “takes delivery under”.

Subsec. (d)(1), (4)(A). Pub. L. 98–369, § 102(a)(1)(B). substituted “section 1256 contracts” for “regulated futures contracts”.

Subsec. (d)(4)(B). Pub. L. 98–369, § 102(a)(1)(A). substituted “section 1256 contract” for “regulated futures contract”.

Pub. L. 98–369, § 107(c). inserted “(or such earlier time as the Secretary may prescribe by regulations)”.

Subsec. (e)(2)(C). Pub. L. 98–369, § 107(d). inserted “(or such earlier time as the Secretary may prescribe by regulations”.

Subsec. (g). Pub. L. 98–369, § 102(a)(3). in amending subsec. (g) generally, inserted provisions relating to regulated futures contracts as par. (1), redesignated former pars. (1) and (2) as subpars. (A) and (B), respectively, of par. (2), and added pars. (3) to (8).

Subsec. (g)(1)(A). Pub. L. 98–369, § 722(a)(2). inserted “, or the settlement of which depends on the value of,” after “delivery of”.

1983—Subsec. (segundo). Pub. L. 97–448, § 105(c)(5)(A). (B), struck out par. (1) which related to contracts requiring delivery of personal property (as defined in section 1092(d)(1)) or an interest in such property, redesignated pars. (2) and (3) as (1) and (2), respectively, and inserted last sentence providing that such term includes any foreign currency contract.

Subsec. (do). Pub. L. 97–448, § 105(c)(1). inserted “, etc.” after “Terminations” in heading and, in text, designated existing first and second sentences as pars. (1) and (3), respectively, added par. (2), inserted “(or transfer)” after “termination” and “(or rights)” after “obligation” in par. (1) as so designated, and substituted “this subsection” for “the preceding sentence” and inserted “(or transfer)” after “termination” in par. (3) as so designated.

Subsec. (d)(4)(B). Pub. L. 97–448, § 105(c)(2). substituted “day on which the first regulated futures contract forming part of the straddle is acquired” for “day on which such position is acquired”.

Subsec. (e)(3)(C)(v). Pub. L. 97–448, § 105(c)(3). inserted “(by regulations or otherwise)” after “determines”.

1982—Subsec. (e)(3)(B). Pub. L. 97–354 substituted “an S corporation” for “an electing small business corporation within the meaning of section 1371(b)”.

Effective Date of 2010 Amendment

Amendment by Pub. L. 111–203 effective 1 day after July 21, 2010. except as otherwise provided, see section 4 of Pub. L. 111–203. set out as a note under section 5301 of Title 12. Banks and Banking.

“The amendments made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [ July 21, 2010 ].”

Effective Date of 2004 Amendment

Amendment by Pub. L. 108–311 effective as if included in section 401 of the Community Renewal Tax Relief Act of 2000 [H. R. 5662, as enacted by Pub. L. 106–554 ], see section 405(b) of Pub. L. 108–311. set out as a note under section 1234B of this title .

Effective Date of 2002 Amendment

“The amendment made by this subsection [amending this section] shall take effect as if included in section 5075 of the Technical and Miscellaneous Revenue Act of 1988 [Pub. L. 100–647 ].”

Effective Date of 1999 Amendment

Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999. see section 532(d) of Pub. L. 106–170. set out as a note under section 170 of this title .

Effective Date of 1986 Amendment

Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986. with certain exceptions and qualifications, see section 1261(e) of Pub. L. 99–514. set out as an Effective Date note under section 985 of this title .

Effective Date of 1984 Amendment

“(f) Effective Dates.—

Except as otherwise provided in this subsection or subsection (g), the amendments made by this section [amending this section, sections 263. 1092. 1212. 1234A. 1362. 1374. and 1402 of this title, and section 411 of Title 42. The Public Health and Welfare, and enacting provisions set out as a note under section 1362 of this title ] shall apply to positions established after the date of the enactment of this Act [ July 18, 1984 ], in taxable years ending after such date.

“(2) Special rule for options on regulated futures contracts.—

In the case of any option with respect to a regulated futures contract (within the meaning of section 1256 of the Internal Revenue Code of 1986 [formerly I. R.C. 1954]), the amendments made by this section shall apply to positions established after October 31, 1983. in taxable years ending after such date.

“(3) Special rule for self-employment tax.—

Except as provided in subsection (g)(2), the amendments made by subsection (c) [amending section 1402 of this title and section 411 of Title 42 ] shall apply to taxable years beginning after the date of the enactment of this Act [ July 18, 1984 ].

“(4) Gains or losses from certain terminations.—

The amendment made by subsection (d)(9) [probably means subsec. (e)(9), which amended section 1234A of this title ] shall apply as if included in the amendment made by section 505(a) [probably means section 507(a)] of the Economic Recovery Tax Act of 1981 [Pub. L. 97–34 ], as amended by section 105(e) of the Technical Corrections Act of 1982 [Pub. L. 97–448 ].

“(g) Elections With Respect to Property Held on or Before the Date of the Enactment of This Act.— At the election of the taxpayer —

the amendments made by this section [amending this section, sections 263. 1092. 1212. 1234A. 1362. 1374. and 1402 of this title, and section 411 of Title 42. The Public Health and Welfare, and enacting provisions set out as a note under section 1362 of this title ] shall apply to all section 1256 contracts held by the taxpayer on the date of the enactment of this Act [ July 18, 1984 ], effective for periods after such date in taxable years ending after such date, or

in lieu of an election under paragraph (1), the amendments made by this section shall apply to all section 1256 contracts held by the taxpayer at any time during the taxable year of the taxpayer which includes the date of the enactment of this Act.

“(h) Elections for Installment Payment of Tax Attributable to Stock Options.—

“(1) In general.— If the taxpayer makes an election under subsection (g)(2) and under this subsection —

the taxpayer may pay part or all the tax for the taxable year referred to in subsection (g)(2) in 2 or more (but not exceeding 5) equal installments, and

“(B) the maximum amount of tax which may be paid in installments under this subsection shall be the excess of —

the tax for such taxable year determined by taking into account subsection (g)(2), over

“(ii) the tax for such taxable year determined by taking into account subsection (g)(2) and by treating —

all section 1256 contracts which are stock options, and

any stock which was a part of a straddle including any such stock options,

as having been acquired for a purchase price equal to their fair market value on the last business day of the preceding taxable year. Stock options and stock shall be taken into account under subparagraph (B)(ii) only if such options or stock were held on the last day of the preceding taxable year and only if income on such options or stock would have been ordinary income if such options or stock were sold at a gain on such last day.

“(2) Date for payment of installment.—

If an election is made under this subsection, the first installment under paragraph (1) shall be paid on or before the due date for filing the return for the taxable year described in paragraph (1), and each succeeding installment shall be paid on or before the date which is 1 year after the date prescribed for payment of the preceding installment.

If a bankruptcy case or insolvency proceeding involving the taxpayer is commenced before the final installment is paid, the total amount of any unpaid installments shall be treated as due and payable on the day preceding the day on which such case or proceeding is commenced.

“(3) Interest imposed.—

For purposes of section 6601 of the Internal Revenue Code of 1986, the time for payment of any tax with respect to which an election is made under this subsection shall be determined without regard to this subsection.

“(4) Form of election.— An election under this subsection shall be made not later than the time for filing the return for the taxable year described in paragraph (1) and shall be made in the manner and form required by regulations prescribed by Secretary of the Treasury or his delegate. The election shall set forth —

the amount determined under paragraph (1)(B) and the number of installments elected by the taxpayer,

the property described in paragraph (1)(B)(ii), and the date on which such property was acquired,

the fair market value of the property described in paragraph (1)(B)(ii) on the last business day of the taxable year preceding the taxable year described in paragraph (1), and

such other information for purposes of carrying out the provisions of this subsection as may be required by such regulations.

“(5) Delay of identification requirement.—

Section 1256(e)(2)(C) of the Internal Revenue Code of 1986 shall not apply to any stock option or stock acquired on or before the 60th day after the date of the enactment of this Act [ July 18, 1984 ].

“(i) Definitions.— For purposes of subsections (g) and (h)—

“(1) Section 1256 contract.—

The term ‘section 1256 contract’ has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1986 (as amended by this section).

The term ‘stock option’ means any option to buy or sell stock.

“(j) Coordination of Election Under Subsection (d)(3) With Elections Under Subsections (g) and (h).—

The Secretary of the Treasury or his delegate shall prescribe such regulations as may be necessary to coordinate the election provided by subsection (d)(3) with the elections provided by subsections (g) and (h).”

“The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1984 .”

Amendment by section 107(c), (d) of Pub. L. 98–369 applicable to positions entered into after July 18, 1984. in taxable years ending after that date, see section 107(e) of Pub. L. 98–369 set out as a note under section 1092 of this title .

Amendment by section 722(a)(2) of Pub. L. 98–369 effective as if included in the provisions of the Technical Corrections Act of 1984, Pub. L. 97–448. to which such amendment relates, see section 722(a)(6) of Pub. L. 98–369. set out as a note under section 172 of this title .

Effective Date of 1983 Amendment

Amendment by Pub. L. 97–448 effective, except as otherwise provided, as if it had been included in the provision of the Economic Recovery Tax Act of 1981, Pub. L. 97–34. to which such amendment relates, see section 109 of Pub. L. 97–448. set out as a note under section 1 of this title .

Except as provided in clauses (ii) and (iii), the amendments made by subparagraphs (B) and (C) [amending this section] shall apply only with respect to contracts entered into after May 11, 1982 .

“(ii) Election by taxpayer of retroactive application.—

“(I) Retroactive application.—

If the taxpayer so elects, the amendments made by subparagraphs (B) and (C) [amending this section] shall apply as if included within the amendments made by title V of the Economic Recovery Tax Act of 1981 [title V of Pub. L. 97–34 ].

“(II) Additional choices with respect to 1981.—

If the taxpayer held a foreign currency contract after December 31, 1980. and before June 24, 1981. and such taxpayer makes an election under subclause (I), such taxpayer may revoke any election made under section 508(c) [set out as an Effective Date note under section 1092 of this title ] or 509(a) [set out below] of such Act, and may make an election under section 508(c) or 509(a) of such Act.

“(III) Additional choices apply to all regulated futures contracts.—

Except as provided in subclause (IV), in the case of any taxpayer who makes an election under subclause (I), any election under section 508(c) or 509(a) of such Act or any revocation of such an election shall apply to all regulated futures contracts (including foreign currency contracts).

“(IV) Section 509(a)(3) and (4) not to apply to foreign currency contracts.—

Paragraphs (3) and (4) of section 509(a) of such Act shall not apply to any foreign currency contract.

“(V) Time for making election or revocation.—

Any election under subclause (I) and any election or revocation under subclause (II) may be made only within the 90-day period beginning on the date of the enactment of this Act [ Jan. 12, 1983 ]. Any such action, once taken, shall be irrevocable.

For purposes of this clause, the terms ‘regulated futures contract’ and ‘foreign currency contract’ have the same respective meanings as when used in section 1256 of the Internal Revenue Code of 1986 [formerly I. R.C. 1954] (as amended by this Act).

“(iii) Election by taxpayer with respect to positions held during taxable years ending after .—

In lieu of the election under clause (ii), a taxpayer may elect to have the amendments made by subparagraphs (B) and (C) [amending subsec. (b) of this section to include foreign currency contracts and enacting subsec. (g) of this section, respectively] applied to all positions held in taxable years ending after May 11, 1982. except that the provisions of section 509(a)(3) and (4) of the Economic Recovery Tax Act of 1981 [set out below] shall not apply.”

Effective Date of 1982 Amendment

Amendment by Pub. L. 97–354 applicable to taxable years beginning after Dec. 31, 1982. see section 6(a) of Pub. L. 97–354. set out as an Effective Date note under section 1361 of this title .

Section (other than subsec. (e)(2)(C)) applicable to property acquired and positions established by the taxpayer after June 23, 1981. in taxable years ending after such date, subsec. (e)(2)(C) of this section applicable to property acquired and positions established by the taxpayer after Dec. 31, 1981. in taxable years ending after such date, and section applicable when so elected with respect to property held on June 23, 1981. see section 508 of Pub. L. 97–34. set out as a note under section 1092 of this title .

Deadline for Determination

“The Secretary of the Treasury or his delegate shall make the determinations under section 1256(g)(9)(B) of the Internal Revenue Code of 1986, as added by this Act, not later than July 1, 2001 .”

Election for Extension of Time for Payment and Application of This Section for the Taxable Year Including June 23, 1981

In the case of any taxable year beginning before June 23, 1981. and ending after June 22, 1981. the taxpayer may elect, in lieu of any election under section 508(c) [set out as an Effective Date note under section 1092 of this title ], to have this section apply to all regulated futures contracts held during such taxable year.

“(2) Application of section 1256.— If a taxpayer elects to have the provisions of this section apply to the taxable year described in paragraph (1).—

the provisions of section 1256 of the Internal Revenue Code of 1986 [formerly I. R.C. 1954] (other than section 1256(e)(2)(C)) shall apply to regulated futures contracts held by the taxpayer at any time during such taxable year, and

for purposes of determining the rate of tax applicable to gains and losses from regulated futures contracts held at any time during such year, such gains and losses shall be treated as gain or loss from a sale or exchange occurring in a taxable year beginning in 1982.

“(3) Determination of deferred tax liability.— If the taxpayer makes an election under this subsection.—

the taxpayer may pay part or all of the tax for such year in two or more (but not exceeding five) equal installments;

“(B) the maximum amount of tax which may be paid in installments under this section shall be the excess of —

the tax for such year, determined by taking into account paragraph (2), over

the tax for such year, determined by taking into account paragraph (2) and by treating all regulated futures contracts which were held by the taxpayer on the first day of the taxable year described in paragraph (1), and which were acquired before the first day of such taxable year, as having been acquired for a purchase price equal to their fair market value on the last business day of the preceding taxable year.

“(4) Date for payment of installment.—

If an election is made under this subsection, the first installment under subsection (a)(3)(A) shall be paid on or before the due date for filing the return for the taxable year described in paragraph (1), and each succeeding installment shall be paid on or before the date which is one year after the date prescribed for payment of the preceding installment.

If a bankruptcy case or insolvency proceeding involving the taxpayer is commenced before the final installment is paid, the total amount of any unpaid installments shall be treated as due and payable on the day preceding the day on which such case or proceeding is commenced.

“(5) Interest imposed.—

For purposes of section 6601 of the Internal Revenue Code of 1986, the time for payment of any tax with respect to which an election is made under this subsection shall be determined without regard to this subsection.

“(b) Form of Election.— An election under this section shall be made not later than the time for filing the return for the taxable year described in subsection (a)(1) and shall be made in the manner and form required by regulations prescribed by the Secretary. The election shall set forth —

the amount determined under subsection (a)(3)(B) and the number of installments elected by the taxpayer,

each regulated futures contract held by the taxpayer on the first day of the taxable year described in subsection (a)(1), and the date such contract was acquired,

the fair market value on the last business day of the preceding taxable year for each regulated futures contract described in paragraph (2), and

such other information for purposes of carrying out the provisions of this section as may be required by such regulations.”

Section 16(b) And Your 10b5-1 Trading Plan

by Robert W. Brownlie and Kellin M. Chatfield

You are director or officer of a public corporation. You have a 10b5-1 Trading Plan in place. As long as you purchase and sell your corporation’s stock strictly pursuant to that plan, you don’t have to worry about the securities laws, right? Wrong. Even with a 10b5-1 trading plan in place, a corporate insider’s trades may be subject to regulatory scrutiny and claims from investors. In particular, corporate insiders using 10b5-1 plans to make both purchases and sales could be exposing themselves to liability under Section 16(b) of the Exchange Act for short-swing transactions.

Section 16(b) of the Exchange Act imposes strict liability on corporate insiders who profit from purchases and sales of company stock within a six-month period. Section 16(b) applies to: (1) directors; (2) officers; and (3) beneficial owners of more than 10% of any class of security of the corporation.[2] It covers purchases, sales, and security-based swap agreements concerning the corporation’s securities.[3] If anyone subject to Section 16(b) makes a profit on transactions in the corporation’s stock that take place within 6 months of one another, his or her profits are recoverable by the corporation.

How does this impact your 10b5-1 plan?

Many 10b5-1 plans provide for purchases as well as sales of the corporation’s stock. Or, a director or officer may institute two separate plans, one for selling and one for purchasing the corporation’s stock. This could just be sound investment strategy. It could also mitigate an inference of scienter in a subsequent securities class action, where a director or officer’s sales of company stock, without intervening purchases, may be considered evidence the director or officer was aware of negative information which should have been disclosed to the public. Routine purchases of the corporation’s stock may alleviate any such negative inference.

Unfortunately, these automatic trades pursuant to a pre-set plan do not exempt directors and officers from Section 16(b) and an insider may still be liable for short-swing profits from automatic sales and purchases under a 10b5-1 plan.

Por ejemplo . Director A has a 10b5-1 plan in place which directs its investment manager to sell 1,000 shares of Director A’s stock whenever the stock price rises above $25/share and to buy 1,000 shares of company stock whenever the prices drops below $20/share. The stock price hits $26 a share on January 1. The plan would automatically sell 1000 shares for a total of $26000 on January 1. Suppose then that the price of the Company stock drops to $19 a share on May 15; the plan would automatically purchase 1000 shares for $19,000. Director A would have achieved a short-swing profit of $7000. This amount is subject to disgorgement and payable to the Company under Section 16(b).

This disgorgement is required even though Director A did not make a conscious decision to trade within the 6-month period. Section 16(b) imposes strict liability on any transactions considered “voluntary,” whether or not the director or officer intended to make a short-swing profit. What is “voluntary” is defined broadly as any trade in which the director or officer retains any amount of control.[4] This would include trades pursuant to a 10b5-1 plan, because the director or officer technically retains the ability to cancel the plan at any-time, thereby avoiding liability under Section 16(b).

Another risk resulting from automatic trades under a trading plan is that the director may incur short-swing profits in overlapping 6-month periods. When disgorging profits for short-swing transactions, a court matches the transactions to obtain the maximum amount of profits.[5] Thus, a court may match multiple transactions against a single purchase or sale, as long as each matched transaction is within 6 months of the underlying transaction, and as long as no individual share of stock is counted twice.[6]

Por ejemplo . Director B has a 10b5-1 plan in place which directs its investment manager to sell 500 shares of Director B’s stock whenever it reaches $30 a share. The plan also directs the investment manager to buy $1000 shares of Director A’s stock whenever the price drops below $15 a share. The stock price hits $31 a share on January 1. The plan would automatically sell 500 shares for $15,500. Suppose the price drops to $15 a share on May 30. The plan would buy 1000 shares for $15,000. The stock price rises on July 1 to $32 a share. The plan would sell 500 shares for $16,000. In this example, even though the stock sales occurred more than 6 months apart, each was within six months of the stock purchase. Thus, a court could match the sale of 500 shares on January 1 for 15,500 to the purchase of 500 shares on May 30 for $7500 – resulting in a profit of $8,000. There would also be 500 unmatched shares from the May 30 transaction. These could be matched with the subsequent sale of 500 shares on July 1 – resulting in a profit of $8500. The total disgorgements based on the single purchase of securities would be $16,500.

Moreover, just because profits have been disgorged for one short-swing transaction does not necessarily cut the director off from liability for a subsequent transaction within the same period. Although a court cannot disgorge the same profit twice, a court may order a supplemental disgorgement if, for example, the director or officer engages in a second transaction that yields greater short-swing profits than those already disgorged.

Going back to Example 1 ; assume that Director A voluntarily disgorges the $7,000 short-swing profit on May 16. On May 30, the stock price increases to $28 a share and the plan automatically sells 1000 shares for $28000. Even though Director A has already disgorged short-swing profits relating to his/her purchase of 1000 securities on May 15, the subsequent transaction resulted in a larger short-swing profit than did the January 1 transaction. Thus, in keeping with its duty to maximize profits paid to the corporation, a court might require a supplemental disgorgement of $2000 [the difference between the profit for Transaction 1 and Transaction 2].

Why does this matter?

Section 16(b) allows private litigants to file a claim seeking disgorgement of profits and recover attorneys’ fees in successful Section 16(b) cases. While the disgorged profits go to the corporation, the fees go to the lawyer bringing the claim. To bring a case, a shareholder must first make a written demand on the corporation to recover the short-swing profits. Because there are virtually no defenses to a short-swing profit case, insiders frequently will disgorged their profits upon demand by the corporation. Thus, Courts have interpreted Section 16(b) to allow lawyers to recover attorneys’ fees — as much as 30% of the recovery by the corporation — for making a successful demand, which is a handsome pay day for just writing a letter.

The individuals who are subject to potential liability under Section 16(b) must report all of their trades on SEC Form 4. Virtually every Form 4 is reviewed by a cadre of lawyers who make their living pursuing Section 16(b) claims. Trades that result in short-swing profits do not go unnoticed.

Liability for short-swing profits is excluded from coverage under directors’ and officers’ liability insurance policies. Corporations are not allowed to indemnify directors and officers for either the profits disgorged under Section 16(b) claims or the attorneys’ fees or other costs incurred in the unsuccessful defense of a Section 16(b) claim.[7]

How can a director or officer mitigate the risks?

There are several ways a director or officer can mitigate the exposure to Section 16(b) liability with its trading plans:

Have a plan only for stocks sales that does not allow for automatic purchases. This, of course, does not eliminate the potential liability, as a director or officer may make a discretionary stock purchase that results in a short-swing profit.

Have a plan that prohibits stock purchases within 6 months and 1 day of any sale; and vice versa.

Have a plan that delegates all authority to a broker/dealer or investment manager who is well informed about the potential risks and liabilities under the Securities laws, in particular, who is cognizant of the potential liability resulting from short-swing transactions.

The risk of liability for short-swing profit liability is real. And, the law rewards individuals who identify situations where potential short-swing profits exist. Therefore, corporate directors, executive officers and 10% shareholders of corporations should take care to ensure that the trading plans established under Rule 10b5-1 to protect themselves from liability for insider trading do not expose them to liability for short-swing profits under Section 16(b).

Robert Brownlie is partner in DLA Piper LLP (US)’s San Diego office and is the Co-Chair of the Firm’s Global Securities Litigation Practice. Kellin Chatfield is an associate in DLA Piper LLP (US)’s San Diego office and is a member of the Firm’s Global Securities Litigation Practice

[1] Robert Brownlie is partner in DLA Piper LLP (US)’s San Diego office and is the Co-Chair of the Firm’s Global Securities Litigation Practice. Kellin Chatfield is an associate in DLA Piper LLP (US)’s San Diego office and is a member of the Firm’s Global Securities Litigation Practice.

Nike (NKE)

NKE » Topics » Section 16(a) Beneficial Ownership Reporting Compliance

This excerpt taken from the NKE DEF 14A filed Jul 27, 2009.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10 percent of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10 percent shareholders are required by the regulations of the SEC to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended May 31, 2009 all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with.

This excerpt taken from the NKE DEF 14A filed Aug 8, 2008.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10 percent of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10 percent shareholders are required by the regulations of the SEC to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended May 31, 2008 all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with.

This excerpt taken from the NKE DEF 14A filed Aug 3, 2007.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10 percent of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10 percent shareholders are required by the regulations of the SEC to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended May 31, 2007 all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with.

This excerpt taken from the NKE DEF 14A filed Aug 9, 2006.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10 percent of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10 percent shareholders are required by the regulations of the SEC to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended May 31, 2006 all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with, except that one report for Roland Wolfram covering the purchase of 100 shares was filed ten days late.

EXCERPTS ON THIS PAGE:

Companies with Company Stock Funds in 401(k) Plan or ESOP Should Review Compliance in Light of Recent SEC Enforcement Actions

Benefits Blast

Most public companies offer a Company Stock fund investment option under their 401(k) plans and non-qualified excess 401(k) plans. On September 10, the SEC announced enforcement actions against 34 companies and insiders (directors, officers, and 10% owners) for failing to file timely reports for stock transactions. All but one settled, with cease-and-desist orders and monetary penalties ranging from $25,000 to $150,000. The enforcement actions came without warning, after more than a decade of little or no SEC enforcement in this area.

Commentators are not interpreting this as a sea change as to late filings where there is no pattern or flagrant violations, but it remains unclear what the SEC might do going forward. Therefore, nearly all public companies are carefully reviewing their compliance procedures and filing history (warning: shameless business plug appears next), often with the help of outside counsel like us. Ideally, management will have initiated this review before board members ask about it (as the surprise Enforcement Actions were widely reported in the business press).

In our experience, most companies have very effective procedures for reporting stock awards to, and stock sales by (including on vesting or exercise), officers and directors. However, some companies that offer a company stock fund investment option under their 401(k) plan and non-qualified excess 401(k) plan could benefit from a check-up. For those of you not expert in the area, Section 16(a) of the Securities Exchange Act of 1934 requires that “insiders” must electronically file a Form 4 Statement of Changes of Beneficial Ownership of Securities with the SEC on or before the 2nd business day after nearly any transaction involving company stock. Examples of transactions that an insider must report include:

Grants of stock options

Cashless exercise of stock options (and any sale of shares)

Grants of restricted stock or RSUs

Vesting (settlement) of restricted stock or RSUs

Open market purchases or sales of company stock

Transfers of shares from insider’s trust to a spouse’s trust

“Discretionary Transactions” under a 401(k) plan, ESOP, Non-qualified excess benefit plan, or stock purchase plan (ESPP).

As if the threat of litigation stemming from the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer wasn’t enough, it sure would be a good time to check your filings and compliance!

Benefits Blast

Estados Unidos. IRS Issues Final Regulations Under Internal Revenue Code Section 83 Regarding Substantial Risk Of Forfeiture Analysis

Companies that compensate their employees with annual or long-term awards of restricted property such as restricted stock grants should take note of the final regulations relating to property transferred in connection with the performance of services under Internal Revenue Code Section 83 issued by the Internal Revenue Service on February 25, 2014 (the " Final Regulations "). These rules impact the timing of taxation of restricted stock grants and other compensatory transfers of property.

The Final Regulations are substantially similar to the proposed regulations issued by the IRS in May 2012, which we discussed in our June 2012 Client Alert, "IRS Issues Proposed Regulations under Internal Revenue Code Section 83 Regarding Substantial Risk of Forfeiture Analysis," available here. but further clarify the impact of insider trading restrictions under Section 16(b) of the Securities Exchange Act of 1934 and involuntary separations from service on the Section 83 "substantial risk of forfeiture" analysis.

Generally, Section 83 requires the inclusion in gross income of property transferred in connection with the performance of services when the property is no longer "subject to a substantial risk of forfeiture." Section 83 regulations provide that whether a risk of forfeiture is "substantial" depends upon the particular facts and circumstances. Under these regulations, a substantial risk of forfeiture may exist where vesting of property is subject to (i) a service condition ( e. g. . employee must work for a specified period to become vested) or (ii) a condition related to the purpose of the transfer ( e. g. . a performance-based condition).

The Final Regulations make three important clarifications relevant to "substantial risk of forfeiture" analysis:

A substantial risk of forfeiture generally may only be established through a service condition or a condition related to the purpose of the transfer (except as otherwise specifically provided in the Section 83 regulations with regard to a sale or other transfer of securities that could subject the seller to a suit under Section 16(b) of the Securities Exchange Act of 1934).

In determining whether a substantial risk of forfeiture exists, both (1) the likelihood that a forfeiture condition will occur and (2) the likelihood that the forfeiture condition will be enforced must be taken into consideration.

Transfer restrictions on securities (such as lock-up provisions, buyback provisions, blackout periods and limited trading windows insider trading compliance programs) generally do not create a substantial risk of forfeiture; however, a substantial risk of forfeiture would exist for so long as the sale or other transfer of the property not exempt from Securities Exchange Act Section 16(b) could subject the seller to a suit under Section 16(b).

The Final Regulations make clear that, although Section 16(b) liability may constitute a substantial risk of forfeiture, the purchase of stock subject to Section 16(b) in an open market transaction separate from the exercise of an option cannot create a substantial risk of forfeiture as to the shares acquired upon the exercise of the option. Taxation of compensatory stock options ordinarily occurs upon the exercise of the option, but such taxation could be delayed for so long as the underlying shares remain subject to a substantial risk of forfeiture by virtue of potential Section 16(b) insider trading liability.

While most companies make exempt stock option grants, if an option was not granted pursuant to an exemption, then the shares underlying the option generally would be subject to Section 16(b) restrictions for six months from the date of grant. This is because the "purchase" of the option shares (which, for Section 16(b) purposes, occurs on the date of grant of the option) could be matched for Section 16(b) purposes with any non-exempt sales occurring within six months of the option grant date. By adding a new example, the Final Regulations highlight than an option holder may not use a non-exempt open market purchase of stock after the date of a non-exempt option grant to defer taxation of option shares subsequently acquired upon the exercise of the option on the grounds that there is Section 16(b) risk from the "match" of the future sale of such option shares against the open market purchase. Instead for purposes of 83(b) and stock options, the relevant Section 16(b) six-month time frame commences on the date of grant of the non-exempt option, and the period during which option shares acquired upon exercise remain subject to a substantial risk of forfeiture by virtue of Section 16(b) risk is limited to this six-month period.

Finally, in response to comments received on the Proposed Rules, the preamble to the Final Regulations restates the principle that the right to receive property or cash in the future is not "property" for purposes of Section 83, and thus cannot be taxable unless and until the property is received. As a result, a right to receive property or cash in the future, such as upon an involuntary termination of employment without cause, does not give rise to a substantial risk of forfeiture under Section 83. The preamble acknowledges that this is the case under Section 83 notwithstanding the fact that a right to receive property in the future (such as a share-settled restricted stock unit) might otherwise be deemed to be subject to a substantial risk of forfeiture for purposes of Section 409A regarding nonqualified deferred compensation.

The Final Regulations do not change the principle that property that is conditioned upon refraining from service, such as a covenant not to compete, can constitute a service condition establishing a substantial risk of forfeiture under Section 83. Under the Section 83 regulations, whether a covenant not to complete constitutes a substantial risk of forfeiture depends upon such factors as the employee's age, health and skill set, the availability of other obtainable employment opportunities and the likelihood that the restrictive covenant will be enforced.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U. S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

El contenido de este artículo pretende proporcionar una guía general sobre el tema. El consejo de especialistas debe ser buscado de acuerdo a sus circunstancias especificas.

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What Is Section 16 Reporting? Securities Lawyer 101

Securities Lawyer 101 Blog

Section 16(a) of the Exchange Act of 1934 (the “Exchange Act”) requires the reporting of beneficial ownership by the officers, directors and stockholders who hold stock directly or indirectly, beneficially owning more than 10% of the company’s common stock or other class of equity securities registered under Section 12(b) or 12(g) of the Exchange Act. Section 16 reporting requirements apply only to companies that have registered a class of securities under Section 12(b) or Section 12(g).

Issuers that voluntarily file periodic reports under Section 15(d) of the Exchange Act, and their directors, officers and large stockholders, are not subject to the reporting obligations of Section 16. Nor are issuers that are required to file periodic reports under the Securities Act of 1933 bound by the provisions of Section 16.

For the purposes of Section 16, beneficial ownership means having or sharing, directly or indirectly, either investment or voting power or both. To determine what or how many securities are reported under Section 16, beneficial ownership means having an economic or pecuniary interest, which includes directly or indirectly receiving or sharing in profits from a transaction in the securities, whether by agreement, relationship or other arrangement (See Rule 16(a)-1, Exchange Act ). Direct economic interests are defined as ownership of securities in certificate form, or of securities held in a brokerage account bearing the individual’s name. Indirect economic interests that imply beneficial ownership include the following:

♦ A person is generally regarded as beneficially owning securities held in the name of immediate family members sharing the same household. As such, if a spouse or household family member purchases an issuer’s securities, the spouse or other members of the household have an interest in those shares;

♦ An indirect pecuniary interest in securities can cause beneficial ownership to be attributed to multiple persons, such as when persons are acting as a group to acquire, hold, vote or dispose of an issuer’s equity securities. Each person in the group is deemed to be a beneficial owner of all the issuer’s equity securities that are beneficially owned by the other persons within the group; y

♦ The right to acquire equity securities by the exercise or conversion of a derivative including debt security is considered an indirect pecuniary interest in the underlying equity security whether or not the right is presently exercisable.

Section 16 requires the following reports:

♦ SEC Form 3 to report an initial statement of beneficial ownership;

♦ Form 4 to report changes in beneficial ownership; y

♦ Form 5 to report annual statements of beneficial ownership.

A Form 3 for the initial statement of beneficial ownership should be filed after one of the following events:

♦ Upon an issuer listing for the first time on a securities exchange under Section 12(b) of the Exchange Act;

♦ Upon an issuer’s first registration statement under Section 12(g) of the Exchange Act such as Form 10 or Form 8A becomes effective; o

♦ After a person becomes a director, officer or 10% holder of the issuer.

A Form 3 is required by Section 16 even if the insider does not beneficially own any of the issuer’s securities at that time. Newly-appointed directors and officers, and new greater-than-10% shareholders must file Forms 3 within ten days.

Any change in ownership after the filing of the Form 3 must be reported on Form 4. A single Form 4 can be used to report multiple transactions. A Form 4 should be filed for any purchases, sales, gifts, or exercise of options that result in acquisition or disposition of the issuer’s equity securities. With limited exceptions, Forms 4 must be filed within two days.

An annual report on Form 5 is required once annually to report transactions that occurred during the prior fiscal year that either were not required to be reported on a Form 4 or should have been reported on a Form 3 or Form 4 but were not. They must state the filer’s beneficial ownership at the end of the fiscal year. The Form 5, if required, is due within 45 days following the end of the company’s fiscal year.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at info@securitieslawyer101.com or visit www. securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. Hamilton & Associates | Securities Lawyers Brenda Hamilton, Securities Attorney 101 Plaza Real South, Suite 202 North Boca Raton, Florida 33432 Telephone: (561) 416-8956 Facsimile: (561) 416-2855 www. SecuritiesLawyer101.com

Insider Trading Guidelines

Accuride Corporation Guidelines for Insider Trading and Unauthorized Use or Disclosure of Confidential Information

Amended and Restated January 1, 2007

Federal and state securities laws prohibit the purchase or sale of a company’s securities by persons who are aware of material information about that company that is not generally known or available to the public. These laws also prohibit persons who are aware of such material nonpublic information from disclosing this information to others who may trade. Companies and their controlling persons may be subject to liability if they fail to take reasonable steps to prevent insider trading by company personnel.

The following information regarding our policy on insider trading and unauthorized use or disclosure of material non-public information may be summarized very simply: DO NOT trade on, or pass to others, material non-public information about Accuride or its subsidiaries (collectively, the “Company”) or those with whom it has business relationships. To do so could have severe consequences for you and for the Company, including criminal liability.

It is important that you understand the breadth of activities that constitute illegal insider trading. Both the U. S. Securities and Exchange Commission (the “SEC”) and The New York Stock Exchange (the “NYSE”) investigate and are very effective at detecting insider trading. The SEC, together with the U. S. Attorneys, pursue insider trading violations vigorously. Cases have been successfully prosecuted against trading by employees through foreign accounts, trading by family members and friends, and trading involving only a small number of shares.

These guidelines address transactions in the securities the Company, transactions in the securities of other companies and the disclosure of the Company’s confidential information as follows:

APPLICABILITY OF GUIDELINES

Who is covered by the Guidelines?

These Guidelines apply to you if you are an “Insider” to the Company, which is defined as:

an employee of the Company (including officers);

a member of the Board of Directors of the Company; o

consultants or contractors who receive or have access to Material Nonpublic Information (as defined on Page 9-10 below) regarding the Company.

As an Insider you are also responsible for making sure that the purchase or sale of any security covered by the Guidelines by any of the following persons or entities also complies with the Guidelines:

your spouse, partner or minor children (no matter where they live) and any other relative (by marriage, adoption or otherwise) who lives in your household (your “Immediate Family”);

trusts, other entities or accounts in which you or members of your Immediate Family have a beneficial interest or exercise control or investment influence; y

any person who, directly or indirectly receives Material Nonpublic Information from you.

The Guidelines continue to apply to your transactions in Company securities even after you have terminated your status as an Insider if you are aware of Material Nonpublic Information at the time your employment or other relationship terminates until that information has become public or is no longer material.

What transactions are covered by the Guidelines?

Transactions in Company Securities. The Guidelines generally apply to all transactions in securities of the Company, including common stock, options for common stock and any other securities the Company may issue from time to time, such as preferred stock, warrants and convertible debentures, as well as to derivative securities relating to the Company’s stock, whether or not issued by the Company, such as exchange-traded put and call options. With respect to transactions in Company securities pursuant to employee benefit plans, please note the following:

Stock Option Exercises. The Guidelines’ trading restrictions generally do not apply to the exercise of a stock option. The trading restrictions do apply, however, to any sale of the underlying stock or to a cashless exercise of the option through a broker, as this entails selling a portion of the underlying stock to cover the costs of exercise.

Employee Stock Purchase Plan. The Guidelines’ trading restrictions do not apply to purchases of Company stock in the employee stock purchase plan resulting from your periodic payroll contributions to the plan under an election you made at the time of enrollment in the plan if you were not in possession of Material Nonpublic Information at the time you made such election. The trading restrictions do apply to your sales of Company stock purchased under the plan.

401(k) Plan. The Guidelines’ trading restrictions do not apply to purchases of Company stock in the 401(k) plan resulting from your periodic contribution of money to the plan pursuant to your payroll deduction election. The trading restrictions do apply, however, to elections you may make under the 401(k) plan to (a) increase or decrease the Percentage of your periodic contributions that will be allocated to the Company stock fund, (b) make an intra-plan transfer of an existing account balance into or out of the Company stock fund, (c) borrow money against your 401(k) plan account if the loan will result in a liquidation of some or all of your Company stock fund balance, and (d) prepay a plan loan if the pre-payment will result in allocation of loan proceeds to the Company stock fund.

Transactions in Other Companies’ Securities. The Guidelines also apply to transactions in other companies, including the Company’s customers, vendors or suppliers (“ business partners ”), about which you have Material Non-Public Information when that information was obtained in the course of your employment with, or other services performed on behalf of, the Company. Civil and criminal penalties, and termination of employment, may result from trading on inside information regarding the Company’s business partners. You should treat Material Nonpublic Information about the Company’s business partners with the same care required with respect to information related directly to the Company. You should keep in mind that information that is not material to the Company may nevertheless be material to one of the Company’s business partners.

STATEMENT OF POLICY

What is the Company’s general policy on insider trading and disclosure of nonpublic information?

It is illegal to purchase or sell securities when you are in possession of Material Nonpublic Information (as described below). It is also illegal to disclose or “tip” Material Nonpublic Information to others who then trade on the basis of such Material Nonpublic Information. Such actions also constitute serious violations of Company policy. These prohibitions apply regardless of the dollar amount of the transaction or the source of the non-public information.

“Purchase” and “sale” are defined broadly under the federal securities law. “Purchase” includes not only the actual purchase of a security, but any contract to purchase or otherwise acquire a security. “Sale” includes not only the actual sale of a security, but any contract to sell or otherwise dispose of a security. These definitions extend to a broad range of transactions including conventional cash-for-stock transactions, conversions, the exercise of stock options with the assistance of a broker, and acquisitions and exercises of warrants or puts, calls or other options related to a security.

It is the Company’s policy to cooperate fully with the SEC and other governmental and regulatory authorities in investigating possible violations by employees and others of applicable laws and regulations. If appropriate, the Company will assist authorities in the prosecution of persons who engage in illegal insider trading.

What policies am I required to adhere to before trading in securities?

Trading on Material Nonpublic Information is Prohibited. You may not engage in any transaction involving a purchase or sale of the Company’s securities, including any offer to purchase or offer to sell, directly or through Immediate Family members or other persons or entities, if you are aware of Material Nonpublic Information relating to the Company. Similarly, you may not trade in the securities of any other company if you are aware of Material Nonpublic Information about that company that you obtained in the course of your employment with the Company. Such prohibition against trading shall remain in effect until the close of business on the second Trading Day following the date of public disclosure of that information, or at such time as such nonpublic information is no longer material. The term “Trading Day” means a day on which the NYSE is open for trading.

Trading Window / Black-out Provisions for Employees other than Financial Insiders.

Voluntary Trading Window for Employees other than Financial Insiders (as defined below). To ensure compliance with the Guidelines and applicable U. S. federal and state securities laws, the Company strongly recommends that all employees having access to Material Nonpublic Information, including the Company’s internal financial statements, refrain from conducting transactions involving the purchase or sale of the Company’s securities other than during the “Voluntary Trading Window”, defined as the period in any fiscal quarter:

beginning at the close of business two (2) full Trading Days following the date of public disclosure of the Company’s financial results for the prior fiscal quarter or year; y

ending at the close of business on the tenth (10th) Trading Day following the date of such disclosure.

Unless you are a director, executive officer or other financial insider, as discussed below, you may choose not to follow this suggestion, but you should be particularly careful with respect to trading outside the Voluntary Trading Window, because you may, at such time, have access to (or later be deemed to have had access to) Material Nonpublic Information regarding, among other things, the Company’s anticipated financial performance for the quarter. Even during the Voluntary Trading Window, you may not engage in transactions in the Company’s securities if you possess Material Nonpublic Information concerning the Company until such information has been known publicly for at least two Trading Days. The Company may also, from time to time, prohibit certain Insiders from trading because of developments known to the Company and not yet disclosed to the public. Even if the Company has not adopted such a prohibition, you are responsible at all times for compliance with the prohibitions against insider trading. Trading in the Company’s securities during the Voluntary Trading Window is not considered a “safe harbor,” and you should use good judgment at all times.

Mandatory Trading Window for Employees other than Financial Insiders. The safest period for employees to trade in the Company’s securities, assuming the absence of Material Nonpublic Information, is during the Voluntary Trading Window. Periods other than the Voluntary Trading Window are more highly sensitive for transactions in the Company’s stock from the perspective of compliance with applicable securities laws. This is due to the fact that officers, directors and other financial insiders will be, as any quarter progresses, increasingly likely to possess Material Nonpublic Information about the expected financial results for the quarter. For this reason, all Insiders are required to refrain from trading other than during the “ Mandatory Trading Window ”, defined as the period:

beginning at the close of business two (2) full Trading Days following the date of public disclosure of the Company’s financial results for the prior fiscal quarter or year; y

ending at the close of business on the day that is two (2) weeks prior to the end of each fiscal quarter.

In other words, no Insider may trade during the period from two (2) weeks prior to the end of each fiscal quarter until two (2) Trading Days following public disclosure of the Company’s financial results for the prior fiscal quarter or year.

The Company reserves the right to declare special blackout periods or other restrictions applying to all or a select group of Insiders when circumstances so warrant. The establishment of such a special blackout period is additional Material Nonpublic Information that you must not disclose within the Company or to third parties.

Pre-Clearance Requirement for Financial Insiders. Notwithstanding the trading windows described above, all executive officers subject to Section 16 of the Securities Exchange Act of 1934 (“executive officers”), each member of the Company’s Board of Directors and all persons who hold a Grade 15 position or above in the Corporate Finance Department (each of the foregoing is referred to as a “ Financial Insider ”) who is not in possession of Material Nonpublic Information and who wishes to engage in any transaction involving the Company’s securities (including any stock purchase, stock sale, gift, loan, pledge, hedge, contribution to a trust, or any other transfer or acquisition), must first obtain pre-approval of the transaction from the Company’s General Counsel or his designee, including for transactions effected during the Voluntary Trading Window. A request for pre-approval should be submitted to the General Counsel at least two (2) business days in advance of the proposed transaction. A form pre-clearance request is attached as Exhibit A. Pre-clearance requests may be made on-behalf of a Financial Insider by an agent of the Financial Insider, provided the Financial Insider confirms in writing the agency. The General Counsel or his designee will then determine whether the transaction may proceed and will promptly notify the Financial Insider of this determination. When making a pre-approval request, the Financial Insider needs to be certain to include information as to how best to be reached.

Approval for a Financial Insider’s proposed transaction may be withheld by the General Counsel or his designee in his discretion, if:

the Financial Insider may have possession of Material Nonpublic Information;

a trading “blackout” period is in effect;

the transaction does not comply with Rule 144 and other legal requirements;

the transaction could result in adverse publicity or have a material adverse impact on trading in the Company’s securities;

for persons subject to Section 16 of the Securities Exchange Act of 1934, as amended:

the transaction could result in liability to the Financial Insider under the short-swing rules of Section 16(b); o

sufficient advance notice had not been given to allow preparation and review of a Form 4; o

other relevant considerations.

No Exception for Hardship. Every Insider has individual responsibility to comply with the Guidelines, regardless of whether the Company has recommended a trading window to that Insider or any other Insiders of the Company. Appropriate judgment should be exercised in connection with any trade in the Company’s securities, even if technically permitted by the Guidelines. An Insider may, from time to time, have to forego a proposed transaction in the Company’s securities even if he or she planned to make the transaction before learning of the Material Nonpublic Information and even though the Insider believes he or she may suffer an economic loss or forego anticipated profit by waiting. The existence of a personal financial emergency does not excuse you from compliance with the Guidelines.

May I trade in Company derivative securities or short sell Company securities? The Company considers it improper and inappropriate for Insiders to engage in short-term or speculative transactions in the Company’s securities or in other transactions in the Company’s securities that may lead to inadvertent violations of the insider trading laws. Accordingly, your trading in Company securities is subject to the following restrictions:

Short Sales. You may not engage in short sales of the Company’s securities (sales of securities that are not then owned), including a “sale against the box” (a sale with delayed delivery).

Publicly Traded Options. You may not engage in transactions in publicly traded options, such as puts, calls and other derivative securities, on an exchange or in any other organized market.

Standing Orders or Stop Loss Orders. Standing orders and stop loss orders should generally be avoided and, if used, should be left in place only for a very brief period of time. A standing order or stop loss order placed with a broker to purchase or sell stock at a specified price leaves you with no control over the timing of the transaction. A standing order or stop loss order transaction executed by the broker when you are aware of Material Nonpublic Information may result in unlawful insider trading.

Hedging or Monetization Transactions. Certain forms of hedging or monetization transactions, such as zero-cost collars and forward sale contracts, involve the establishment of a short position in the Company’s securities and limit or eliminate your ability to profit from an increase in the value of the Company’s securities. Therefore, you are prohibited from engaging in any hedging or monetization transactions involving Company securities.

Margin Accounts and Pledges. Securities held in a margin account or pledged as collateral for a loan may be sold without your consent by the broker if you fail to meet a margin call or by the lender in foreclosure if you default on the loan. Because a margin or foreclosure sale may occur at a time when you are aware of Material Nonpublic Information or otherwise are not permitted to trade in Company securities, you are prohibited from holding Company securities in a margin account or pledging Company securities as collateral for a loan. An exception to this prohibition may be granted where you wish to pledge Company securities as collateral for a loan (not including margin debt) and clearly demonstrate the financial capacity to repay the loan without resort to the pledged securities. If you wish to pledge Company securities as collateral for a loan, you must submit a request for approval to the Company’s General Counsel at least two weeks prior to the proposed execution of documents evidencing the proposed pledge.

May I pre-establish a time for the purchase or sale of Company securities at a time that I am not aware of Material Nonpublic Information?

Pursuant to U. S. Securities and Exchange Rule 10b5-1, directors, officers and employees of the Company may establish written programs that permit (i) automatic trading of the Company’s stock through a third-party broker or (ii) trading of the Company’s stock by an independent person (e. g. an investment banker) who is not aware of Material Nonpublic Information at the time of a trade. All such automatic trading programs or blind trusts (“ Trading Programs ”) must be reviewed and pre-approved by the General Counsel or his designee prior to establishment, to confirm compliance with the Guidelines and the applicable securities laws. All Trading Programs shall be subject to the restrictions and limitation set forth in Exhibit B, attached hereto, which shall be updated from time to time by the Company’s legal department to conform with any changes to Rule 10b5-1 or the practices thereunder. Once a Trading Program is Implemented in accordance with Exhibit B, trades under the Trading Program shall not be subject to the limitations and restrictions included in other sections of the Guidelines. Trading under a Trading Program may occur even at a time outside of the Company’s trading window or when the person on whose behalf such trade is made is aware of Material Nonpublic Information.

If I receive Material Nonpublic Information about the Company or any of its business partners, may I disclose that information to others?

Maintain the Confidentiality of Nonpublic Information. Nonpublic information relating to the Company or its business partners is the property of the Company and the unauthorized disclosure of such information is forbidden.

Maintaining the confidentiality of Company information is essential for competitive, security and other business reasons, as well as to comply with securities laws. You should treat all information you learn about the Company or its business plans in connection with your employment as confidential and proprietary to the Company. Inadvertent disclosure of confidential or inside information may expose the Company and you to significant risk of investigation and litigation.

The timing and nature of the Company’s disclosure of material information to outsiders is subject to legal rules, the breach of which could result in substantial liability to you, the Company and its management. Accordingly, it is important that responses to inquiries about the Company by the press, investment analysts or others in the financial community be made on the Company’s behalf only through authorized individuals.

If you receive inquiries about the Company from securities analysts, reporters, or others, decline comment and direct them to the Company’s Investor Relations Representative.

Do not discuss Material Nonpublic Information where it may be overheard, such as in restaurants, elevators, restrooms, and other public places. Remember that cellular phone conversations are often overheard and that persons other than their intended recipients may retrieve voice mail and e-mail messages.

If you believe it is necessary to the performance of your specific job duties to disclose any Material Nonpublic Information to persons outside of the Company, you must receive approval by an employee who holds a Vice President level or more senior title and such disclosure must be consistent with the Company’s contractual and legal obligations. Generally, such disclosures may only be made after the Company has received an appropriate confidentiality agreement from the receiving party.

Don’t Tout the Company’s Securities; Don’t Tip Material Nonpublic Information. You must not disclose (“tip”) Material Nonpublic Information to any other person (including Immediate Family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates, nor are you permitted to make recommendations or express opinions on the basis of Material Nonpublic Information as to trading in the Company’s securities. Even if you are not in possession of Material Nonpublic Information, do not recommend to any other person that they buy or sell securities of the Company. (Remember that “tipping” Material Nonpublic Information is always prohibited, and that your recommendation could be imputed to the Company and may be misleading if you do not have all relevant information).

POTENTIAL CRIMINAL AND CIVIL LIABILITY AND/OR DISCIPLINARY ACTION

What legal liability may I be subject to if I engage in securities transactions on the basis of Material Nonpublic Information?

Insiders that engage in securities transactions at a time when they have knowledge of Material Nonpublic Information may be subject to penalties that include:

imprisonment for up to 20 years;

criminal fines of up to $5 million; y

civil fines of up to three times the profit gained or loss avoided.

What legal liability may I be subject to if I disclose Material Nonpublic Information to others who engage in securities transactions?

Insiders may be liable for improper transactions by any person (commonly referred to as a “tippee”) to whom they have disclosed Material Nonpublic Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities. The SEC has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the National Association of Securities Dealers, Inc. use sophisticated electronic surveillance techniques to uncover insider trading.

Could the Company incur liability for my actions if I engage in securities transactions at a time that I have Material Nonpublic Information? If the Company fails to take appropriate steps to prevent illegal insider trading, the Company may have “controlling person” liability for a trading violation, with civil penalties of up to the greater of $1 million and three times the profit gained or loss avoided, as well as a criminal penalty of up to $25 million. The civil penalties can extend personal liability to the Company’s directors, officers and other supervisory personnel if they fail to take appropriate steps to prevent insider trading.

What disciplinary actions may the Company take for violations of the Guidelines?

Insiders who violate the Guidelines will be subject to disciplinary action by the Company. This disciplinary action may include ineligibility for future participation in the Company’s equity incentive plans, other Company imposed sanctions, suspension or termination of employment.

DEFINITION OF MATERIAL NONPUBLIC INFORMATION

Note that inside information has two important elements – materiality and public availability.

What information is material?

It is not possible to define all categories of material information. However, information should be regarded as material if there is a reasonable likelihood that it would be considered important to an investor in making a decision to buy, hold or sell a security. While it may be difficult under this standard to determine whether particular information is material, there are various categories of information that are particularly sensitive and, as a general rule, should always be considered material. Examples of such information include:

Financial results;

Projections of future earnings or losses;

News of a pending or proposed merger or acquisition;

Gain or loss of a substantial customer or supplier;

Changes in a dividend policy;

Major changes in senior management;

News of the disposition of a significant subsidiary or business;

New product announcements of a significant nature;

Significant product defects or modifications;

Significant pricing changes;

Significant write-offs;

Stock buy-back programs;

Regulatory proceedings and governmental investigations;

Impending bankruptcy or financial liquidity problems;

Stock splits;

New equity or debt offerings;

Significant litigation exposure due to actual or threatened litigation;

Settlement of significant litigation; y

Changes in the Company’s auditors or notification from its auditors that the Company may no longer rely on the auditor’s report.

This list is not exhaustive and, depending upon the circumstances, other information may be material. In short, if you would consider the information in making an investment decision, you should assume it is material. Either positive or negative information may be material. Because trading that receives scrutiny will be evaluated after the fact with the benefit of hindsight, questions concerning the materiality of particular information should be resolved in favor of materiality, and trading should be avoided. When in doubt, please contact the Company’s General Counsel.

What constitutes non-public information?

Nonpublic information is information that is not generally known or available to the public. One common misconception is that material information loses its “nonpublic” status as soon as a press release is issued disclosing the information. In fact, information is considered to be available to the public only when it has been released broadly to the marketplace (such as by a press release or an SEC filing) and the investing public has had time to absorb the information fully. As a general rule, information is considered nonpublic until the second full Trading Day after the information is released. For example, if the Company announces financial earnings before trading begins on a Tuesday, the first time you can buy or sell Company securities is the opening of the market on Thursday (assuming you are not aware of other Material Nonpublic Information at that time). However, if the Company announces earnings after trading begins on that Tuesday, the first time you can buy or sell Company securities is the opening of the market on the following Friday.

ADDITIONAL INFORMATION – DIRECTORS AND OFFICERS

Reporting Obligations Under Section 16(a)–SEC Forms 3, 4 and 5

Section 16(a) of the 1934 Act generally requires all officers, directors and 10% stockholders (“ Reporting Persons ”) within 10 days after the Reporting Person becomes an officer, director, or 10% stockholder, to file with the SEC an “Initial Statement of Beneficial Ownership of Securities” on SEC Form 3 listing the amount of the Company’s securities which the Reporting Person beneficially owns. Following the initial filing on SEC Form 3, every change in the beneficial ownership of the Company’s securities must be reported on SEC Form 4 within 2 business days of the date on which the change occurs. Certain changes in ownership can be filed on Form 5 within 45 days after fiscal year end. Form 4 must be filed even if, as a result of balancing transactions, there has been no net change in holdings. In deciding the day on which a purchase or sale on the open market occurs for purposes of filing Form 4, with certain exceptions, the date of the broker’s or dealer’s confirmation would ordinarily be determinative.

Special rules apply in certain situations. If any officer or director purchases or sells any Company securities within six months after the event which required him or her to file Form 3, the Form 4 filed with respect to that purchase or sale must also report any other purchases or sales he or she made within the preceding six months which were not previously reported. Similarly, if an officer or director purchases or sells any Company securities within six months after his or her termination from such position, the transaction must be reported on Form 4 if he made any purchase or sale within the preceding six months and prior to termination.

Certain transactions pursuant to tax-conditioned plans, including purchases of securities under qualified 401(k) and other retirement plans, are exempt from Section 16(b) liability and do not need to be reported on Form 4. However, in addition to the Form 3 and Form 4 reporting requirements, every reporting person is required to file a Form 5 within 45 days after the end of the Company’s fiscal year, unless he/she has previously reported all changes in beneficial ownership, including those transactions exempt from Section 16(b) liability, on Form 4. Form 5 reconciles the reporting person’s Section 16 reports by requiring disclosure of the reporting person’s total beneficial ownership of the Company’s securities at year-end and, with certain exceptions, all transactions affecting the reporting person’s beneficial ownership not disclosed on Form 4. Form 5 must also identify any required reports that the reporting person failed to file during the previous year.

Recovery of Profits Under Section 16(b)

For the purpose of preventing the unfair use of information which may have been obtained by a Reporting Person, any profits realized by any officer, director or 10% stockholder from any “purchase” and “sale” of Company stock during a six-month period, so called “short-swing profits,” may be recovered by the Company. When such a purchase and sale occurs, good faith is no defense. The Reporting Person is liable even if compelled to sell for personal reasons, and even if the sale takes place after full disclosure and without the use of any inside information.

The liability of a Reporting Person under Section 16(b) of the 1934 Act is only to the Company itself. The Company, however, cannot waive its right to short swing profits, and any Company stockholder can bring suit in the name of the Company. In this connection it must be remembered that reports of ownership filed with the SEC on Form 3, Form 4 or Form 5 pursuant to Section 16(a) (discussed above) are readily available to the public, and certain attorneys carefully monitor these reports for potential Section 16(b) violations. In addition, liabilities under Section 16(b) may require separate disclosure in the Company’s annual report to the SEC on Form 10-K or its proxy statement for its annual meeting of stockholders. No suit may be brought more than two years after the date the profit was realized. However, if the Reporting Person fails to file a report of the transaction under Section 16(a), as required, the two-year limitation period does not begin to run until after the transactions giving rise to the profit have been disclosed. Failure to report transactions and late filing of reports require separate disclosure in the Company’s proxy statements.

Officers and directors should consult the attached “Short-Swing Profit Rule 16(b) Checklist” attached hereto as “Exhibit C” in addition to consulting the General Counsel prior to engaging in any transactions involving the Company’s securities

Short Sales Prohibited Under Section 16(c)

Section 16(c) of the 1934 Act prohibits Reporting Persons absolutely from making short sales of the Company’s securities, i. e. sales of shares which the Reporting Person does not own at the time of sale, or sales of securities against which the Reporting Person does not deliver the shares within 20 days after the sale. Under certain circumstances, the purchase or sale of put or call options, or the writing of such options, can result in a violation of Section 16(c). Reporting Persons violating Section 16(c) face criminal liability.

The General Counsel should be consulted if you have any questions regarding reporting obligations, short-swing profits or short sales under Section 16.

INQUIRIES ABOUT THE GUIDELINES

Please direct your questions as to any of the matters discussed in the Guidelines to Steve Martin, Senior Vice President/General Counsel and Corporate Secretary, at (812) 962-5068.

EXHIBIT B: Rule 10b5-1 Trading Programs

Rule 10b5-1 trading programs established pursuant to the Company’s Policy on Insider Trading (each a “ Program ”) are limited to the following two types:

A written Program that permits automatic trading of the Company’s stock through a third party broker (an “Automatic Trading Program”) established by a director, officer or employee of the Company (a “Program Eligible Person”) at a time when the Program Eligible Person is not aware of Material Nonpublic Information. The Automatic Trading Program document must specify the number of shares to be purchased or sold, the price(s) at which transaction are to take place, and the date(s) on which transactions are to take place. Alternatively, the Automatic Trading Program may establish an objective formula for any or all of these criteria (e. g. the number of shares could be specified as a percentage of the holdings of the Program Eligible Person); o

A Program where transactions in the Company’s stock are initiated by the trustee of a so-called “blind” trust, provided the Program is established by a Program Eligible Person at a time when the Program Eligible Person is not aware of Material Nonpublic Information. A “blind” trust is a trust established by a Program Eligible Person. An independent trustee without any involvement or even knowledge of the Program Eligible Person must make the investment and disposition decisions. The trustee should be a recognized financial institution possessing trust powers. Under this type of Program, the Program Eligible Person cannot exert any influence over, or even communicate with, the trustee regarding specific investments. If the trustee becomes aware of Material Nonpublic Information regarding the Company, whether from the Program Eligible Person or otherwise, the trustee may not engage in a purchase or sale of the Company’s stock.

Additional Program Restrictions. All Programs shall also be subject to the following restrictions:

The Program must be reviewed and pre-approved by the Company’s General Counsel or his designee.

The Program Eligible Person cannot engage in any separate transaction (e. g. a hedging transaction) that directly or indirectly alters or offsets an authorized transaction made under the Program.

Any Program Eligible Person preparing such a Program must allow for the cancellation of a transaction and/or suspension of a Program upon notice and request by the Company to the extent the Program or any proposed trade (i) fails to comply with applicable law (e. g. exceeding the number of shares which the Program Eligible Person may sell under Rule 144 in a rolling three month period), or (ii) would create material adverse consequences for the Company (e. g. due to the imposition of lock-up agreements on the Company officers).

No Program may be established at a time when the Program Eligible Person is aware of Material Nonpublic Information.

Once a Program is prepared, it cannot be changed or deviated from (as opposed to the termination thereof), except (i) with notice to the Company’s General Counsel and (ii) at a time when the Program Eligible Person is permitted to trade in the Company’s stock under the Guidelines (i. e. during the Trading Window when the Program Eligible Person is not otherwise blocked from trading and when the Program Eligible Person is not aware of Material Nonpublic Information).

All Programs must be entered into in good faith and not as part of a plan or scheme to evade the prohibitions of the securities laws (including, without limitation, Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended. The Company may immediately terminate any Program that it determines was put in place either (i) not in good faith or (ii) as part of a plan or scheme to evade the prohibitions of the securities laws. The key terms of the Company policy and Programs established pursuant to it (and trades made pursuant thereto) may be disclosed to the public through a press release, by placement on the Company’s website or through other means to be determined by the Company in its discretion.

The Company shall not have any liability to any Program Eligible Person as a result of the establishment of a Program, any Company disclosure with respect thereto, or any cancellation or transactions and/or suspension of a Program as discussed above.

EXHIBIT C: Short-Swing Profit Rule Section 16(b) Checklist

Note: Any combination of purchase and sale or sale and purchase within six months of each other results in a violation of Section 16(b), and the “profit” must be recovered by the Company. It makes no difference how long the shares being sold have been held–or that you are an insider for only one of the two matching transactions. The highest priced sale will be matched with the lowest priced purchase within the six month period.

SALES

If a sale is to be made by an officer, director or 10% stockholder (or any family member living in the same household):

Have there been any purchases by the insider (or family members) within the past six months?

Have there been any option exercises within the past six months?

Are any purchases (or option exercises) anticipated or required within the next six months?

Has a Form 4 been prepared?

Note: If a sale is to be made by an affiliate of the Company and unregistered stock is to be sold, has a Form 144 been prepared and has the broker been reminded to sell pursuant to Rule 144?

PURCHASES AND OPTIONS EXERCISES

If a purchase or option exercise for stock is to be made:

Have there been any sales by the insider (or family members) within the past six months?

Are any sales anticipated or required within the next six months (such as tax-related or year-end transactions)?

Has a Form 4 been prepared?

Before proceeding with a purchase or sale, consider whether you are aware of material inside information which could affect the price of the stock.

INSIDER TRADING AND CONFIDENTIALITY POLICY

Download the Insider Trading and Confidentiality Policy

As a public company, News Corp is subject to various federal and state laws and regulations governing trading in its securities. It is the policy of News Corp and its subsidiaries (the “Company”) to comply fully, and to assist its employees in complying fully, with these laws and regulations. This Policy applies to all members of the Company’s Board of Directors, director emeriti and employees, as well as members of such persons’ immediate families and households. All references in this Policy to employees of the Company should be read to include all such persons listed in the preceding sentence.

The Company depends upon the conduct and diligence of its employees, in both their professional and personal capacities, to ensure full compliance with this Policy. This Policy provides procedures and guidelines with respect to transactions in the Company’s securities, the protection of material, non-public information and the standard of conduct expected of the Company’s employees in this highly sensitive area. It is the personal obligation and responsibility of each employee to act in a manner consistent with this Policy.

“Insider trading” is a top enforcement priority of the Securities and Exchange Commission (“SEC”), the NASDAQ Global Select Market (“NASDAQ”) and the Department of Justice. Criminal prosecutions for insider trading are commonplace and may result in fines and/or imprisonment.

What is insider trading? The prohibition against such trading generally is understood to prohibit (1) trading on the basis of material, non-public information, (2) disclosing or “tipping” material, non-public information to others or recommending the purchase or sale of securities on the basis of such information or (3) assisting someone who is engaged in any of the above activities.

Who is an insider? The term “insider” applies to anyone who, by virtue of a special relationship with the Company, possesses material, non-public information regarding the business of the Company.

An individual can be considered an insider for a limited time with respect to certain material, non-public information even though he or she is not a director or officer. For example, an assistant who knows that an acquisition is about to occur may be regarded as an insider with respect to that information until the news of such acquisition has been fully disclosed to the public.

What is material, non-public information? Information is generally deemed to be “material” if there is a substantial likelihood a “reasonable investor” would rely on it in deciding to purchase, sell or hold a security to which the information relates. As a practical matter, materiality often is determined after the fact, when it is known that someone has traded on the information and after the information itself has been made public and its effects upon the market are more certain. Examples of information that is generally regarded as material are:

Financial results;

Projections that significantly differ from external expectations;

Major proposed or pending acquisitions, investments or divestitures;

Significant project or product developments;

Changes in key personnel;

Changes in dividends;

Stock splits;

Stock buy-backs;

New equity or debt offerings;

Positive or negative developments in outstanding significant litigation;

Events that may result in the creation of a significant reserve or write-off or other significant adjustments to the financial statements;

Actual or threatened significant litigation or inquiry by a governmental or regulatory authority; y

Any other facts which might cause the Company’s financial results to be substantially affected.

“Non-public” information is any information that has not been previously disclosed and is not otherwise available to investors generally. Filings with the SEC and press releases are generally regarded as public information. Information about undisclosed financial results or a possible merger, acquisition or other material development, whether concerning the Company or otherwise, and obtained in the normal course of employment or through a rumor, tip or just “loose talk”, is not public information. Information should be considered “non-public” until the beginning of the third (3rd) Trading Day (as defined below) after such information has been disseminated widely to the general public through press releases, news tickers, newspaper items, quarterly or annual reports or other widely disseminated means.

For purposes of this Policy, a “Trading Day” shall mean a day on which the NASDAQ is open for trading.

Potential Criminal and Civil Liability and/or Disciplinary Action. The Securities Exchange Act of 1934, as amended (the “Exchange Act”), and specifically Rule 10b-5 of the Exchange Act, makes it unlawful for any person to make false statements or omit to state material facts in connection with the purchase or sale of any security. There are no limits on the size of a transaction that will trigger insider trading liability. In the past, relatively small trades have resulted in SEC investigations and lawsuits.

Individuals found liable for insider trading face penalties of up to three (3) times the profit gained or loss avoided, a criminal fine of up to $5 million and up to twenty (20) years in jail. In addition to the potential criminal and civil liabilities mentioned above, in certain circumstances the Company may be able to recover all profits made by an insider who traded illegally, plus collect other damages. In addition, the Company (and its executive officers and directors) could itself face penalties of the greater of $1 million or three (3) times the profit gained or loss avoided as a result of an employee’s violation and/or a criminal penalty of up to $25 million for failing to take steps to prevent insider trading.

Without regard to the civil or criminal penalties that may be imposed by others, willful violation of this Policy and its procedures may constitute grounds for dismissal

The procedures regarding securities trading outlined below are designed to deter and, where possible, to prevent such improper trading.

POLICIES REGARDING TRANSACTIONS IN THE COMPANY’S SECURITIES

The following policies apply to all transactions, direct or indirect, in all of the Company’s securities, including, but not limited to, the Company’s Class A Common Stock and Class B Common Stock (including those shares of common stock that may be held in any Company 401(k) retirement savings plan, pension plan, retirement plan, other similar plan or any such similar plan that the Company may adopt in the future), CHESS Depositary Interests representing the Class A Common Stock and Class B Common Stock and derivative securities (including stock options, put or call options and other similar securities).

Prohibitions for All Employees:

No Trading on Material, Non-Public Information. No employee who is aware of any material, non - public information concerning the Company or a third-party with whom the Company does business, shall engage in any transaction in the Company’s or such third-party’s securities, including any offer to purchase or sell, during any period commencing with the date that he or she obtains such material, non-public information and ending at the beginning of the third (3rd) Trading Day following the date of public disclosure of that information. After termination of employment, any employee who is in possession of material, nonpublic information is prohibited from trading in Company securities until that information has become public or is no longer material.

No Tipping. No employee shall disclose (“tip”) material, non-public information to any other person where such information may be used by such person to his or her benefit by trading in the securities of the company to which such information relates, nor shall an employee make any recommendations or express any opinions as to trading in the Company’s securities to any other person on the basis of material, non - public information.

No Short Sales. No employee shall engage in the short sale of the Company’s securities. A short sale is a sale of securities not owned by the seller or, if owned, not delivered against such sale within twenty (20) days thereafter (a “short against the box”). Short sales of the Company’s securities evidence an expectation on the part of the seller that the securities will decline in value, and, therefore, signal to the market that the seller has no confidence in the Company or its short-term prospects. In addition, short sales may reduce the seller’s incentive to improve the Company’s performance.

No Investments in Derivatives of the Company’s Securities. No employee shall invest in Company - based derivative securities. “Derivative Securities” are options, warrants, stock appreciation rights or similar rights whose value is derived from the value of an equity security, such as the Company’s common stock. This prohibition includes, but is not limited to, trading in Company-based put or call option contracts, trading in straddles and the like. However, holding and exercising stock options, restricted stock units or other derivative securities granted under the Company’s equity compensation plans is not prohibited by this Policy.

No Margin Purchases. No employee shall purchase the Company’s securities on margin. This means such persons are prohibited from borrowing from a brokerage firm, bank or other entity in order to purchase the Company’s securities (other than in connection with “cashless” exercises of stock options under the Company’s equity compensation plans).

401(k) Plan. This Policy does not apply to purchases of Company stock in its 401(k) plan resulting from periodic contributions of money pursuant to a payroll deduction election. The Policy does apply, however, to certain elections made under the Company’s 401(k) plan, including (a) an election to increase or decrease the percentage of periodic contributions that will be allocated to the Company stock fund, (b) an election to make an intra-plan transfer of an existing account balance into or out of the Company stock fund, (c) an election to borrow money against a 401(k) plan account if the loan will result in a liquidation of some or all of the Company stock fund balance and (d) an election to pre-pay a plan loan if the pre - payment will result in allocation of loan proceeds to the Company stock fund.

Prohibitions and Procedures for Section 16 Reporting Persons and Designated Individuals:

The following prohibitions and procedures apply to Section 16 Reporting Persons (as defined below) and certain other employees that may be designated by the Company from time to time (“Designated Individuals”). “Section 16 Reporting Persons” are members of the Company’s Board of Directors, director emeriti and certain executive officers, who are subject to the reporting and “short-swing profit” liability provisions of Section 16 of the Exchange Act. Section 16 Reporting Persons and Designated Individuals will be informed of their status by the News Corp General Counsel.

Under special circumstances, certain employees who are not Section 16 Reporting Persons or Designated Individuals may gain access to material, non-public information and the Company, in its discretion, may determine that such employees may also be subject to the below listed prohibitions and procedures. Such employees will be notified of such status and will be subject to the below listed prohibitions and procedures for such period of time as the Company deems appropriate.

No Trading During Black-Out Periods. Section 16 Reporting Persons, Designated Individuals, as well as members of their immediate families and households are subject to black-out periods during which they are prohibited from conducting any transactions involving the Company’s securities. Each black-out period begins at the close of the market on the fourteenth (14th) day prior to the close of any fiscal quarter and ends at the open of the market on the third (3rd) Trading Day following the release of the Company’s quarterly or annual financial results for that particular quarter (the “Black-Out Period”). The prohibition against trading during the Black-Out Period also prohibits the fulfillment of “limit orders” by any broker for such Section 16 Reporting Person, Designated Individual or member of such person’s immediate family or household, and the brokers with whom any such “limit order” is placed must be informed of such prohibition at the time such “limit order” is placed.

Notwithstanding the foregoing, a transaction may be exempt from this prohibition if it is made pursuant to a written trading plan that has been approved in writing in advance of a Black-Out Period while the employee was not in possession of material non-public information by the News Corp General Counsel and that meets all of the requirements of the SEC’s rules and regulations, including Rule 10b5-1 of the Exchange Act.

The Black-Out Period restriction may be waived in individual cases at the discretion of the News Corp General Counsel. Additional black-out periods may be implemented with regard to certain employees or groups from time to time who are in possession of non-public information regarding potentially significant matters.

No Trading in the Company’s Securities on a Short-Term Basis. Any Company securities purchased on the open market by a Section 16 Reporting Person, Designated Individual or member of such individuals’ immediate family or household must be held for a minimum of six (6) months. Note that the SEC’s short swing profit rules already penalize Section 16 Reporting Persons who sell any Company securities within six (6) months of a purchase by requiring such person to disgorge all profits to the Company whether or not such person had knowledge of any material, non-public information.

Same day “cashless” exercises of stock options are not subject to this prohibition, provided that there were no previous purchase transactions on the open market within six (6) months of the exercise date.

Pre-Clearance of Trading by Section 16 Reporting Persons and Designated Individuals

If a Section 16 Reporting Person, Designated Individual or member of such person’s immediate family or household is contemplating a transaction in the Company’s securities, the proposed transaction must be pre-cleared with either the News Corp General Counsel or his or her designee, even if the proposed transaction is to take place outside of the Black-Out Period. If the transaction is cleared to proceed, the News Corp Legal Department will assist a Section 16 Reporting Person in complying with Section 16 and, where applicable, Rule 144 of the Securities Act of 1933, as amended.

IT SHOULD BE NOTED THAT ANY PERSON WHO POSSESSES MATERIAL, NON-PUBLIC INFORMATION, REGARDLESS OF WHETHER OR NOT IT IS WITHIN THE BLACK-OUT PERIOD OR NOT, SHOULD NOT ENGAGE IN ANY TRANSACTION INVOLVING THE COMPANY’S SECURITIES.

Exceptions to the Prohibitions on Trading

The only exceptions to this Policy’s prohibitions of trading in the Company’s securities as outlined above are the following:

Stock Option Exercises – Exercises in stock options granted under the Company’s equity compensation plans for cash; however, this exception does not include the subsequent sale of the shares acquired pursuant to the exercise of a stock option; y

Bona Fide Gifts – Bona fide gifts of securities are not deemed to be transactions for the purposes of this Policy. Whether a gift is truly bona fide will depend on the circumstances surrounding a specific gift. The more unrelated the donee is to the donor, the more likely the gift would be considered “bona fide” and not a “transaction.” For example, gifts to charities, churches or non-profit organizations would not be deemed to be “transactions.” However, gifts to dependent children followed by a sale of the “gifted securities” in close proximity to the time of the gift may imply some economic benefit to the donor and, therefore, may be deemed to be a “transaction” and not a “bona fide gift.”

While these transactions are exceptions to this Policy’s prohibitions on trading in the Company’s securities, a Section 16 Reporting Person, Designated Individual or member of such person’s immediate family or household contemplating such a transaction should still pre-clear the proposed transaction with either the News Corp General Counsel or his or her designee.

POLICIES REGARDING THE USE, DISCLOSURE AND PROTECTION OF MATERIAL, NON-PUBLIC INFORMATION

All employees of the Company have ethical and legal responsibilities to maintain the confidentiality of material, non-public information.

Use and Disclosure of Material, Non-Public Information. As explained previously, under no circumstances may an employee use material, non-public information about the Company for his or her personal benefit. Moreover, except as specifically authorized or in the performance of regular corporate duties, under no circumstances may an employee release to others information that might affect the Company’s securities. Therefore, it is important that an employee not disclose material, non-public information to anyone, including other employees of the Company, unless the other employee needs to know such information in order to fulfill his or her job responsibilities. Under no other circumstances should such information be disclosed to anyone, including family, relatives or business or social acquaintances. In maintaining the confidentiality of the information, the individual in possession of such information shall not affirm or deny statements made by others, either directly or through electronic means, if such affirmation or denial would result in the disclosure of material, non-public information.

If an employee has any doubt about whether certain information is non-public or material, such doubt should be resolved in favor of not communicating such information or trading without discussing with the assigned compliance officer or raising with in-house counsel. Questions concerning what is or is not material, non-public information should be directed to the Company’s Legal Department.

Material, Non-Public Information Regarding Other Companies. In the ordinary course of doing business, employees may come into possession of material, non-public information with respect to other companies. An individual receiving material, non-public information in such a manner has the same duty not to disclose the information to others or to use that information in connection with securities transactions of such other company as such individual has with respect to material, non-public information about the Company.

If the Company is in the process of negotiating a significant transaction with another company, employees are cautioned not to trade in the stock of that company if they are in possession of material, non-public information concerning such company.

If an employee is not certain whether it is permissible to trade in the stock of such company, the employee should contact the Company’s Legal Department before making any trades.

Unauthorized Disclosure of Internal Information. Unauthorized disclosure of internal information about the Company may create serious problems for the Company whether or not the information is used to facilitate improper trading in securities of the Company. Therefore, it shall be the duty of each person employed or affiliated with the Company to maintain the confidentiality of information relating to the Company or obtained through a relationship of confidence. Company personnel should not discuss internal Company matters or developments with anyone outside the Company, except in the performance of regular corporate duties.

Precautions to Prevent Misuse or Unauthorized Disclosure of Sensitive Information. When an employee is involved in a matter or transaction which is sensitive and, if disclosed, could reasonably be expected to have an effect on the market price of the securities of the Company or any other company involved in the transaction, that individual should consider taking extraordinary precautions to prevent misuse or unauthorized disclosure of such information. Such measures include the following:

Maintaining files securely and avoiding storing information on computer systems that can be accessed by other individuals;

Avoiding the discussion of confidential matters in areas where the conversation could possibly be overheard;

Not gossiping about Company affairs; y

Restricting the copying and distribution of sensitive documents within the Company.

Internet. Any written or verbal statement that would be prohibited under the law or under this Policy is equally prohibited if made on the Internet or by social media.

Inadvertent Disclosure of Material, Non-Public Information. If material, non-public information regarding the Company is inadvertently disclosed, no matter what the circumstances, by any employee, the person making or discovering that disclosure should immediately report the facts to the News Corp General Counsel.

Inquiries Regarding Material, Non-public Information. When an inquiry is received regarding information that may be material, it should be referred, without comment, to the Company’s Investor Relations Department.

Reporting of Violations Any person who believes that a violation of this policy has taken place shall report such violation promptly to the General Counsel of News Corp.

Any questions concerning this Policy should be addressed to the News Corp Legal Department.

From the team at myStockOptions. com and myNQDC. com. this blog has commentaries on equity compensation and NQ deferred comp, tips on the related tax and financial planning, updates about new stuff at our websites, and sometimes the lighter side of the topics we cover. Hacemos nuestro mejor esfuerzo para mantener la escritura animada.

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11 July 2012

IRS Issues Guidance On The Section 83(b) Election For Restricted Stock: Sample Language For Filing, Plus Tax Examples

When you receive a grant of restricted stock (or if you receive restricted stock upon an allowed early exercise of stock options), you can elect to be taxed on the value at grant instead of vesting. Este movimiento se conoce como elección de la Sección 83 (b). Nombrado después de la sección relevante del Internal Revenue Code (IRC). No está disponible para la concesión de unidades de acciones restringidas, ya que las UAI se gravan bajo una parte diferente del IRC.

Las ventajas de hacer la elección son: (1) usted comienza el período de posesión de ganancias de capital temprano, es decir, en la concesión en lugar de en la adquisición, y (2) usted está gravado con fines de ingresos ordinarios sobre el valor de la subvención, Ser inferior al valor posterior en el momento de la adquisición. Es crucial notar que cancelar o cancelar una elección de la Sección 83 (b) es prácticamente imposible una vez que se ha hecho.

Reglas estrictas dictan cuando esta presentación tiene que ser hecha (por ejemplo, dentro de los 30 días de la concesión), cómo debe ser presentada y qué debe aparecer en ella.

You make the election by sending the appropriate information to the IRS office where you file your tax return (you also send the election to your company and file it with your annual tax return ). The necessary information includes:

your name, address, and Social Security number

a description of the property/shares (e. g. X shares of my company) and the fair market value

the date on which you received the shares and in what taxable year

the restriction that will cause forfeiture if its requirements are not met or the restriction that will lapse when vesting requirements are met

any money paid for the stock

Despite the fact that the filing must include specific information about the property (i. e. shares), such as its value and transfer date, the IRS has no form for the Section 83(b) election. IRS Revenue Procedure 2012-29 presenta una muestra de lenguaje aceptable para hacer la elección. It also provides examples showing the election's tax impact when the stock is later sold after vesting or if the grant is repurchased or forfeited before vesting. Los ejemplos confirman un riesgo mayor con la elección de la Sección 83 (b): si las acciones nunca se conceden, la confiscación no le da un crédito o deducción por los impuestos que pagó por adelantado. Como se indica en los ejemplos, sólo si pagó algo por el stock restringido, como puede suceder con las opciones de ejercicio temprano en una empresa privada. might you have a capital loss for the difference between any repurchase price and what you paid for the stock (i. e. the exercise price).

Choosing whether or not to make the 83(b) election is a financial-planning decision. For guidance on the analysis needed to determine whether it makes tax and financial sense, see the articles in the section Restricted Stock: Section 83(b) at myStockOptions. com.

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Horace Mann Educators Corporation 2010 Comprehensive Executive Compensation Plan (section 16 Officer) Specimen Incentive Stock Option Agreement

HORACE MANN EDUCATORS CORPORATION

2010 Comprehensive Executive Compensation Plan

INCENTIVE STOCK OPTION

(Section 16 Officer)

TERMS AND CONDITIONS

The following Terms and Conditions apply to the Option granted to Employee by the Company under the Plan as specified in the Incentive Stock Option Agreement of which these Terms and Conditions form a part. Certain specific terms of the Option, including the number of shares purchasable, the Grant Date, the vesting schedule, the Expiration Date, and Exercise Price, are set forth on the designations page of this Agreement.

1. General . By accepting the grant of the Option, Employee agrees to be bound by all of the terms and provisions of this Agreement and the Plan (as presently in effect or later amended), which are incorporated herein by reference, the rules and regulations under the Plan adopted from time to time, and any interpretations, decisions and determinations the Compensation Committee of the Company’s Board of Directors (the “Committee”) may make from time to time. Terms used in this Agreement but not defined herein shall have the same meanings as in the Plan. If there is any conflict between the provisions of this Agreement and mandatory provisions of the Plan, the provisions of the Plan govern.

The Option is an incentive stock option as defined under Section 422 of the Internal Revenue Code of 1986, as amended, to the maximum extent possible, and to the extent the Option does not qualify as an incentive stock option, it is a non-qualified stock option.

2. Right to Exercise Option . Employee may exercise the Option only after the time and to the extent the Option has become vested and exercisable and prior to the Expiration Date or other termination or forfeiture of the Option.

3. Method of Exercise . To exercise the Option, Employee must (a) give written notice to the Vice President, Shared Services: HR Financial Services or other designee of the Company, which notice shall specifically refer to this Agreement, state the number of shares of Stock as to which the Option is being exercised, state whether the Employee wishes the shares of Stock to be in his or her name or jointly in the names of the Employee and the Employee’s spouse (and if so, the spouse’s name), and be signed by Employee, and (b) pay in full to the Company the Exercise Price of the Option for the number of Shares being purchased either (i) in cash (including by check), payable in United States dollars, (ii), by delivery of a number of whole Shar

Impact of SEC insider trading rules on executive compensation arrangements.

The Securities and Exchange Commission (SEC) has adopted revised rules and forms that apply to purchases and sales of employer securities by corporate "insiders" (directors, certain officers and 10% shareholders). These new rules, which generally became effective May 1, 1991, relate to the short-swing profit recovery provisions of various statutes, principally Section 16 of the Securities Exchange Act of 1934.

Exemption for option exercises

The exercise of a stock option is not considered a "purchase" under the Section 16 liability provisions, although the exercise remains subject to the Section 16 reporting provisions. The SEC reasoned that the grant of an option is a purchase, while the exercise merely changes the form of ownership from indirect to direct.

For tax purposes, taxable income from the exercise of a non-qualified option must now be recognized at the exercise date. Segundo. 83(c)(3) no longer delays income recognition for six months, because there is no longer a substantial risk of forfeiture. Likewise, for incentive stock options (ISOs), the alternative minimum tax adjustment (Sec. 56(b)(3)) is measured at the exercise date (rather than six months later).

The timing of the income recognition is unclear, however, if an insider makes a separate, nonexempt purchase within six months of an option exercise. For example, assume an insider makes an open-market purchase of company stock on June 1, 1991 and exercises a nonqualified stock option on June 2, 1991. Due to the Section 16(b) liability provisions, the insider would be unable to sell the stock acquired from the option exercise until six months after the June 1 purchase (i. e. Nov. 30, 1991). However, based on Regs. Segundo. 1.83-3(j)(2), Example (3), it would appear that the insider is taxed on the option spread on June 2, 1991. Similarly, the tax preference on an ISO exercise would also be measured on June 2, 1991.

Most of the complexity of the new rules centers on the exemption from liability for certain transactions under "exempt plans." Because most companies grant options or other stock-based awards at least every 12 months, any insider's sale of stock would necessarily occur within six months before or after a purchase and therefore result in short-swing liability. To alleviate this problem, an exemption has been provided under Rule 16b-3 for two types of plans--award plans (e. g. traditional stock and option plans), under which an award is made to an insider, and participant-directed plans (e. g. a Sec. 401(k) plan or a directors' plan permitting election of cash or stock), in which company stock is acquired or disposed of by the insider's volitional act. Award plans: While specific detailed conditions must be met to obtain the exemption, most award plans should have little, if any, problem in complying with Rule 16b-3. Thus, option grants and restricted stock awards generally are not considered purchases for Section 16 liability purposes. (Note: The grants or awards, however, must be reported by the insider.) Participant-directed plans: The revised rules exempt participant-directed transactions under certain plans from the Section 16 liability provisions, but not the reporting provisions. The best examples of this type of plan are thrift/savings plans (e. g. Sec. 401(k) plans with a company stock fund) and plans permitting corporate directors to elect to receive their annual retainers and other fees in either cash or stock. The conditions for exempting participant-directed transactions are slightly different than those exempting stock-award transactions and arguably somewhat more complicated; satisfying this portion of Rule 16b-3 involves insider action, generally an election six months in advance of the transaction or holding distributed stock or an interest in a stock fund for at least six months. Nevertheless, insiders (subject to their making the appropriate election) will be able to purchase and sell interests in company stock and transfer account balances under their company's Sec. 401(k) plan without incurring short-swing liability. Previously, these plan transactions were, in virtually all cases, exempt from Section 16. Thus, the new rules require insiders to report their "purchases" under these plans and take affirmative action to avoid subjecting such "purchases" to the liability provisions of Section 16(b).

Special exemption from Section 16 reporting and liability provisions

Certain plans and arrangements that provide benefits only in cash are completely exempt from the Section 16 reporting and liability rules. Such plans may include those that provide stock appreciation rights (SARs), phantom stock, performance units, and supplemental employee stock ownership plans (ESOPs) and/or Sec. 401(k) plans that mirror investment in company stock. These types of arrangements may be very attractive to companies that want to avoid the new Section 16 rules. Adverse accounting implications (i. e. variable accounting) could result, however.

Other compensation arrangements

Awards under certain plans (e. g. SARs, phantom stock and performance units) that can be settled in either cash or stock or that pay benefits solely in stock, as well as stock tendered to pay tax withholding on option exercises, are treated as forms of indirect stock ownership subject to Section 16. SARs payable only in cash, but issued in tandem with stock options, are also considered indirect stock ownership. As such, these arrangements must satisfy the conditions for an exempt plan not only to avoid treating awards under such plans as purchases, but also to avoid treating the settlement of the awards as sales. Further, any election to receive a cash payment must be made during a 10-day window period, i. e. the third through twelfth day following the date of the company's quarterly earnings release. Shares for withholding: The prior rules allowed an executive to irrevocably elect to surrender shares to cover tax withholding either six months before the "tax date" or during one of the quarterly window periods. Under the new rules, the tax date for a non-qualified stock option is the exercise date. Thus, to use option shares for tax withholding, an executive must exercise options either during a window period or at least six months after irrevocable electing share withholding. This diminishes planning flexibility somewhat, particularly when the window period is used. (Some advisers and commentators have suggested making the six-month irrevocable election on grant of the options, thereby triggering share withholding on later exercise, even if years after the grant.) Also, the election is not truly irrevocable, as it can be revoked on six months' advance notice. While it can be argued that a share-for-withholding provision is no longer necessary because an executive can simply sell shares to raise the necessary cash to pay the withholding, such a transaction would be a sale, matchable with any purchases made within six months. Use of shares for withholding during a window period, or at least six months after an irrevocable election, is an exempt transaction (i. e. it is not considered a sale). ESOPs and discretionary profit-sharing plans: When an employer makes discretionary contributions to a profit-sharing plan or ESOP that is allocated to a company stock fund within a participant's account and there is no participant direction for such allocation, the allocation is reportable by an insider, but is an otherwise exempt purchase. (See SEC Interpretative Letter, Thompson, Hine and Flory.) The SEC treats the transaction as an exempt grant or award, assuming compliance with the relevant portions of Rule 16b-3. Restricted stock: Awards of restricted stock are largely unaffected by the amended rules, as long as the awards are made under an exempt plan. The awards must be reported, but are not considered purchases. The vesting of the award or lapsing of restrictions is a nonevent, the same as under the current rules. Also, if an executive wishes to surrender shares to cover tax withholding, the election (but not necessarily the actual withholding) must be made during a window period; otherwise, the surrender is treated as a sale. Alternatively, an irrevocable election to surrender shares can be made at least six months in advance of the tax date. (See SEC No-Action Letter, Ralston Purina Company II.) Also, if the award is not pursuant to an exempt plan, it is considered a purchase. Stock appreciation rights: Because insiders can exercise options and obtain cash through an immediate sale without violating Section 16 (assuming no purchases in the six-month period preceding the sale), a company's need for existing or future SARs is questionable. Fluctuations in the value of SARs have a direct impact on a corporation's earnings and profits. However, existing SARs can be capped to eliminate future earnings charges and to allow for future income reversals if the stock price drops. Another solution is to issue limited SARs (LSARs), exercisable only in the event of a tender offer or merger. LSARs do not require an adjustment to earnings until a change in control occurs.

Effective date and transition rule

The new rules became effective May 1, 1991, although an optional phase-in until Sept. 1, 1992 is provided for equity-compensation plans. There is no grandfathering of the old rules, but any equity-compensation plan that does not conform to the new rules until Sept. 1, 1992 is governed by the old rules. If a company (i. e. a registrant under the 1934 Act) chooses to adopt a plan that complies with the new rules or convert one of its plans to the new rules, all of its plans must be converted. Compliance with all of the reporting rules was required beginning on May 1, 1991, even if the underlying plan has yet to conform to the new liability rules.

COPYRIGHT 1991 American Institute of CPA's No portion of this article can be reproduced without the express written permission from the copyright holder.

Copyright 1991, Gale Group. Todos los derechos reservados. Gale Group is a Thomson Corporation Company.

Tax Reporting for Qualifying Dispositions of ESPP Shares

Reporting compensation income and capital gain or loss for a qualifying disposition of ESPP shares.

If you hold shares from an employee stock purchase plan long enough to avoid a disqualifying disposition, you still may have to report some or all of your profit as compensation income when you sell or otherwise dispose of the shares. If you have additional profit beyond the amount reported as compensation income, it is reported as capital gain. This page explains how to report these events.

Need a book? Our bestselling book Consider Your Options provides a plain language guide to getting the most from stock options, employee stock purchase plans, restricted stock awards and other forms of equity compensation. Our other book on this topic, Equity Compensation Strategies. is a reference and study guide for professionals who advise clients on how to handle stock options.

Preliminary explanation

These rules impose reporting requirements on a disposition of ESPP shares that occurs after you have held the shares long enough to avoid a disqualifying disposition. Unlike the rules for incentive stock options, these rules may require some or all of your profit to be reported as compensation income even after you've satisfied the holding period requirement. The amount of compensation income is calculated differently than for a disqualifying disposition, using the lesser of two numbers. Strangely, it is possible (although unusual) for the amount of compensation income to be larger for a qualifying disposition than it is for a disqualifying disposition.

The law on this issue is poorly written and causes plenty of confusion among the companies that maintain these plans, the individual participants and their tax preparers. Even the IRS has sometimes appeared to be confused about this rule, stating it incorrectly in Publication 525. The description here is based on the rule as it appears in the tax law, specifically section 423(c) of the Internal Revenue Code.

Que necesitas

Income from a qualifying disposition of ESPP stock may or may not appear on Form W-2, so that is one item you need. If you sold the shares (instead of making a different kind of disposition, such as a gift), you should also have Form 1099-B, which reports your proceeds from the sale. In addition, you need information provided on Form 3922, which employers are required to provide beginning with the 2010 tax year.

Step 1: Calculate compensation income

Your compensation income from ESPP shares in a qualifying disposition is the lesser of two amounts.

The first is the discount allowed on your purchase, determined as of the "grant date," which is normally the first day of the offering period. (Your company should inform you if a different grant date is used.) Note that this is not necessarily the actual discount you received on the shares. It's the discount determined as if you bought the shares on the grant date, even though you didn't buy the shares that day and couldn't have done so even if you wanted. Beginning with the 2010 tax year, you should find the numbers needed to calculate this amount on Form 3922 supplied by your employer. It's the difference between the fair market value of the stock on the grant date and the purchase price determined as of the grant date (not the actual purchase price).

The second number, which comes into play only if smaller than the first one, is essentially your profit from the shares. More precisely, it's the difference between the fair market value of the stock when you disposed of it (normally your sale price, but you would need to find the value if you disposed of the shares without selling them, such as a gift or donation) and the actual amount you paid for the shares.

The smaller of these two numbers (the discount or the profit) is the amount of compensation income you have as a result of the disposition.

Step 2: Check your W-2

The compensation income from a qualifying disposition may be reflected on Form W-2 received from the company maintaining the plan. That doesn't always happen, so you should check your W-2. It may be difficult to isolate this amount because it is not listed separately. One clue would be to compare the number in box 1 (your total wages) with the number in box 3 (social security wages), because this income should appear in box 1 but not in box 3. If you're uncertain about whether the company included this amount in your wages reported on form W-2 you should clarify this with the payroll department.

Step 3: Report your compensation income

If the compensation income from your qualifying disposition was included in the wages reported on Form W-2, simply report the number from your W-2 on your tax return the way you normally do. If it was not included on your W-2, add the ESPP compensation to the wages on your Form W-2 and report the total as wages on your tax return.

Some people worry that they need to attach an explanation if the number for wages on Form 1040 doesn't match the number on the attached Form W-2. That isn't necessary here because the number you're reporting is greater than the number on Form W-2.

Step 4: Calculate your basis

Next you need to calculate your basis for the shares. This is the amount you paid for the shares, increased by the amount of compensation income reported. If your qualifying disposition was a gift, you should provide this basis information to the recipient of the gift. If the disposition was a sale, proceed to Step 5.

Step 5: Report the sale of the shares

Report the sale of the shares on Schedule D, using the sales proceeds reported on Form 1099-B and the basis calculated in Step 4. You had to hold the shares more than a year (and perhaps longer) to have a qualifying disposition, so your gain or loss is long-term.

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The IRS Eyes Executive Compensation

Will You Be Ready When The Tax Man Calls?

The plethora of stories in recent years about executive compensation excesses has prompted action on a number of fronts. Investors have weighed in with a flurry of shareholder initiatives during proxy season. Financial advisors such as Institutional Shareholder Services have made negative recommendations to their clients concerning many equity-based plan proposals. The New York Stock Exchange and NASDAQ instituted new corporate governance initiatives and requirements for shareholder approval of equity-based plans. Congress enacted the Sarbanes-Oxley Act of 2002 and has been considering numerous other pieces of proposed legislation affecting executive compensation.

Not to be outdone, last year the Internal Revenue Service (IRS) launched a pilot program to gather data on executive compensation practices and compliance at two dozen large public companies with the goal of establishing a database to be used in more wide-ranging examinations. More specifically, the IRS has identified the following eight subjects as particular areas of interest in its program: nonqualified deferred compensation, stock-based compensation, the million-dollar cap on deductible compensation under Section 162(m) of the Internal Revenue Code (Code), golden parachutes, split-dollar life insurance, option transfers to family limited partnerships, offshore employee leasing, and fringe benefits. Businesses should expect that future examinations by the IRS will include a focus on those subjects.

Nonqualified Deferred Compensation

The nonqualified deferred compensation plans that are an integral part of many companies' executive compensation programs create a number of issues of interest to the IRS. The ability to defer tax liability is appealing to executives, although the associated loss of control over the money is not. Attempts to postpone deferral and payout elections to the last possible moment while retaining access to the funds ( e. g. . through emergency withdrawal provisions that, in practice, do not require that an emergency exist) raise constructive receipt issues that could result in accelerated recognition of tax. In some circumstances the investment returns credited to the accounts of participants may themselves constitute additional contributions with additional tax consequences. Even if the plan successfully delays the income tax liability for the deferred compensation, the employment tax rules require the withholding and payment of employment taxes on a different schedule--when the services have been performed or there is no longer a substantial risk of forfeiture, whichever occurs last, rather than when payment is actually received by the executive. As a result, the IRS will look to see whether the required employment taxes have been paid at the proper time. From the employer's perspective, the deferral of income by the executive results in an unwanted delay in the associated tax deduction even if the employer has contributed funds to a "rabbi trust" for the executive's benefit. The IRS will be looking to see whether the employer has postponed its compensation deduction until the year in which the associated payment is includible in the executive's income. Rabbi trusts (especially those maintained offshore) and other devices to secure the accounts of participants will also receive scrutiny.

Stock-Based Compensation

The many different forms of stock-based compensation ( e. g. . restricted stock, incentive stock options (ISOs), nonqualified stock options, stock appreciation rights, phantom stock and employee stock purchase plans), and the increasingly heavy reliance in recent years on stock-based compensation as a major component of executive pay, generate a large number of issues of concern to the IRS. Among these are whether income is reported and withholding taxes collected and paid at the proper time (such as when restricted stock ceases to be subject to a substantial risk of forfeiture or when a nonqualified stock option is exercised); whether the requirements for electing the accelerated recognition of income are met (the so-called 83(b) election); whether the formalities required for ISO treatment are properly observed (such as timely shareholder approval of the plan, exercise price not less than fair market value at date of grant, and compliance with the applicable employment requirements); and whether the required participation standards are met for employee stock purchase plans.

Section 162(m) Million-Dollar Cap

Code Section 162(m) generally limits to $1,000,000 the tax deduction for annual compensation paid to an executive officer of a publicly traded corporation. However, certain types of payments (generally described as performance-based) are excluded from the 162(m) limit and therefore remain deductible even if they cause annual compensation to exceed $1,000,000. The IRS will be looking to see whether the deduction limitation has been properly applied or whether compensation deductions have been taken in excess of the amount permitted by Section 162(m). In addition, because the 162(m) restriction only applies to payments to persons who fill specified corporate offices as of the last day of the year, the IRS will be checking to see whether the restriction has been circumvented by end-of-the-year gamesmanship-- i. e. . resignation from office prior to year-end followed by a reinstatement to a covered office at the beginning of the next year.

Golden Parachutes

Congress adopted Code Section 280G twenty years ago to combat what it considered to be excessive payments made to corporate executives in connection with transactions involving a change in ownership or control of a public company or some non-public companies. Although not all payments are taken into account and the related calculations get rather complex, once the value of the relevant cash and noncash payments (parachute payments) reach a certain level, Section 280G generally denies the company a compensation deduction for any amount above the executive's average annual pay for the preceding five years (called an excess parachute payment). At the same time, Code Section 4999 penalizes the executive by imposing a 20 percent non-deductible excise tax (in addition to the normal income tax) on the amount received in excess of that average annual pay. Subjects of interest to the IRS include whether all required payments have been taken into account; whether the amounts of the average annual pay, the parachute payments and any excess parachute payments have been correctly calculated; and whether all applicable income and excise taxes have been withheld and reported.

Split-Dollar Life Insurance

Split-dollar life insurance has been the subject of a number of developments in recent years, including concerns under Sarbanes-Oxley (is there an extension of credit?) and less favorable tax treatment under new IRS regulations. The tax treatment of individual split-dollar arrangements is subject to a number of variables, including whether the arrangement is eligible for protection under certain grandfather rules, whether material modifications have been made to the arrangement, and whether the applicable premium rates are generally available to the public. In connection with its executive compensation initiative, the IRS has announced that it will be looking to see whether appropriate amounts have been included in the income of the employees covered by split-dollar arrangements ( e. g. . the value of term protection at a minimum or the value of the policy if it has been transferred to the employee). The appropriate amount of includible income will be a function of how a number of variables affect the split-dollar program. For additional information on split-dollar life insurance, visit www. sgrlaw. com/publications and click on Trust The Leaders, Summer 2003 Issue.

Transfers of Stock Options to Related Parties

Code Section 83 applies to compensatory transfers of property (such as corporate stock) and compensatory grants of nonqualified stock options. Although compensation income is generally recognized under Section 83 when restrictions on stock lapse ( i. e. . when the stock vests) or the stock option is exercised, the regulations issued under Section 83 provide for different treatment when the property is transferred by the employee prior to vesting or exercise. In that case, if the transfer is at arm's length, the amount received on the transfer is treated as compensation to the transferring employee, and the transferee recognizes no income in the future when the stock restrictions lapse or the option is exercised. To take advantage of that treatment in a way not intended by Congress or the IRS, some aggressive taxpayers (frequently at the urging of even more aggressive tax shelter promoters) have structured transactions in which compensatory options have been transferred to a family limited partnership (FLP) or some other related entity in exchange for a promissory note with a principal amount equal to the fair value of the option (so that the transfer appears to be arm's length) but with principal payments deferred for many years. When the option is later exercised, neither the employee nor the FLP reports any taxable income, and the employee reports compensation income only in the future when payments are received on the note. To better scrutinize these transactions, the IRS has categorized them as "listed transactions" that are subject to the list-keeping, registration and disclosure requirements that were put in place to combat abusive tax shelters. In addition, the IRS revised the regulations under Section 83 to provide that the transfer of an option by the employee to a related party does not close the compensation element of the option even if the transfer is at arm's length. As a result, the IRS will be looking to see whether employees' option transfers and subsequent exercises have been accompanied by appropriate tax recognition, withholding and reporting.

Offshore Leasing of Employees

The offshore leasing arrangement of concern to the IRS is a device that has been used inappropriately (in the view of the IRS) to reduce corporate income taxes and employment taxes. In the typical arrangement, an executive will resign from employment with a domestic corporation (the "original employer," generally but not always controlled by the executive) and enter into a new employment relationship with a foreign entity organized in a jurisdiction having a tax treaty with the U. S. The foreign entity leases the services of the executive to a domestic U. S. entity that, in turn, leases the executive's services to the original employer. The executive continues to sit at the same desk and to perform the same services for the original employer, but the original employer and the intermediary leasing company treat the payments they make as business expenses (other than compensation) that are not subject to employment taxes or to timing constraints on deductibility. The foreign leasing company claims the benefit of the U. S. tax treaty and, because it has no permanent establishment in the U. S. treats its revenues as exempt from U. S. income tax. The excess of those revenues over the amount paid to the executive (the equivalent of deferred compensation) is held for the executive's benefit in an arrangement that in form avoids constructive receipt but in substance allows the funds to be protected from creditors and to be controlled by the executive.

As in the case of option transfers by employees to related parties, the IRS has classified these arrangements as listed transactions subject to list-keeping, registration and disclosure requirements. The IRS has announced its intention to challenge these arrangements on a number of grounds and assert that additional income taxes and employment taxes are payable. In connection with its executive compensation initiative, the IRS will be looking to see if any such offshore employee leasing arrangement is in place, whether applicable income taxes and employment taxes have been reported and paid, and whether deductions have been claimed earlier than allowed.

Fringe Benefits

Fringe benefits come in many shapes and sizes and include such diverse elements as health insurance, executive physicals, employee discounts, club memberships, car allowances and personal use of business aircraft. The value of those benefits generally constitutes additional taxable compensation for the recipient unless some specific exclusion applies to make the benefit nontaxable, and eligibility for such an exclusion often requires strict compliance with eligibility criteria (such as nondiscriminatory availability). The IRS will be looking to make sure businesses have been properly treating fringe benefits as taxable unless the applicable requirements for exclusion from income have been met. Benefit types in which the IRS has announced a particular interest include relocation benefits and personal use of corporate-owned aircraft and automobiles.

Now Would Be a Good Time for a Preventative Compliance Audit

Prevenido vale por dos. Una puntada a tiempo ahorra nueve. An ounce of prevention is worth a pound of cure. These maxims have stood the test of time for a good reason--they're good advice. With advance notice of the topics that are of special interest to the IRS, businesses have the opportunity to avoid headaches in the future by reviewing their executive compensation programs and procedures now. Plans may not have kept up with changing legal requirements. The replacement for the person who knew all about how things are supposed to work may not be familiar with all those picky technicalities. Or perhaps programs or benefits have evolved over time without ever being subjected to a legal or best-practices review. Whether conducted internally or with the assistance of an outside consultant or advisor, a compliance audit performed now can help you find and correct these and other problems before the tax man calls. And he will call.

In This Issue

1. The sales reported on this Form 4 were effected pursuant to a Rule 10b5-1 trading plan adopted by the reporting person on May 18, 2012.

2. The reported price in Column 4 is a weighted average price. These shares were sold in multiple transactions at prices ranging from $19.69 to $20.68 per share, inclusive. The reporting person undertakes to provide to the issuer, any security holder of the issuer, or the staff of the Securities and Exchange Commission, upon request, full information regarding the number of shares sold at each separate price within the range set forth in this footnote (2).

3. The reporting person is one of the Managers of The Founder's Fund Management, LLC, which is the General Partner of The Founders Fund, LP ("FF"), and may be deemed to share voting and investment power over the securities held by FF. The reporting person disclaims beneficial ownership over such securities except to the extent of his pecuniary interest therein. The inclusion of these securities in this report shall not be deemed an admission of beneficial ownership of the reported securities for purposes of Section 16 or for any other purposes.

4. The reported price in Column 4 is a weighted average price. These shares were sold in multiple transactions at prices ranging from $20.69 to $20.70 per share, inclusive. The reporting person undertakes to provide to the issuer, any security holder of the issuer, or the staff of the Securities and Exchange Commission, upon request, full information regarding the number of shares sold at each separate price within the range set forth in this footnote (4).

5. The reporting person is one of the Managing Members of The Founder's Fund II Management, LLC ("FF II Management"), which is the General Partner of The Founders Fund II, LP ("FF II"), and may be deemed to share voting and investment power over the securities held by FF II. The reporting person disclaims beneficial ownership over such securities except to the extent of his pecuniary interest therein. The inclusion of these securities in this report shall not be deemed an admission of beneficial ownership of the reported securities for purposes of Section 16 or for any other purposes.

6. The reporting person is one of the Managing Members of FF II Management, which is the General Partner of The Founders Fund II Principals Fund, LP ("FFPF"), and may be deemed to share voting and investment power over the securities held by FFPF. The reporting person disclaims beneficial ownership over such securities except to the extent of his pecuniary interest therein. The inclusion of these securities in this report shall not be deemed an admission of beneficial ownership of the reported securities for purposes of Section 16 or for any other purposes.

7. The reporting person is one of the Managing Members of FF II Management, which is the General Partner of The Founders Fund II Entrepreneurs Fund, LP ("FFEF"), and may be deemed to share voting and investment power over the securities held by FFEF. The reporting person disclaims beneficial ownership over such securities except to the extent of his pecuniary interest therein. The inclusion of these securities in this report shall not be deemed an admission of beneficial ownership of the reported securities for purposes of Section 16 or for any other purposes.

8. The reporting person is the beneficial owner of Rivendell One LLC ("Rivendell"), and has sole voting and investment power over the securities held by Rivendell.

9. The reporting person is the Manager and a Member of Lembas, LLC ("Lembas"), and has sole voting and investment power over the securities held by Lembas. The reporting person disclaims beneficial ownership over such securities except to the extent of his pecuniary interest therein. The inclusion of these securities in this report shall not be deemed an admission of beneficial ownership of the reported securities for purposes of Section 16 or for any other purposes.

10. The shares reported on this Form 4 represent pro rata distributions, and not a purchase or sale of the shares, by Lembas, LLC to its members who are not affiliates of the issuer, without consideration.

11. The reported price in Column 4 is a weighted average price. These shares were sold in multiple transactions at prices ranging from $19.02 to $20.01 per share, inclusive. The reporting person undertakes to provide to the issuer, any security holder of the issuer, or the staff of the Securities and Exchange Commission, upon request, full information regarding the number of shares sold at each separate price within the range set forth in this footnote (11).

12. The reported price in Column 4 is a weighted average price. These shares were sold in multiple transactions at prices ranging from $20.02 to $20.07 per share, inclusive. The reporting person undertakes to provide to the issuer, any security holder of the issuer, or the staff of the Securities and Exchange Commission, upon request, full information regarding the number of shares sold at each separate price within the range set forth in this footnote (12).

Perhaps we’re looking into this a bit too much, but we found the Tax Court’s decision this Thursday in Kilker v. Commissioner . 2011-250 to be a bit curious.

In Kilker . the taxpayer (Kilker) was the owner and operator of Allegra Print and Imagining, a printing shop. Kilker was Allegra’s CEO during 2003 and 2004. In 2003, in exchange for providing Zap Corp. (Zap) with printing services, Kilker received 73,529 shares of Zap stock. The stock was restricted stock pursuant to SEC rule 144, meaning Kilker could not sell or transfer the stock for at least 1 year. In 2004, at the end of the 1-year holding period, Kilker sold 30,000 shares for a total of $90,290.

Kilker failed to file a tax return for 2004. The IRS recreated Kilker’s 2004 tax return, and reported the $90,290 as capital gain. The Tax Court agreed:

Section 61(a) defines gross income as all income from whatever source derived. Section 61(a)(3) specifically includes in income gains derived from dealings in property. Respondent argues that petitioner received $90,290 from the sale of 30,000 shares of Zap stock in 2004. To satisfy his initial burden of production with respect to petitioner’s capital gain income of $90,290, respondent provided the Court with a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, and trade confirmations from Edward Jones confirming the information reported on the Form 1099-B. Petitioner has failed to present any evidence to dispute she received this amount or any evidence of her basis in the shares of stock. Accordingly, we sustain respondent’s determination with respect to the capital gain income.

Parece bastante simple. But here’s what we’re wondering: Why didn’t the IRS and the Tax Court include the income related to the Zap stock in Kilker’s 2003 tax year, when it was received in 2003, rather than when it was sold in 2004?

When a taxpayer receives stock in exchange for services, the inclusion of the value of the stock in the income of the recipient is governed by Section 83. Generally, stock received in exchange for services is taxable upon receipt for an amount equal to its FMV less any amount paid by the taxpayer for the stock. However, if the stock received is 1) subject to a substantial risk of forfeiture, and 2) not freely transferable, Section 83 defers the taxation of the stock until the stock is no longer subject to a substantial risk of forfeiture and is freely transferable.

In Kilker . the taxpayer received the Zap stock in 2003 subject to SEC Rule 144, which prohibits the sale of the unregistered stock on the public market for 1 year. Now, it may sound like this is a sufficient restriction on transferability to defer income recognition on the receipt of the Zap stock from 2003 (when the stock was granted) until 2004 (when the restriction lapsed under Rule 144 and the stock was sold). However, the District Court of California and the Ninth Circuit have recently held that the restriction on transferability under Rule 144 does not constitute a significant enough restriction to defer income under Section 83, echoing the position tax advisors have adhered to for years based on the general structure and language of Section 83.

In Gudmundsson v. U. S . 107 AFTR 2d 2011-852 (634 F.3d 212), 02/11/2011, the taxpayer (Gudmundsson) received stock options on July 1, 1999 that were subject to several constraints. The Ninth Circuit discussed the Rule 144 element of the constraints as follows:

First, these were “restricted securities” under Securities and Exchange Commission (“SEC”) Rule 144 meaning they were acquired directly from the issuer and not in a public offering, id. Under Rule 144, the Stock could not be sold on a public exchange until the expiration of a holding period that, in Gudmundsson’s case, ended on July 1, 2000. The Stock could, however, be disposed of in a private placement sale or pledged as security or loan collateral.

The Ninth Circuit ultimately concluded that the options were taxable on July 1, 1999, the date of receipt, despite the fact that Rule 144 barred the sale of the options on the public market until July 1, 2000:

The Stock was not subject to a substantial risk of forfeiture on July 1, 1999, and although this is enough for income recognition under Section 83, we briefly address plaintiffs’ arguments regarding the transferability of the Stock, as well. Plaintiffs assert, however, that the Stock was not transferable because “in reality, … [t]he various restrictions imposed by law and agreement made [the Stock] impossible to sell.” Regardless of whether this is true, the argument misunderstands what Section 8 3 requires. Transferability is not just a question of marketability. In fact, even if sales are prohibited for a period of time, property may be transferable if it can be pledged or assigned.

To summarize, the district court was correct to recognize the Stock as income on July 1, 1999, as the Stock was transferable and not subject to a substantial risk of forfeiture on that day. This conclusion was correct under Section 8 3(a) and in general, as income in whatever form is taxable in the year in which it is received.

This begs the question: with authority like Gudmundsson out there, why didn’t the Tax Court in its decision in Kilker inlcude the income generated from the receipt of Zap stock in 2003 when it was received? Why did it wait until the stock was sold in 2004?

Clearly, under the principles established in earlier case law, the mere presence of the Rule 144 restriction on the sale of the Zap stock should not have prevented the IRS from including the FMV of the Zap stock in Kilker’s income in 2003. Perhaps there was some other substantial risk of forfeiture that was stipulated between the two parties and was not disclosed in the court documents. Or perhaps by the time the IRS caught wind of Kilker’s failure to file her 2004 tax return, the statute had run on the 2003 return, which apparently was filed. Otherwise, it would seem the IRS missed an opportunity to tax the income in 2003, and potentially increase the amount included in Kilker’s income if the stock price was higher upon receipt in 2003 that upon sale in 2004.

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Comcast

Director and Executive Officer Stock Ownership Policies

Last Revised: February 25, 2014

It is Comcast Corporation’s policy (this “Policy”) to require that its Section 16 executive officers and non-executive employee directors each maintain a significant ownership position in Comcast’s shares of Class A, Class A Special or Class B common stock (collectively, “Comcast common stock”), as set forth in the applicable guidelines below.

In furtherance of this Policy, Comcast’s executive officers and non-executive employee directors are prohibited from using any strategies or products (including derivative securities, such as put or call options, or short-selling techniques) to hedge against potential changes in the value of Comcast common stock. Comcast’s executive officers and non-executive directors also may not hold Comcast common stock in margin accounts or pledge Comcast common stock as collateral for a loan, unless approved by the Chair of the Governance and Directors Nominating Committee of the Board of Directors or his or her designee, who shall consider such items as he or she deems relevant, including the amount of the pledge as compared to both the average daily trading volume with respect to the relevant class of common stock and the total value of Comcast common stock held by such person, as well as such person’s ability to repay any loans secured by Comcast common stock or to substitute other assets as collateral.

Ownership Guidelines

The Section 16 executive officers and non-executive employee directors will be expected to own Comcast common stock based on the following applicable guidelines (the “Ownership Guidelines”):

Chief Executive Officer, President and Chairman of the Board of Directors

At least 10 times base salary

Corporate Division Vice Chairman; Corporate Division Senior Executive Vice Presidents; Non-executive employee directors

At least 3 times base salary

All other Section 16 executive officers

At least 1.5 times base salary

Additional employees or categories of employees may be designated as being subject to this Policy from time to time by the Governance and Directors Nominating Committee.

Ownership Defined

For purposes of meeting the applicable Ownership Guidelines, ownership will be determined by:

(1) adding the following amounts:

(i) 100% of the market value of Comcast common stock owned (x) directly by the employee or his or her spouse, (y) jointly by the employee and his or her spouse and/or his or her issue, and (z) indirectly by a trust, partnership, limited liability company or other entity for the benefit of the employee, his or her spouse and/or his or her issue; (ii) 100% of the market value of the employee’s Deferred Stock Units under Comcast’s Deferred Stock Option Plan; (iii) 100% of the market value of Comcast common stock credited to the employee’s account under any Employee Stock Purchase Plan; (iv) 60% of the difference between the market price and the exercise price of the employee’s vested stock options under Comcast’s Stock Option Plans; (v) 60% of the market value of Comcast common stock owned in Comcast’s Retirement-Investment (401(k)) Plan; and (vi) 60% of the market value of Comcast common stock vested and deferred under Comcast’s Restricted Stock Plan; y

(2) subtracting any shares of Comcast common stock held in a margin account or pledged as collateral for a loan.

Valuation Date

Ownership as of any date for purposes of determining compliance with the Ownership Guidelines will be calculated based on the closing price of the applicable class of Comcast common stock as of the trading date prior to the date of determination. For this purpose, the closing price of the Class B Common Stock will be deemed to be the closing price of the Class A Common Stock or Class A Special Common Stock, whichever is lower.

Grace Period

A subject employee will be allowed a grace period to meet the Ownership Guidelines in full, from the date the employee first becomes subject to the Policy through the fifth December 31st thereafter, as set forth below (the “Grace Period”). The term “Base Year,” as used in the table below, is defined as the calendar year during which the subject employee first becomes subject to this Policy. The Grace Period may be extended, and the required minimum holdings percentage indicated below may be reduced, at the discretion of the Governance and Directors Nominating Committee.

Subject employees may satisfy the Ownership Guidelines in part over the course of the Grace Period, as follows:

Required Minimum Holdings as a Percent of Guideline

Conformidad

A subject employee will annually certify whether or not he or she is in compliance with this Policy both: (i) as of December 31 prior to the year of the year in which the certification is made; and (ii) as of each date (if any) during the year prior to the year in which the certification is made on which the employee sold or otherwise disposed of stock. Certifications will be provided to the Cable Division’s Vice President – Compensation and Benefits using the Comcast Corporation Employee Stock Ownership Policy Compliance Certification Form. A subject employee is not required to purchase or otherwise acquire shares to come in to compliance with this Policy. The Governance and Directors Nominating Committee may determine that a subject employee shall be deemed to be in compliance with this Policy in cases where any non-compliance occurs as a result: (a) solely or primarily of a decline of the market price of the stock; (b) of transactions made pursuant to hardship exceptions; (c) of a bona fide gift; and/or (d) of a diversification election made with respect to stock deferred under Comcast’s Restricted Stock Plan.

Non-Compliance

If a subject employee is not in compliance with the Ownership Guidelines, then he or she will not be permitted to sell or otherwise dispose of stock until his or her holdings meet the applicable minimum requirement, and then only to the extent that the employee’s remaining holdings do not fall below the applicable minimum holding requirement. Bona fide gifts and diversification elections made with respect to stock deferred under Comcast’s Restricted Stock Plans shall not be deemed to be dispositions hereunder.

Hardship Provision

Hardship exceptions to the Ownership Guidelines, upon the recommendation of senior management, may be made: (i) with respect to named executive officers, by the Chair of the Governance and Directors Nominating Committee; and (ii) with respect to all other subject employees, by the Corporate Division Senior Executive Vice President having responsibility for administration.

Administration and Interpretation

The Governance and Directors Nominating Committee reserves the right to interpret, change, amend, modify or terminate this Policy at any time.

Conformidad

A non-employee director will annually certify whether or not he or she is in compliance with this Policy both: (i) as of December 31 each year; and (ii) as of each date (if any) during each year on which the non-employee director sold or otherwise disposed of stock. Certifications will be provided to the Cable Division’s Vice President – Compensation and Benefits using the Comcast Corporation Non-Employee Director Stock Ownership Policy Compliance Certification Form. A non-employee director is not required to purchase or otherwise acquire shares to come in to compliance with this Policy. The Governance and Directors Nominating Committee may determine that a non-employee director shall be deemed to be in compliance with this Policy in cases where any non-compliance occurs as a result: (a) solely or primarily of a decline of the market price of the stock; (b) of transactions made pursuant to hardship exceptions; (c) of a bona fide gift; and/or (d) of a diversification election made with respect to stock deferred under Comcast’s Restricted Stock Plan.

Non-Compliance

If a non-employee director is not in compliance with the Ownership Guidelines, then he or she will not be permitted to sell or otherwise dispose of stock until his or her holdings meet the applicable minimum requirement, and then only to the extent that the director’s remaining holdings do not fall below the applicable minimum holding requirement. Bona fide gifts and diversification elections made with respect to stock deferred under Comcast’s Restricted Stock Plans shall not be deemed to be dispositions hereunder.

Hardship Provision

Hardship exceptions may be made at the discretion of the Chair of the Governance and Directors Nominating Committee, provided that any hardship exception with respect to the Chair shall be made by a majority of the remaining members of the Governance and Directors Nominating Committee.

Administration and Interpretation

The Governance and Directors Nominating Committee reserves the right to interpret, change, amend, modify or terminate this Policy at any time.

1 Decisions concerning the Chair shall be made by a majority of the remaining members of the Governance and Directors Nominating Committee.

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A Delaware Lawyer’s Perspective On Stock Option Grant Procedures

Law360, New York (January 8, 2007, 12:00 AM ET) -- One of the most significant corporate governance stories of 2006 was the continuing stream of revelations by publicly traded corporations of problems with the process by which employee stock options were granted and reported and the resulting flood of restatements of financial statements by these companies.

According to one report, nearly 190 companies have been the subject of publicly announced investigations by either the Securities and Exchange Commission (SEC), the United States Department of Justice or the companies themselves. (See Schwannhausser, “What If You Threw a.

To view the full article, register now.

RHYTHMS NET CONNECTIONS INC - S-1 - 19990216 - STOCK_PLANS

1997 STOCK OPTION/STOCK ISSUANCE PLAN

As of January 31, 1999, we had reserved 9,727,942 shares of common stock for issuance pursuant to our 1997 Stock Option/Stock Issuance Plan (the "1997 Stock Plan"), which has been approved by our Board of Directors and stockholders. The 1997 Stock Plan provides for the granting to employees and officers of qualified "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for the granting to employees, officers and directors and consultants of nonqualified stock options. The 1997 Stock Plan also provides for the granting of restricted stock. As of January 31, 1999, options to purchase an aggregate of 8,507,393 shares of common stock had been granted, net of cancellations, and 1,220,549 shares of common stock remained available for future grants. From January 1, 1998 through January 31, 1999, 4,695,190 options to purchase common stock were exercised, of which an aggregate of 3,523,122 were exercised by the Named Executive Officers as a group, an aggregate of 365,096 were exercised by our other executive

officers as a group, and an aggregate of 806,972 were exercised by our non-officer employees. To date, we have not granted any shares of restricted stock under the 1997 Stock Plan.

The 1997 Stock Plan is administered by the compensation committee of our Board of Directors. Options granted generally vest at a rate of 25% of the shares at the end of the first year and 2.083% of the shares at the end of each month thereafter and generally expire ten years from the date of grant. All options granted are immediately exercisable, subject to a repurchase right at the original purchase price that we hold that lapses in accordance with the vesting schedule of the options. If an optionee exercises an option to purchase shares in which such optionee has not acquired a vested interest in accordance with the applicable vesting provisions, then the purchased shares are deposited in escrow with our corporate secretary, where they continue to vest in accordance with the applicable vesting provisions. We hold a right, exercisable at any time during the sixty-day period following the date an optionee ceases for any reason to remain in service, to repurchase at the exercise price for such options all or, at our discretion and with the consent of the optionee, any portion of such unvested shares.

If we merge with or into another corporation or sell all or substantially all of our assets, all outstanding options shall be assumed or an equivalent option substituted by the successor corporation. If a successor corporation refuses to assume or substitute for the options, a portion of each outstanding option shall be accelerated so that such portion becomes fully vested. Please see "--Employment Agreements and Change in Control Arrangements."

The exercise price of incentive stock options granted under the 1997 Stock Plan must be at least equal to the fair value of our common stock on the date of grant. The exercise price of options to an optionee who owns more than 10% of our outstanding voting securities must equal at least 110% of the fair value of the common stock on the date of grant, and the option term shall not exceed ten years measured from the option grant date.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. In addition, our bylaws require us to indemnify our directors and officers, and allow us to indemnify our other employees and agents, to the fullest extent permitted by law. We have also entered into agreements to indemnify our directors and certain executive officers. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

State of Delaware - Search and Services/Information

TITLE 8

Corporations

CHAPTER 1. GENERAL CORPORATION LAW

Subchapter VI. Stock Transfers

§a; 201 Transfer of stock, stock certificates and uncertificated stock.

Except as otherwise provided in this chapter, the transfer of stock and the certificates of stock which represent the stock or uncertificated stock shall be governed by Article 8 of subtitle I of Title 6. To the extent that any provision of this chapter is inconsistent with any provision of subtitle I of Title 6, this chapter shall be controlling.

§a; 202 Restrictions on transfer and ownership of securities.

(a) A written restriction or restrictions on the transfer or registration of transfer of a security of a corporation, or on the amount of the corporation's securities that may be owned by any person or group of persons, if permitted by this section and noted conspicuously on the certificate or certificates representing the security or securities so restricted or, in the case of uncertificated shares, contained in the notice or notices sent pursuant to § 151(f) of this title, may be enforced against the holder of the restricted security or securities or any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate or certificates representing the security or securities so restricted or, in the case of uncertificated shares, contained in the notice or notices sent pursuant to § 151(f) of this title, a restriction, even though permitted by this section, is ineffective except against a person with actual knowledge of the restriction.

(b) A restriction on the transfer or registration of transfer of securities of a corporation, or on the amount of a corporation's securities that may be owned by any person or group of persons, may be imposed by the certificate of incorporation or by the bylaws or by an agreement among any number of security holders or among such holders and the corporation. No restrictions so imposed shall be binding with respect to securities issued prior to the adoption of the restriction unless the holders of the securities are parties to an agreement or voted in favor of the restriction.

(c) A restriction on the transfer or registration of transfer of securities of a corporation or on the amount of such securities that may be owned by any person or group of persons is permitted by this section if it:

(1) Obligates the holder of the restricted securities to offer to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing, a prior opportunity, to be exercised within a reasonable time, to acquire the restricted securities; o

(2) Obligates the corporation or any holder of securities of the corporation or any other person or any combination of the foregoing, to purchase the securities which are the subject of an agreement respecting the purchase and sale of the restricted securities; o

(3) Requires the corporation or the holders of any class or series of securities of the corporation to consent to any proposed transfer of the restricted securities or to approve the proposed transferee of the restricted securities, or to approve the amount of securities of the corporation that may be owned by any person or group of persons; o

(4) Obligates the holder of the restricted securities to sell or transfer an amount of restricted securities to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing, or causes or results in the automatic sale or transfer of an amount of restricted securities to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing; o

(5) Prohibits or restricts the transfer of the restricted securities to, or the ownership of restricted securities by, designated persons or classes of persons or groups of persons, and such designation is not manifestly unreasonable.

(d) Any restriction on the transfer or the registration of transfer of the securities of a corporation, or on the amount of securities of a corporation that may be owned by a person or group of persons, for any of the following purposes shall be conclusively presumed to be for a reasonable purpose:

(1) Maintaining any local, state, federal or foreign tax advantage to the corporation or its stockholders, including without limitation:

a. Maintaining the corporation's status as an electing small business corporation under subchapter S of the United States Internal Revenue Code [26 U. S.C. §a; 1371 et seq.], or

b. Maintaining or preserving any tax attribute (including without limitation net operating losses), or

c. Qualifying or maintaining the qualification of the corporation as a real estate investment trust pursuant to the United States Internal Revenue Code or regulations adopted pursuant to the United States Internal Revenue Code, or

(2) Maintaining any statutory or regulatory advantage or complying with any statutory or regulatory requirements under applicable local, state, federal or foreign law.

(e) Any other lawful restriction on transfer or registration of transfer of securities, or on the amount of securities that may be owned by any person or group of persons, is permitted by this section.

§a; 203 Business combinations with interested stockholders.

(a) Notwithstanding any other provisions of this chapter, a corporation shall not engage in any business combination with any interested stockholder for a period of 3 years following the time that such stockholder became an interested stockholder, unless:

(1) Prior to such time the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

(2) Upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; o

(3) At or subsequent to such time the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

(b) The restrictions contained in this section shall not apply if:

(1) The corporation's original certificate of incorporation contains a provision expressly electing not to be governed by this section;

(2) The corporation, by action of its board of directors, adopts an amendment to its bylaws within 90 days of February 2, 1988, expressly electing not to be governed by this section, which amendment shall not be further amended by the board of directors;

(3) The corporation, by action of its stockholders, adopts an amendment to its certificate of incorporation or bylaws expressly electing not to be governed by this section; provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation or bylaws must be approved by the affirmative vote of a majority of the shares entitled to vote. An amendment adopted pursuant to this paragraph shall be effective immediately in the case of a corporation that both (i) has never had a class of voting stock that falls within any of the 2 categories set out in paragraph (b)(4) of this section, and (ii) has not elected by a provision in its original certificate of incorporation or any amendment thereto to be governed by this section. In all other cases, an amendment adopted pursuant to this paragraph shall not be effective until 12 months after the adoption of such amendment and shall not apply to any business combination between such corporation and any person who became an interested stockholder of such corporation on or prior to such adoption. A bylaw amendment adopted pursuant to this paragraph shall not be further amended by the board of directors;

(4) The corporation does not have a class of voting stock that is: (i) Listed on a national securities exchange; or (ii) held of record by more than 2,000 stockholders, unless any of the foregoing results from action taken, directly or indirectly, by an interested stockholder or from a transaction in which a person becomes an interested stockholder;

(5) A stockholder becomes an interested stockholder inadvertently and (i) as soon as practicable divests itself of ownership of sufficient shares so that the stockholder ceases to be an interested stockholder; and (ii) would not, at any time within the 3-year period immediately prior to a business combination between the corporation and such stockholder, have been an interested stockholder but for the inadvertent acquisition of ownership;

(6) The business combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (i) constitutes 1 of the transactions described in the second sentence of this paragraph; (ii) is with or by a person who either was not an interested stockholder during the previous 3 years or who became an interested stockholder with the approval of the corporation's board of directors or during the period described in paragraph (b)(7) of this section; and (iii) is approved or not opposed by a majority of the members of the board of directors then in office (but not less than 1) who were directors prior to any person becoming an interested stockholder during the previous 3 years or were recommended for election or elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to (x) a merger or consolidation of the corporation (except for a merger in respect of which, pursuant to § 251(f) of this title, no vote of the stockholders of the corporation is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation (other than to any direct or indirect wholly-owned subsidiary or to the corporation) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting stock of the corporation. The corporation shall give not less than 20 days' notice to all interested stockholders prior to the consummation of any of the transactions described in clause (x) or (y) of the second sentence of this paragraph; o

(7) The business combination is with an interested stockholder who became an interested stockholder at a time when the restrictions contained in this section did not apply by reason of any of paragraphs (b)(1) through (4) of this section, provided, however, that this paragraph (b)(7) shall not apply if, at the time such interested stockholder became an interested stockholder, the corporation's certificate of incorporation contained a provision authorized by the last sentence of this subsection (b).

Notwithstanding paragraphs (b)(1), (2), (3) and (4) of this section, a corporation may elect by a provision of its original certificate of incorporation or any amendment thereto to be governed by this section; provided that any such amendment to the certificate of incorporation shall not apply to restrict a business combination between the corporation and an interested stockholder of the corporation if the interested stockholder became such prior to the effective date of the amendment.

(c) As used in this section only, the term:

(1) "Affiliate" means a person that directly, or indirectly through 1 or more intermediaries, controls, or is controlled by, or is under common control with, another person.

(2) "Associate," when used to indicate a relationship with any person, means: (i) Any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.

(3) "Business combination," when used in reference to any corporation and any interested stockholder of such corporation, means:

(i) Any merger or consolidation of the corporation or any direct or indirect majority-owned subsidiary of the corporation with (A) the interested stockholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation subsection (a) of this section is not applicable to the surviving entity;

(ii) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a series of transactions), except proportionately as a stockholder of such corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation;

(iii) Any transaction which results in the issuance or transfer by the corporation or by any direct or indirect majority-owned subsidiary of the corporation of any stock of the corporation or of such subsidiary to the interested stockholder, except: (A) Pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (B) pursuant to a merger under § 251(g) of this title; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of such corporation subsequent to the time the interested stockholder became such; (D) pursuant to an exchange offer by the corporation to purchase stock made on the same terms to all holders of said stock; or (E) any issuance or transfer of stock by the corporation; provided however, that in no case under items (C)-(E) of this subparagraph shall there be an increase in the interested stockholder's proportionate share of the stock of any class or series of the corporation or of the voting stock of the corporation;

(iv) Any transaction involving the corporation or any direct or indirect majority-owned subsidiary of the corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation or of any such subsidiary which is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; o

(v) Any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in paragraphs (c)(3)(i)-(iv) of this section) provided by or through the corporation or any direct or indirect majority-owned subsidiary.

(4) "Control," including the terms "controlling," "controlled by" and "under common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary; Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for 1 or more owners who do not individually or as a group have control of such entity.

(5) "Interested stockholder" means any person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the corporation, or (ii) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and associates of such person; provided, however, that the term "interested stockholder" shall not include (x) any person who (A) owned shares in excess of the 15% limitation set forth herein as of, or acquired such shares pursuant to a tender offer commenced prior to, December 23, 1987, or pursuant to an exchange offer announced prior to the aforesaid date and commenced within 90 days thereafter and either (I) continued to own shares in excess of such 15% limitation or would have but for action by the corporation or (II) is an affiliate or associate of the corporation and so continued (or so would have continued but for action by the corporation) to be the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such a person is an interested stockholder or (B) acquired said shares from a person described in item (A) of this paragraph by gift, inheritance or in a transaction in which no consideration was exchanged; or (y) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the corporation; provided that such person shall be an interested stockholder if thereafter such person acquires additional shares of voting stock of the corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of paragraph (9) of this subsection but shall not include any other unissued stock of such corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

(6) "Person" means any individual, corporation, partnership, unincorporated association or other entity.

(7) "Stock" means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.

(8) "Voting stock" means, with respect to any corporation, stock of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity. Every reference to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.

(9) "Owner," including the terms "own" and "owned," when used with respect to any stock, means a person that individually or with or through any of its affiliates or associates:

(i) Beneficially owns such stock, directly or indirectly; o

(ii) Has (A) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person's affiliates or associates until such tendered stock is accepted for purchase or exchange; or (B) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person's right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons; o

(iii) Has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of subparagraph (ii) of this paragraph), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.

(d) No provision of a certificate of incorporation or bylaw shall require, for any vote of stockholders required by this section, a greater vote of stockholders than that specified in this section.

(e) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all matters with respect to this section.

§a; 204 Ratification of defective corporate acts and stock [For application of this section, see 80 Del. Laws, c. 40, § 16]

(a) Subject to subsection (f) of this section, no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in this section or validated by the Court of Chancery in a proceeding brought under § 205 of this title.

(b)(1) In order to ratify 1 or more defective corporate acts pursuant to this section (other than the ratification of an election of the initial board of directors pursuant to paragraph (b)(2) of this section), the board of directors of the corporation shall adopt resolutions stating:

(A) The defective corporate act or acts to be ratified;

(B) The date of each defective corporate act or acts;

(C) If such defective corporate act or acts involved the issuance of shares of putative stock, the number and type of shares of putative stock issued and the date or dates upon which such putative shares were purported to have been issued;

(D) The nature of the failure of authorization in respect of each defective corporate act to be ratified; y

(E) That the board of directors approves the ratification of the defective corporate act or acts.

Such resolutions may also provide that, at any time before the validation effective time in respect of any defective corporate act set forth therein, notwithstanding the approval of the ratification of such defective corporate act by stockholders, the board of directors may abandon the ratification of such defective corporate act without further action of the stockholders. The quorum and voting requirements applicable to the ratification by the board of directors of any defective corporate act shall be the quorum and voting requirements applicable to the type of defective corporate act proposed to be ratified at the time the board adopts the resolutions ratifying the defective corporate act; provided that if the certificate of incorporation or bylaws of the corporation, any plan or agreement to which the corporation was a party or any provision of this title, in each case as in effect as of the time of the defective corporate act, would have required a larger number or portion of directors or of specified directors for a quorum to be present or to approve the defective corporate act, such larger number or portion of such directors or such specified directors shall be required for a quorum to be present or to adopt the resolutions to ratify the defective corporate act, as applicable, except that the presence or approval of any director elected, appointed or nominated by holders of any class or series of which no shares are then outstanding, or by any person that is no longer a stockholder, shall not be required.

(2) In order to ratify a defective corporate act in respect of the election of the initial board of directors of the corporation pursuant to § 108 of this title, a majority of the persons who, at the time the resolutions required by this paragraph (b)(2) of this section are adopted, are exercising the powers of directors under claim and color of an election or appointment as such may adopt resolutions stating:

(A) The name of the person or persons who first took action in the name of the corporation as the initial board of directors of the corporation;

(B) The earlier of the date on which such persons first took such action or were purported to have been elected as the initial board of directors; y

(C) That the ratification of the election of such person or persons as the initial board of directors is approved.

(c) Each defective corporate act ratified pursuant to paragraph (b)(1) of this section shall be submitted to stockholders for approval as provided in subsection (d) of this section, unless:

(1) No other provision of this title, and no provision of the certificate of incorporation or bylaws of the corporation, or of any plan or agreement to which the corporation is a party, would have required stockholder approval of such defective corporate act to be ratified, either at the time of such defective corporate act or at the time the board of directors adopts the resolutions ratifying such defective corporate act pursuant to paragraph (b)(1) of this section; y

(2) Such defective corporate act did not result from a failure to comply with § 203 of this title.

(d) If the ratification of a defective corporate act is required to be submitted to stockholders for approval pursuant to subsection (c) of this section, due notice of the time, place, if any, and purpose of the meeting shall be given at least 20 days before the date of the meeting to each holder of valid stock and putative stock, whether voting or nonvoting, at the address of such holder as it appears or most recently appeared, as appropriate, on the records of the corporation. The notice shall also be given to the holders of record of valid stock and putative stock, whether voting or nonvoting, as of the time of the defective corporate act, other than holders whose identities or addresses cannot be determined from the records of the corporation. The notice shall contain a copy of the resolutions adopted by the board of directors pursuant to paragraph (b)(1) of this section or the information required by paragraph (b)(1)(A) through (E) of this section and a statement that any claim that the defective corporate act or putative stock ratified hereunder is void or voidable due to the failure of authorization, or that the Court of Chancery should declare in its discretion that a ratification in accordance with this section not be effective or be effective only on certain conditions must be brought within 120 days from the applicable validation effective time. At such meeting, the quorum and voting requirements applicable to ratification of such defective corporate act shall be the quorum and voting requirements applicable to the type of defective corporate act proposed to be ratified at the time of the approval of the ratification, except that:

(1) If the certificate of incorporation or bylaws of the corporation, any plan or agreement to which the corporation was a party or any provision of this title in effect as of the time of the defective corporate act would have required a larger number or portion of stock or of any class or series thereof or of specified stockholders for a quorum to be present or to approve the defective corporate act, the presence or approval of such larger number or portion of stock or of such class or series thereof or of such specified stockholders shall be required for a quorum to be present or to approve the ratification of the defective corporate act, as applicable, except that the presence or approval of shares of any class or series of which no shares are then outstanding, or of any person that is no longer a stockholder, shall not be required;

(2) The approval by stockholders of the ratification of the election of a director shall require the affirmative vote of the majority of shares present at the meeting and entitled to vote on the election of such director, except that if the certificate of incorporation or bylaws of the corporation then in effect or in effect at the time of the defective election require or required a larger number or portion of stock or of any class or series thereof or of specified stockholders to elect such director, the affirmative vote of such larger number or portion of stock or of any class or series thereof or of such specified stockholders shall be required to ratify the election of such director, except that the presence or approval of shares of any class or series of which no shares are then outstanding, or of any person that is no longer a stockholder, shall not be required; y

(3) In the event of a failure of authorization resulting from failure to comply with the provisions of § 203 of this title, the ratification of the defective corporate act shall require the vote set forth in § 203(a)(3) of this title, regardless of whether such vote would have otherwise been required.

Shares of putative stock on the record date for determining stockholders entitled to vote on any matter submitted to stockholders pursuant to subsection (c) of this section (and without giving effect to any ratification that becomes effective after such record date) shall neither be entitled to vote nor counted for quorum purposes in any vote to ratify any defective corporate act.

(e) If a defective corporate act ratified pursuant to this section would have required under any other section of this title the filing of a certificate in accordance with § 103 of this title, then, whether or not a certificate was previously filed in respect of such defective corporate act and in lieu of filing the certificate otherwise required by this title, the corporation shall file a certificate of validation with respect to such defective corporate act in accordance with § 103 of this title. A separate certificate of validation shall be required for each defective corporate act requiring the filing of a certificate of validation under this section, except that (i) 2 or more defective corporate acts may be included in a single certificate of validation if the corporation filed, or to comply with this title would have filed, a single certificate under another provision of this title to effect such acts, and (ii) 2 or more overissues of shares of any class, classes or series of stock may be included in a single certificate of validation, provided that the increase in the number of authorized shares of each such class or series set forth in the certificate of validation shall be effective as of the date of the first such overissue. The certificate of validation shall set forth:

(1) Each defective corporate act that is the subject of the certificate of validation (including, in the case of any defective corporate act involving the issuance of shares of putative stock, the number and type of shares of putative stock issued and the date or dates upon which such putative shares were purported to have been issued), the date of such defective corporate act, and the nature of the failure of authorization in respect of such defective corporate act;

(2) A statement that such defective corporate act was ratified in accordance with this section, including the date on which the board of directors ratified such defective corporate act and the date, if any, on which the stockholders approved the ratification of such defective corporate act; y

(3) Information required by 1 of the following paragraphs:

a. If a certificate was previously filed under § 103 of this title in respect of such defective corporate act and no changes to such certificate are required to give effect to such defective corporate act in accordance with this section, the certificate of validation shall set forth (x) the name, title and filing date of the certificate previously filed and of any certificate of correction thereto and (y) a statement that a copy of the certificate previously filed, together with any certificate of correction thereto, is attached as an exhibit to the certificate of validation;

b. If a certificate was previously filed under § 103 of this title in respect of the defective corporate act and such certificate requires any change to give effect to the defective corporate act in accordance with this section (including a change to the date and time of the effectiveness of such certificate), the certificate of validation shall set forth (x) the name, title and filing date of the certificate so previously filed and of any certificate of correction thereto, (y) a statement that a certificate containing all of the information required to be included under the applicable section or sections of this title to give effect to the defective corporate act is attached as an exhibit to the certificate of validation, and (z) the date and time that such certificate shall be deemed to have become effective pursuant to this section; o

c. If a certificate was not previously filed under § 103 of this title in respect of the defective corporate act and the defective corporate act ratified pursuant to this section would have required under any other section of this title the filing of a certificate in accordance with § 103 of this title, the certificate of validation shall set forth (x) a statement that a certificate containing all of the information required to be included under the applicable section or sections of this title to give effect to the defective corporate act is attached as an exhibit to the certificate of validation, and (y) the date and time that such certificate shall be deemed to have become effective pursuant to this section.

A certificate attached to a certificate of validation pursuant to paragraph (e)(3)b. or c. of this section need not be separately executed and acknowledged and need not include any statement required by any other section of this title that such instrument has been approved and adopted in accordance with the provisions of such other section.

(f) From and after the validation effective time, unless otherwise determined in an action brought pursuant to § 205 of this title:

(1) Subject to the last sentence of subsection (d) of this section, each defective corporate act ratified in accordance with this section shall no longer be deemed void or voidable as a result of the failure of authorization described in the resolutions adopted pursuant to subsection (b) of this section and such effect shall be retroactive to the time of the defective corporate act; y

(2) Subject to the last sentence of subsection (d) of this section, each share or fraction of a share of putative stock issued or purportedly issued pursuant to any such defective corporate act shall no longer be deemed void or voidable and shall be deemed to be an identical share or fraction of a share of outstanding stock as of the time it was purportedly issued.

(g) In respect of each defective corporate act ratified by the board of directors pursuant to subsection (b) of this section, prompt notice of the ratification shall be given to all holders of valid stock and putative stock, whether voting or nonvoting, as of the date the board of directors adopts the resolutions approving such defective corporate act, or as of a date within 60 days after such date of adoption, as established by the board of directors, at the address of such holder as it appears or most recently appeared, as appropriate, on the records of the corporation. The notice shall also be given to the holders of record of valid stock and putative stock, whether voting or nonvoting, as of the time of the defective corporate act, other than holders whose identities or addresses cannot be determined from the records of the corporation. The notice shall contain a copy of the resolutions adopted pursuant to subsection (b) of this section or the information specified in paragraphs (b)(1)(A) through (E) or paragraphs (b)(2)(A) through (C) of this section, as applicable, and a statement that any claim that the defective corporate act or putative stock ratified hereunder is void or voidable due to the failure of authorization, or that the Court of Chancery should declare in its discretion that a ratification in accordance with this section not be effective or be effective only on certain conditions must be brought within 120 days from the later of the validation effective time or the time at which the notice required by this subsection is given. Notwithstanding the foregoing, (i) no such notice shall be required if notice of the ratification of the defective corporate act is to be given in accordance with subsection (d) of this section, and (ii) in the case of a corporation that has a class of stock listed on a national securities exchange, the notice required by this subsection may be deemed given if disclosed in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to §§ 13, 14 or 15(d) [15 U. S.C. §§ 78m, 77n or 78o(d)] of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, or the corresponding provisions of any subsequent United States federal securities laws, rules or regulations. If any defective corporate act has been approved by stockholders acting pursuant to § 228 of this title, the notice required by this subsection may be included in any notice required to be given pursuant to § 228(e) of this title and, if so given, shall be sent to the stockholders entitled thereto under § 228(e) and to all holders of valid and putative stock to whom notice would be required under this subsection if the defective corporate act had been approved at a meeting other than any stockholder who approved the action by consent in lieu of a meeting pursuant to § 228 of this title or any holder of putative stock who otherwise consented thereto in writing. Solely for purposes of subsection (d) of this section and this subsection, notice to holders of putative stock, and notice to holders of valid stock and putative stock as of the time of the defective corporate act, shall be treated as notice to holders of valid stock for purposes of §§ 222 and 228, 229, 230, 232 and 233 of this title.

(h) As used in this section and in § 205 of this title only, the term:

(1) "Defective corporate act" means an overissue, an election or appointment of directors that is void or voidable due to a failure of authorization, or any act or transaction purportedly taken by or on behalf of the corporation that is, and at the time such act or transaction was purportedly taken would have been, within the power of a corporation under subchapter II of this chapter, but is void or voidable due to a failure of authorization;

(2) "Failure of authorization" means: (i) the failure to authorize or effect an act or transaction in compliance with the provisions of this title, the certificate of incorporation or bylaws of the corporation, or any plan or agreement to which the corporation is a party, if and to the extent such failure would render such act or transaction void or voidable; or (ii) the failure of the board of directors or any officer of the corporation to authorize or approve any act or transaction taken by or on behalf of the corporation that would have required for its due authorization the approval of the board of directors or such officer;

(3) "Overissue" means the purported issuance of:

a. Shares of capital stock of a class or series in excess of the number of shares of such class or series the corporation has the power to issue under § 161 of this title at the time of such issuance; o

b. Shares of any class or series of capital stock that is not then authorized for issuance by the certificate of incorporation of the corporation;

(4) "Putative stock" means the shares of any class or series of capital stock of the corporation (including shares issued upon exercise of options, rights, warrants or other securities convertible into shares of capital stock of the corporation, or interests with respect thereto that were created or issued pursuant to a defective corporate act) that:

a. But for any failure of authorization, would constitute valid stock; o

b. Cannot be determined by the board of directors to be valid stock;

(5) "Time of the defective corporate act" means the date and time the defective corporate act was purported to have been taken;

(6) "Validation effective time" with respect to any defective corporate act ratified pursuant to this section means the latest of:

a. The time at which the defective corporate act submitted to the stockholders for approval pursuant to subsection (c) of this section is approved by such stockholders or if no such vote of stockholders is required to approve the ratification of the defective corporate act, the time at which the board of directors adopts the resolutions required by paragraph (b)(1) or (b)(2) of this section;

b. Where no certificate of validation is required to be filed pursuant to subsection (e) of this section, the time, if any, specified by the board of directors in the resolutions adopted pursuant to paragraph (b)(1) or (b)(2) of this section, which time shall not precede the time at which such resolutions are adopted; y

c. The time at which any certificate of validation filed pursuant to subsection (e) of this section shall become effective in accordance with § 103 of this title.

(7) "Valid stock" means the shares of any class or series of capital stock of the corporation that have been duly authorized and validly issued in accordance with this title.

In the absence of actual fraud in the transaction, the judgment of the board of directors that shares of stock are valid stock or putative stock shall be conclusive, unless otherwise determined by the Court of Chancery in a proceeding brought pursuant to § 205 of this title.

(i) Ratification under this section or validation under § 205 of this title shall not be deemed to be the exclusive means of ratifying or validating any act or transaction taken by or on behalf of the corporation, including any defective corporate act, or any issuance of stock, including any putative stock, or of adopting or endorsing any act or transaction taken by or in the name of the corporation prior to the commencement of its existence, and the absence or failure of ratification in accordance with either this section or validation under § 205 of this title shall not, of itself, affect the validity or effectiveness of any act or transaction or the issuance of any stock properly ratified under common law or otherwise, nor shall it create a presumption that any such act or transaction is or was a defective corporate act or that such stock is void or voidable.

§a; 205 Proceedings regarding validity of defective corporate acts and stock [For application of this section, see 80 Del. Laws, c. 40, § 16]

(a) Subject to subsection (f) of this section, upon application by the corporation, any successor entity to the corporation, any member of the board of directors, any record or beneficial holder of valid stock or putative stock, any record or beneficial holder of valid or putative stock as of the time of a defective corporate act ratified pursuant to § 204 of this title, or any other person claiming to be substantially and adversely affected by a ratification pursuant to § 204 of this title, the Court of Chancery may:

(1) Determine the validity and effectiveness of any defective corporate act ratified pursuant to § 204 of this title;

(2) Determine the validity and effectiveness of the ratification of any defective corporate act pursuant to § 204 of this title;

(3) Determine the validity and effectiveness of any defective corporate act not ratified or not ratified effectively pursuant to § 204 of this title;

(4) Determine the validity of any corporate act or transaction and any stock, rights or options to acquire stock; y

(5) Modify or waive any of the procedures set forth in § 204 of this title to ratify a defective corporate act.

(b) In connection with an action under this section, the Court of Chancery may:

(1) Declare that a ratification in accordance with and pursuant to § 204 of this title is not effective or shall only be effective at a time or upon conditions established by the Court;

(2) Validate and declare effective any defective corporate act or putative stock and impose conditions upon such validation by the Court;

(3) Require measures to remedy or avoid harm to any person substantially and adversely affected by a ratification pursuant to § 204 of this title or from any order of the Court pursuant to this section, excluding any harm that would have resulted if the defective corporate act had been valid when approved or effectuated;

(4) Order the Secretary of State to accept an instrument for filing with an effective time specified by the Court, which effective time may be prior or subsequent to the time of such order, provided that the filing date of such instrument shall be determined in accordance with § 103(c)(3) of this title;

(5) Approve a stock ledger for the corporation that includes any stock ratified or validated in accordance with this section or with § 204 of this title;

(6) Declare that shares of putative stock are shares of valid stock or require a corporation to issue and deliver shares of valid stock in place of any shares of putative stock;

(7) Order that a meeting of holders of valid stock or putative stock be held and exercise the powers provided to the Court under § 227 of this title with respect to such a meeting;

(8) Declare that a defective corporate act validated by the Court shall be effective as of the time of the defective corporate act or at such other time as the Court shall determine;

(9) Declare that putative stock validated by the Court shall be deemed to be an identical share or fraction of a share of valid stock as of the time originally issued or purportedly issued or at such other time as the Court shall determine; y

(10) Make such other orders regarding such matters as it deems proper under the circumstances.

(c) Service of the application under subsection (a) of this section upon the registered agent of the corporation shall be deemed to be service upon the corporation, and no other party need be joined in order for the Court of Chancery to adjudicate the matter. In an action filed by the corporation, the Court may require notice of the action be provided to other persons specified by the Court and permit such other persons to intervene in the action.

(d) In connection with the resolution of matters pursuant to subsections (a) and (b) of this section, the Court of Chancery may consider the following:

(1) Whether the defective corporate act was originally approved or effectuated with the belief that the approval or effectuation was in compliance with the provisions of this title, the certificate of incorporation or bylaws of the corporation;

(2) Whether the corporation and board of directors has treated the defective corporate act as a valid act or transaction and whether any person has acted in reliance on the public record that such defective corporate act was valid;

(3) Whether any person will be or was harmed by the ratification or validation of the defective corporate act, excluding any harm that would have resulted if the defective corporate act had been valid when approved or effectuated;

(4) Whether any person will be harmed by the failure to ratify or validate the defective corporate act; y

(5) Any other factors or considerations the Court deems just and equitable.

(e) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions brought under this section.

(f) Notwithstanding any other provision of this section, no action asserting:

(1) That a defective corporate act or putative stock ratified in accordance with § 204 of this title is void or voidable due to a failure of authorization identified in the resolution adopted in accordance with 204(b) of this title; o

(2) That the Court of Chancery should declare in its discretion that a ratification in accordance with § 204 of this title not be effective or be effective only on certain conditions,

may be brought after the expiration of 120 days from the later of the validation effective time and the time notice, if any, that is required to be given pursuant to § 204(g) of this title is given with respect to such ratification, except that this subsection shall not apply to an action asserting that a ratification was not accomplished in accordance with § 204 of this title or to any person to whom notice of the ratification was required to have been given pursuant to § 204(d) or (g) of this title, but to whom such notice was not given.

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What Is the Difference Between Warrants and Options?

What is the difference between warrants and options? Is there a difference?

Warrants and stock options are similar in that they are both contractual rights to buy stock of a company, at a price fixed in the contract, and for the period specified in the contract. However, warrants and options are typically thought of and referred to differently for a number of reasons.

The primary reason that they are thought of and referred to differently is that stock options are typically associated with compensatory services while warrants are typically associated with investment transactions.

Por ejemplo . an employee or consultant would typically receive stock options. An investor in a convertible note and warrant round would typically receive warrants.

A compensatory options typically has a completely different contractual look and feel than an investment warrant. For example, a compensatory option is usually awarded under an equity incentive plan, and the option agreement is governed by the plan; the compensatory option will usually have vesting, and repurchase rights on termination of service. A warrant won’t come granted under an equity incentive plan, and typically does not come with vesting.

In addition, the tax differences between a compensatory stock option and an investment warrant are dramatically different.

Questions and Answers

I am frequently asked the following question: Can a service provider receive a warrant in connection with the provision of services?

The short answer is yes, but it is important to keep in mind that a warrant received in connection with the performance of services will be taxed just like a compensatory stock option.

In other words, unless the warrant qualifies under the incentive stock option rules (which it likely would not) the following apply:

to avoid adverse tax consequences under Section 409A. the warrant would generally must have an exercise price equal to the fair market value of the underlying stock on the date of grant;

upon exercise, the excess of the fair market value of the shares received over the exercise price would be taxed as ordinary compensation income;

if the recipient was an employee, upon exercise income and employment tax withholding would be required; y

if the service provider was an independent contractor and not an employee, the income, although not subject to income and employment tax withholding, would probably have to be reported to the IRS on a Form 1099.

Taxes

A warrant is not taxed as described above if received in connection with an investment or a loan and not in connection with the provision of services. There is generally no tax owed as a result of the exercise of a non-compensatory warrant. However, depending on the circumstances in which the warrant is received, there can be tax owed before the warrant is exercised.

Por ejemplo . a warrant issued in connection with a note will be considered to give rise to original issue discount. which is generally required to be taken into income over the term of the note. You should consult with a tax advisor about any warrants received in connection with an investment to determine the correct tax treatment.

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This website is made available by the lawyer or law firm publisher for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. Usando este sitio del blog usted entiende que no hay relación del cliente del abogado entre usted y el editor del Web site. El sitio web no debe utilizarse como sustituto del asesoramiento legal competente de un abogado profesional con licencia en su estado.

Pensamientos y comentarios sobre la ley de startups. Traído a usted por Davis Wright Tremaine

Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U. S.C. 1001 and 15 U. S.C. 78ff(a).

Represents shares of common stock received upon vesting of a performance share unit award granted on May 21, 2015 pursuant to the Company's 2015 Performance Share Unit Plan and partially earned on December 31, 2015 based on the satisfaction of certain performance-based vesting requirements. The performance share units vested on December 31, 2015 and the shares of common stock were delivered on February 17, 2016.

Represents shares sold pursuant to a Sell-to-Cover Rule 10b5-1 Plan to pay withholding taxes due in connection with the vesting of certain restricted stock units on January 1, 2016 and January 2, 2016, which such shares were delivered on January 15, 2016.

The price reported in Column 4 is a weighted average price. These shares were sold in multiple transactions at prices ranging from $5.65 to $5.74, inclusive. The reporting person undertakes to provide to Energous Corporation, any security holder of Energous Corporation, or the staff of the Securities and Exchange Commission, upon request, full information regarding the number of shares purchased at each separate price within the ranges set forth in this footnote (3) to this Form 4.

Each performance share unit represents a contingent right to receive one share of common stock.

Represents a performance share unit award granted on May 21, 2015 pursuant to the Company's 2015 Performance Share Unit Plan and partially earned on December 31, 2015 based on the satisfaction of certain performance-based vesting requirements. The performance share units vest on December 31, 2018.

Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.

Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number.

GEN TRAK INC - SB-2/A - 19990716 - STOCK_PLANS

1998 Stock Option Plan

On September 30, 1998, our board of directors approved the 1998 Stock Option Plan and reserved 100,000 shares of common stock for issuance upon exercise of options granted under the Stock Option Plan. In the fourth quarter of 1998, the board issued options for a total of 60,000 shares to ten people. This total included fully vested options for 10,000 shares issued to Mr. Nichols, our Vice President and Controller, and fully vested options for 5,000 shares to Dr. Ertingshausen, our new director. The exercise price of these options is $3.00 per share. These options are exercisable for five years after grant.

The purposes of the Stock Option Plan are

o to provide incentives and rewards to those employees who are in a position to contribute to our long-term growth and profitability;

o to attract, retain and motivate personnel with experience and ability;

o to make our compensation program competitive with those of other employers.

We anticipate we will benefit from the added interest which such personnel will have in the success of Gen Trak as a result of their proprietary interest.

The Stock Option Plan presently is administered by the board of directors. The board may establish a stock option committee consisting of at least two directors, to administer the Stock Option Plan.

The board or stock option committee is authorized to select the employees, directors, advisors and consultants who will receive options. The board or stock option committee will also determine the number of shares each person may acquire, and the terms and conditions of the options. Generally, the interpretation and construction of any provision of the Stock Option Plan or any option granted thereunder is within the discretion of the board or stock option committee.

The Stock Option Plan provides that options may or may not be incentive stock options within the meaning of Section 422 of the Internal Revenue Code. Only our employees are eligible to receive incentive stock options. Employees and non-employee directors, advisors and consultants are eligible to receive options which are not incentive stock options. Incentive stock options receive favorable treatment under federal tax laws. The options granted by the board in the fourth quarter of 1998 are not incentive stock options, but are non-qualified stock options.

An option may not be transferred by the optionee, other than to his heirs. Options are exercisable only by the optionee during his lifetime or, in the event of his death, by his heirs.

Transactional Success Fee Arrangements

We have arrangements to pay the following individuals a "success" fee if Gen Trak completes certain transactions:

o Arthur Boyce, in connection with his employment agreement;

o All of the members of our board of directors;

o Norbert Zeelander, in connection with his consulting agreement with Gen Trak.

These "success" fees are payable in the following events:

o Our acquisition of assets from another business, other than in the ordinary course of our business;

o Our sale of all or a material part of our assets other than in the ordinary course of our business; o

o Sale by our shareholders of more than 50% of the outstanding stock of Gen Trak.

The "success" fees are a percentage of the total amount of the transaction. The success fees begin at 5% of the first of $5,000,000 and are smaller percentages of additional amounts over $5,000,000. These fees are payable only if the other party to a transaction was introduced to Gen Trak by the individual claiming the success fee.

We do not currently have any plans, arrangements, agreements or understandings relating to the sale of Gen Trak or any of its assets, nor are we seeking a merger partner. In no case are activities relating to identifying a transaction which would trigger the right to a success fee the primary component of the individual's relationship with us. These agreements were entered into primarily as an incentive for individuals otherwise involved with us to recognize and bring opportunities to our attention. In the event we seek a merger partner after the date of this prospectus, it is expected that the underwriter would have a substantial role in identifying and negotiating with any potential merger partner. We have an agreement with the underwriter regarding fees to be paid in connection with a merger or acquisition.

Exercise An Option

Exercise An Option - Introduction

In Options Trading, exercising an option means to enforce your rights to buy the underlying stock if you are holding call options or to sell the underlying stock if you are holding put options.

Sí, las opciones de compra le da el derecho de comprar la acción subyacente a un precio específico, mientras que las opciones de venta le dan el derecho de vender la acción subyacente a un precio específico, pero ese derecho no ocurre automáticamente antes de la expiración de la opción. Thats right, options are what is known in finance as a "Contingent Claim", which means that a claim is contingent on the holder. The holder decides whether to enforce that right or not and that is known as to "exercise an option".

Este tutorial cubrirá cómo ejercer las opciones, qué sucede cuando se ejerce las opciones y por qué los operadores de opciones deben ejercer opciones.

Explosive Options Trading Mentor Find Out How My Students Make Over 43% Profit Per Trade, Confidently, Trading Options In The US Market Even In a Recession!

How To Exercise An Option?

Exercising an option is as easy as clicking a button or a link in your trading interface if you are using an online options trading broker. Al hacer clic en ese botón se informa a su corredor de su intención de ejercer una opción que, a continuación, establece una serie compleja de acciones que cubriremos en una sección posterior más adelante. Cuando se ejerce una opción de llamada. Usted comprará la acción subyacente al precio de ejercicio de la opción de compra. For instance, if you exercise 1 contract of a $40 strike price call option, you would buy 100 shares of the underlying stock at $40 no matter what price it is at the time of exercise. This price is known as the "Exercise Price". Cuando se ejerce una opción de venta. Venderá sus acciones al precio de ejercicio de las opciones de venta. For instance, if you exercise 1 contract of $40 strike price put option, you would be selling 100 shares of the underlying stock at $40 no matter what price it is at the time of exercise. Si usted no tiene la acción subyacente, usted terminará para arriba con una posición común corta. That's right, you cannot exercise an option unless you are the holder of a long position. Si es corto un contrato de opciones, no puede ejercer la opción.

Tenga en cuenta que sólo American Style Options puede ejercitarse antes de la expiración. Opciones de Estilo Europeo no ofrecen tal flexibilidad. La mayoría de las opciones negociadas en bolsa en todo el mundo son opciones de estilo americano. Todas las opciones de acciones negociadas públicamente en el mercado de EE. UU. son opciones de estilo americano también. Algunas opciones de índice, como las opciones de índice Nasdaq 100, son opciones de estilo europeo.

Difference between Exercise and Assignment

You exercise an option when you are the holder of an option and you choose to exercise the rights of the options that you own. When that happens the person who sells you the option recieves an "assignment ". Sí, la asignación es cuando las opciones que usted escribió a través de una venta para abrir el pedido ha sido ejercida por el comprador de la opción. El procedimiento exacto es mucho más complejo que eso, pero esa es la diferencia entre un ejercicio y una asignación en el comercio de opciones.

What Happens When an Option is Exercised?

When you exercise an option, a request is sent to your options trading broker that sets off a whole chain of events leading to the eventual resolution of an options contract that will cease to exist after that.

When the exercise request is received by your options broker, that request to exercise an option is sent to the Options Clearing Corporation or OCC in the form of an "Exercise Notice". La Corporación de compensación de opciones es la entidad responsable de asegurar que todos los contratos de opciones se liquidan con éxito cuando se ejercen y es la organización de compensación más grande del mundo para instrumentos financieros derivados. Una vez que la OCC reciba la notificación de ejercicio, la OCC seleccionará al azar a una firma miembro que está en corto en ese mismo contrato de opciones que se ejerce para la asignación. La empresa seleccionada cumple los términos del contrato de opciones entregando la acción subyacente si se trata de una opción de compra que se ejerce o pagando la acción subyacente si se trata de una opción de venta que se está ejerciendo. Después de eso, la empresa seleccionada selecciona uno o más de sus titulares de cuenta que son cortos que el mismo contrato de opciones para la asignación. The delivery of the stocks or the paying for the stocks by the firm would come from these selected assignees. Cada corredor o empresa tendría su propio procedimiento para seleccionar las cuentas para la asignación, pero el método más comúnmente utilizado es la selección al azar. Todo este proceso complejo se lleva a cabo en pocos minutos con el resultado neto reflejado en su cuenta.

Process When You Exercise An Option

As you can see from the above process, it is really the OCC that is fulfilling the other side of the contract when you exercise an option. No existe una conexión directa entre usted y el escritor de opciones. This is how the OCC guarantees performance on every options contract; by obligating itself for all fulfillments. Después de eso, la OCC selecciona a las firmas miembros para la asignación con el fin de cerrar todo el proceso. Como tal, no hay realmente ninguna preocupación acerca de si o no el partido que toma el lado opuesto de su opción tiene las acciones o el dinero para cumplir con su ejercicio porque es realmente el OCC que se trata con usted, no otro operador de opciones.

Exercise An Option - Case Study

John owns 2 contracts of AAPL's $190 strike price call options and has $40,000 cash in his account. Peter owns 2 contracts of AAPL's $190 strike price put options and has 200 shares of AAPL in his account.

Tanto Juan como Pedro deciden ejercer sus opciones.

At the end of the exercise, John's account now consists of 200 shares of AAPL stocks bought at $190 per share for a total of $38,000 and remaining cash of $2000. Peter's account now consists of $38,000 and no shares as he sells his 200 shares of AAPL at $190 per share in accordance with the terms of the put options.

Why Should Options Traders Exercise Options?

The question that most options trading beginners ask is whether or not it is necessary to exercise an option in order to take profit on it? Well, the answer simply is, No. In fact, most options traders don't exercise options in order to take profit. According to the OCC, for the year of 2008, 69.4% of all options were closed out before they expire. This means that 69.4% of options traders simply sell their options in order to take profit or cut loss. Only 11.6% of all options contracts were exercised with only 19% of all options contracts expiring worthless. Of course this statistic totally busted the myth that more than 80% of all options contracts expire worthless which has been the basis behind some theories such as Options Pain.

De hecho, tomar ganancias en una posición de opciones rentables mediante la venta de la posición en lugar de ejercer en realidad puede ser más rentable si no están usando ninguna estrategia de negociación de opciones que depende de la decadencia del tiempo para el beneficio. Esto es porque aparte del valor ganado en el valor intrínseco. La opción probablemente todavía tendría algún valor extrínseco a la izquierda. Si usted ejercita tal opción, perdería instantáneamente todo el valor extrínseco restante en la opción.

Lets assume that you bought AAPL's $170 strike price call options for $1.30 when it was trading at $170.

AAPL rallies to $190 and your $170 strike price call options are now worth $21.00.

If you exercised the option and bought AAPL for $170 and then sold it for the prevailing price of $190, you would make a total of $190 - $170 - $1.30 = $18.70.

However, if you simply sold the options off at its current price of $21.00, you would have make a total of $21.00 - $1.30 = $19.70.

¿Ver? You would have made $1 more if you sold the option rather than exercise it in this example. This is because the options still have $1 extrinsic value left when AAPL rallies to $190. The above calculation did not take into consideration the fact that the process of exercising the options and then selling the stocks at market price separately incurs a lot more commissions than just selling the options outright.

So, why should any options traders exercise an option?

Well, there are two main reasons why an options trader would exercise an option. En primer lugar, que las opciones de comerciante quiere pasar de una apuesta a corto plazo opciones a una inversión a largo plazo en el stock subyacente. A veces una acción podría parecer tan prometedor para el largo plazo que el comerciante de opciones en realidad quiere mantenerlo para fines de inversión a largo plazo. Ésa podría ser la motivación principal detrás de ejercitar una opción de la llamada. En segundo lugar, el comerciante de opciones tiene las existencias de las que quiere deshacerse de un buen precio. Que podría ser la principal motivación detrás de ejercer una opción de venta.

Exercise An Option - Advantages

. Útil cuando se desea cambiar de poseer las opciones a poseer las existencias en sí para la inversión a largo plazo. Useful when you wish to sell your stocks at a favorable price by exercising a put option. Cuando el dividendo pagado al poseer la acción es mayor que el valor extrínseco restante de una opción de compra.

Exercise An Option - Disadvantages

. Todo el valor extrínseco restante en la opción se evapora y el contrato de opciones deja de existir. Como tal, el ejercicio de una opción no puede ser tan rentable como simplemente la venta de un contrato de opciones rentables de forma absoluta. Commissions are sometimes higher when you exercise an option than if you simply sell the option.

Exercise An Option Questions

Salary Deferral Arrangements

Christina Medland, Andrew Stancel, "Tax-effective Risk-adjusted Incentive Arrangements for Public Companies", Taxation of Executive Compensation and Retirement . Vol. 22, No. 9, May 2011: includes overview of cash settled performance share unit plans.

Christina Medland, Jennifer Sandford, "Tax Treatment of Share-Based Compensation", Taxation of Executive Compensation and Retirement . September 2005, p. 583.

Christina H. Medland, "The Potential Effect of the American Jobs Creation Act on Canadian Deferred Compensation Plans", Taxation of Executive Compensation and Retirement . Vol. 16, No. 5, December/January 2005, p. 491.

Simon Thompson, "Canada's Income Tax Rules for Non-Registered Plans: Implications for Foreign Pensions", A Journal of International Taxation . Vol. 15, No. 10, October 2004, p. 34.

Anu Nijhawan, "The Limitations of Deferred Share Unit Plans", Taxation of Executive Compensation . Vol. 16, No. 1, July/August 2004, p. 440.

Christina H. Medland, Ronit Florence, "Pricing of Deferred Share Units - Part 1", Taxation of Executive Compensation and Retirement . Vol. 12, No. 1, July/August 2000, p. 303.

S. Ungurean, "A Deferred Share Unit Plan Receives Revenue Canada Approval", Taxation of Executive Compensation and Retirement . Vol. 9, No. 2, September 1997, p. 19.

V. Bjorndahl, "Share Appreciation Rights (SARs): Possible Risks and Concerns", Taxation of Executive Compensation and Retirement . Vol. 8, No. 8, April 1997, p. 275.

P. Fritze, "Trends in deferred compensation: Limitations and Opportunities", Taxation of Executive Compensation and Retirement . October 1996, p. 195.

Holmes, "Stock-Based Deferred Compensation May be Provided to Employees of Private Corporations", Taxation of Executive Compensation and Retirement . December 1990/January 1991, p. 375.

"Employer's Contribution Towards Stock Plan Allows Tax Deferral for Employee", Taxation of Executive Compensation and Retirement . March 1990, p. 248.

Philp, "Executive and Employee Compensation After Tax Reform", 1988 Conference Report . do. 28.

Gordon, "Deferred Compensation", 1986 Conference Report . do. 34.

Paragraph (k)

Administrative Policy

24 November 2015 CTF Annual Roundtable, Q. 2

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Attribution Rules . (§ 382(l)(3) and Reg. § 1.382-2T(b))

Attribution From Entities . (Reg. § 1.382-2T(h)(12))

In determining whether an ownership change has occurred, the constructive ownership rules of § 318, with several modifications, are applied (§ 382(l)(3)).

The rules for attributing ownership of stock (within the meaning of § 382(k)(6)) from corporations to their shareholders are applied without regard to the extent of the shareholders' ownership in the corporation.

Any stock owned by a corporation is treated as being owned proportionately by its shareholders.

Any stock attributed to a corporation's shareholders is not treated as being held by such corporation.

Stock attributed from a partnership, estate or trust similarly shall not be treated as being held by such entity.

The effect of the entity attribution rules is to prevent application of the special limitation after an acquisition that does not result in a more than 50% change in the ultimate beneficial ownership of a loss corporation.

Conversely, the entity attribution rules will result in an ownership change where more than 50% of a loss corporation's stock is acquired indirectly through an acquisition of stock in the corporation's parent corporation.

Example 17 . L corporation is publicly traded; no shareholder owns as much as 5%. P corporation is publicly traded; no shareholder owns as much as 5%. On January 1, 1998, P corporation purchases 100% of L corporation stock on the open market. The L stock owned by P is attributed to the shareholders of P, all of whom are less than 5% shareholders who are treated as a single, separate 5% shareholder under § 382(g)(4)(C). Accordingly, there has been an ownership change of L, because the percentage of stock owned by the P shareholders after the purchase (100%) has increased by more than 50 percentage points over the lowest percentage of L stock owned by that group at any time during the testing period (0% prior to January 1, 1998).

Family Attribution Rules . (Reg. § 1.382-2T(h)(16))

The family attribution rules of § 318(a)(1) and § 318(a)(5) do not apply, but an individual, his spouse, his parents, children, and his grandparents are treated as a single shareholder.

If an individual may be treated as a member of more than one family and each family that is treated as one individual is a 5% shareholder, then the individual is treated as a member of the family that results in the lowest increase in ownership among 5% shareholders.

Option Attribution . (Reg. § 1.382-2T(h)(4))

General Rules .

Solely for the purpose of determining whether there is an ownership change on any testing date ,

Stock of the loss corporation that is subject to an option

Shall be treated as acquired on any such date . pursuant to an exercise of the option by its owner on that date ,

If such deemed exercise would result in an ownership change.

The preceding sentence shall be applied separately with respect to

Each class of options (i. e. options with terms that are identical, issued by the same issuer, and issued on the same date) owned by each 5% shareholder (or person who would be a 5% shareholder if the option were treated as exercised), and

Each 5% shareholder, each owner of an option who would be a 5% shareholder if the option were treated as exercised, and each combination of such persons.

Contingencies - Generally the extent to which an option is contingent or otherwise not currently exercisable shall be disregarded for purposes of this section.

Series of Options - For purposes of this section, an option to acquire an option with respect to the stock of the loss corporation, and each one of a series of such options, shall be considered as an option to acquire such stock.

Interests that Are Similar to Options - For purposes of this sections,

Any interest which is similar to an option including, but not limited to, a convertible debt instrument, an instrument other than debt that is convertible into stock, a put, a stock interest subject to risk of forfeiture, and a contract to acquire or sell stock,

Shall be treated as an option.

Actual Exercise of Options .

In General - The actual exercise of any option in existence immediately before and after an ownership change,

Whether or not the option was treated as exercised in connection with the ownership change

Shall be disregarded for purposes of this section,

But only if the option is exercised by the 5% shareholder (or person who would have been a 5% shareholder if the options owned by such person had been exercised immediately before the ownership change) who owned the option immediately before and after such ownership change.

Actual Exercise Within 120 Days of Deemed Exercise .

If the actual exercise of an option occurs on or before the end of the period which is 120 days after the date on which the option is treated as exercised, the loss corporation may elect to treat this section as not applying to such option and take into account only the acquisition of loss corporation stock resulting from the actual exercise of the option.

Such election shall have no effect on the determination of whether an ownership change occurs, but shall apply only for the purpose of determining the date on which the change date occurs.

Effect of Deemed Exercise of Options on the Outstanding Stock of the Loss Corporation .

Right of Obligation to Issue Stock - Solely for purposes of determining whether an ownership change has occurred, the deemed exercise of an option with respect to unissued stock (or treasury stock) of a corporation shall result in a corresponding increase in the amount of its total outstanding stock.

Right or Obligation to Acquire Outstanding Stock by the Loss Corporation - Solely for purposes of determining whether an ownership change has occurred, the deemed exercise of a right to transfer outstanding stock to the issuing corporation (or a right of the issuing corporation to acquire its stock) shall result in a corresponding decrease in the amount of its total outstanding stock.

Effect on Value of Old Loss Corporation - The deemed exercise of an option with respect to unissued stock (or treasury stock) shall have no effect on the determination of the value of the old loss corporation and the computation of the § 382 limitation. See § 382 (l)(1)(B) disregarding capital contributions made during the two-year period preceding the change date for purposes of computing the § 382 limitation.

Options That Lapse Or Are Forfeited - If an option that is treated as exercised lapses unexercised or the owner of such option irrevocably forfeits his right to acquire stock pursuant to the option, the option shall be treated for purposes of this section as if it never had been issued.

In that case, the loss corporation may file an amended return for prior years (subject to any applicable statute of limitations) if the § 382 limitation was thus inapplicable.

If an income tax return has not been filed by the date that the option (or options) lapses or is irrevocably forfeited, the loss corporation may ignore such option (or options) in determining whether an ownership change has occurred.

Options Not Subject to Attribution - Option attribution does not apply to:

Long-Held Options With Respect to Actively Traded Stock - Any option with respect to stock of the loss corporation which stock is actively traded on an established securities market (within the meaning of § 1273(b)) for which market quotations are readily available, if such option has been continuously owned by the same 5% shareholder (or a person who would be a 5% shareholder if such option were exercised) for at least three years . but only until the earlier of such time as

The option is transferred by or to a 5% shareholder (or a person who would be a 5% shareholder if such option were exercised), or

The fair market value of the stock that is subject to the option exceeds the exercise price for such stock on the testing date.

Options with respect to the stock of a loss corporation that are assumed (or substituted) in a reorganization and converted into options with respect to the stock of another party to the reorganization shall not be treated as transferred, provided that there are no changes in the terms of the options, other than the stock that may be acquired pursuant to the option is that of another party of the reorganization and the amount of stock subject to the option is adjusted only to reflect the exchange ratio for the exchange of stock of the loss corporation in the reorganization.

Right to Receive or Obligation to Issue a Fixed Dollar Amount of Value of Stock Upon Maturity of Certain Debt .

Any right to receive or obligation to issue stock pursuant to the terms of a debt instrument that, in economic terms, is equivalent to nonconvertible debt because the right to receive stock of the issuer of a fixed dollar amount is based upon the fair market value for such stock determined at or about the date the stock is transferred pursuant to such right or obligation (i. e. the amount of the stock transferred pursuant to the option is equal to a fixed dollar amount, divided by the value of each share of such stock at or about the date of the stock transfer).

This paragraph shall not apply if the method for determining the fair market value of the stock of the issuer is intended to or, in fact, provides the owner of the debt instrument with a participation in any appreciation of any stock of the issuer.

Right or Obligation to Redeem Stock of the Loss Corporation - Any right or obligation of the loss corporation to redeem any of its stock at the time such stock is issued, but only to the extent such stock is issued to persons who are not 5% shareholders immediately before the issuance.

Options Exercisable Only Upon Death, Disability or Mental Incompetency - Any option entered into between owners of the same entity (or an owner and the entity in which the owner has a direct ownership interest) with respect to such owner's ownership interest in the entity that is exercisable only upon the death, complete disability or mental incompetency of such owner.

Right to Receive or Obligation to Issue Stock as Interest or Dividends . Any right to receive or obligation to issue stock of a corporation in payment of interest or dividends by the issuing corporation.

Options Outstanding Following an Ownership Change .

In General - Any option in existence immediately before or after an ownership change, whether or not the option was treated as exercised in connection with the ownership change, but only so long as the option continues to be owned by the 5% shareholder (or person who was treated as a 5% shareholder) who owned the option immediately before and after such ownership change.

Agreement to Acquire or Sell Stock by Certain Shareholders - Any option between noncorporate owners who actively participate in management, the option is issued when the corporation is not a loss corporation and is exercisable solely upon retirement of such owner.

Options Issued or Transferred Before January 1, 1987 .

Options Issued Before May 6, 1986 - An option issued before May 6, 1986, is subject to the rules of this section only if it is transferred by (or to) a 5% shareholder (or a person who would be a 5% shareholder if the option were treated as exercised) on or after such date.

In all other cases, such an option shall not be subject to this section, but will be subject to this section upon exercise.

Thus, for example, a warrant to acquire stock of the loss corporation issued before May 6, 1986 shall not be subject to this section unless the warrant is transferred by (or to) a 5% shareholder.

The exercise of such a warrant, however, would be taken into account under this section.

May 6, 1986 - September 18, 1986 - An option issued or transferred on or after May 6, 1986, and before September 18, 1986, is subject to the rules of this section.

September 18, 1986 - December 31, 1986 - An option issued or transferred on or after September 18, 1986, and before January 1, 1987, is subject to the rules of this section, except that the option shall be treated for purposes of this section as if it never had been issued in the event that either:

The option lapses unexercised or is irrevocably forfeited by the holder thereof, or

On the date the option was issued, there was no significant likelihood that such option would be exercised within the five-year period from the date of such issuance and a purpose for the issuance of the option was to cause an ownership change prior to January 1, 1987.

Copyright y copia; 2015 Taxhub. net.

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On September 30 of the current year, a U. S. company entered into a futures contract to hedge the value of its inventory. The inventory was reported on the balance sheet at its cost of $250,000 on September 30. On December 31, the market value of the inventory had decreased to $175,000. The entity had a gain of $74,500 on the futures contract at December 31. What is the proper accounting for this hedging transaction on the December 31 year-end financial statements, assuming that the hedge is considered to be highly effective? a. Other comprehensive income will increase by $74,500. segundo. Other comprehensive income will decrease by $500. do. Net income will increase by $74,500. re. Net income will decrease by $500.

Choice "d" is correct. This hedge is classified as a fair value hedge because it is being used to hedge the value of the inventory. Therefore, the gain on the fair value hedge must be recognized in earnings, along with the loss on the inventory, for a net decrease in net income of $500: Gain on derivative= $74,500 Loss on inventory= $175,000 FV - $250,000 BV = $(75,000) Net loss on fair value hedge= $(75,000) loss+ $74,500 gain= $(500) loss

In order for a financial instrument to be a derivative for accounting purposes, the financial instrument must: I. Have one or more underlyings. II. Require an initial net investment. a. I only. segundo. II only. do. Both I and 11. d. Neither I nor II.

Choice "a" is correct. SFAS No.133 defines derivatives for accounting purposes as having one or more underlyings (and one or more notional amounts), and as not requiring an initial net investment (or having an initial net investment that is smaller than would be required for other types of similar contracts).

derivative may be designated and qualify as a fair value hedge if a set of criteria relating to the derivative and the hedged item are met. The most significant criteria are:

1. There is formal documentation of the hedging relationship between the derivative and the hedged item. 2. The hedge must be expected to be highly effective in offsetting changes in the fair value of the hedged item and the effectiveness is assessed at least every 3 months. 3. The hedged item is specifically identified. 4. The hedged item presents exposure to changes in fair value that could affect income.

A change in the fair value of a derivative qualified as a cash flow hedge is determined to be either effective in offsetting a change in the hedged item or ineffective in offsetting such a change. How should the effective and ineffective portions of the change in value of a derivative which qualifies as a cash flow hedge be reported in financial statements? 1. Effective portion in. 2. Ineffective portion in?

Choice "c" is correct. Changes in (gains and losses on) the effective portion of a cash flow hedge are deferred and reported in "other comprehensive income;" changes in the ineffective portion are reported in current income. Gains and losses which are deferred and reported in "other comprehensive income" must be reclassified and recognized in income in the period(s) in which the hedged item affects income.

Selected information from the accounts of Row Co. at December 31, Year 5, follows: Total income since incorporation $420,000 Total cash dividends paid 130,000 Total value of property dividends distributed 30,000 Excess of proceeds over cost of treasury stock sold, accounted for using the cost method 110,000 In its December 31, Year 5, financial statements, what amount should Row report as retained earnings?

Choice "a" is correct. Look at each item given and decide how it affects retained earnings: income since incorporation equals unadjusted ending retained earnings (RE), that is, current year income is included; cash dividends is a direct deduction from RE on the date of declaration; property dividends are deducted from RE at market value on the date of declaration; the excess proceeds from the sale of treasury stock is considered additional paid-in capital. Thus, ending RE = unadj. RE - cash dividends - property dividends = $420,000 - $130,000- $30,000 = $260,000. Choice "b" is incorrect. This amount does not include the effect of the property dividends. Property dividends are deducted from RE at market value on the date of declaration. Choice "c" is incorrect. This amount incorrectly includes the proceeds from the sale of the treasury stock. The cost method of accounting for treasury stock affects retained earnings only if the shares are sold below cost and the difference exceeds any additional paid-in capital from treasury stock.

Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, Year 1, Cyan's retained earnings were $300,000. In March, Year 2, Cyan reacquired 5,000 shares of its common stock at $20 per share. In June, Year 2, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ended December 31, Year 2, was $60,000. At December 31, Year 2, what amount should Cyan report as retained earnings?

Choice "a" is correct. $360,000 retained earnings at 12/31 /Year 2 ($300 + $60). Because all treasury stock transactions were recorded under the "cost method," and the resale of treasury stock was at a price that exceeded its acquisition price, none of the treasury stock transactions affected retained earnings. Choice "b" is incorrect. The $5,000 gain [1 000 shares x ($25 sale price - $20 purchase price)] is recorded as a credit to Additional Paid-in Capital-Treasury Stock, not as a credit to retained earnings. Only losses in excess of APIC-Treasury Stock are booked to retained earnings.

In September, Year 1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, Year 5, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, West's stockholders' equity was reduced by: a. $120 b. $2,400 c. $12,000 d. $36,000

Choice "c" is correct. In Year 1, no dividend was recorded since none of the rights were exercised and no value was assigned. In Year 5, redemption reduced equity by $12,000 [120,000 rights x $.10 per share].

How would the declaration of a 15°/o stock dividend by a corporation affect each of the following?

1. Retained earnings

2. Total stockholders' equidad

Decrease to retained earnings - No effect on shareholder's equity. Rule: A stock dividend (less than 20-25°/o of stock outstanding) is treated by transferring the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total shareholder's equity because all transfers take place within shareholder's equity.

Shares of its own stock held by a corporation should be recorded as treasury stock and shown as a reduction in the stockholders' equity section of the B/S.

Hoyt Corp.'s current balance sheet reports the following stockholders' equity: 5°/o cumulative preferred stock, par value $100 per share; 2,500 shares issued and outstanding $250,000 Common stock, par value $3.50 per share; 100,000 shares issued and outstanding 350,000 Additional paid-in capital in excess of par value of common stock 125,000 Retained earnings 300,000 Dividends in arrears on the preferred stock amount to $25,000. If Hoyt were to be liquidated, the preferred stockholders would receive par value plus a premium of $50,000. The book value per share of common stock IS: a. $7.75 b. $7.50 c. $7.25 d. $7.00

Choice "d" is correct. $7.00 book value per common share. Preferred stock 250,000 Common stock 350,000 Additional paid-in capital 125,000 Retained earnings 300,000 Total stockholders equity 1,025,000 Less: PR stock interest (325,000)* 700,000 Total shares O/S / 100,000 Book value per share $ 7.00 * Par value preferred 250,000 Premium on preferred 50,000 Div. In arrears 25,000 Total preferred stock interest 325,000

Any preferred shareholder interest must be removed from shareholders' equity before computing book value per share.

Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole's:

Yes - No. By definition, a liquidating dividend is one in which the company is returning a portion of capital originally contributed to the company in excess of retained earnings. A (pure) "liquidating dividend" implies there is no "retained earnings" left to decrease.

Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, does the par value method report a greater amount for additional paid-in capital and a greater amount for retained earnings? Additional paid-in capital

No - No. Compared to the cost method for reporting treasury stock, the par value method will report a lower amount for additional paid-in capital (APIC) and the same amount for retained earnings. The easiest way to solve this problem is to make a set of assumptions consistent with the facts and record the proper entries.

Assumptions: Original issue$100 Acquisition cost$80 Par value$60

Cost method DR CR Treasury stock 80 Cash 80

Par value method DR CR Treasury stock 60 APIC 20 Cash 80

Note: The only difference is that a portion of the debit is transferred from treasury stock to APIC, thereby reducing the credit balance of APIC.

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders' equity and the book value per common share?

Total stockholders' equidad

Book value per share

Decrease - Increase. The acquisition of treasury stock at a price less than their book value will: 1. Decrease stockholders' equity in total. All treasury stock transactions decrease total equity. 2. Increase book value per share. Book value per share is based on the number of outstanding common shares, which is reduced by the acquisition of treasury stock (the denominator is reduced). The numerator (book value) is also reduced by the cost to purchase the shares, but the overall effect on the ratio is an increase in book value per share. For example, if book value were $1,000 and there were 100 common shares, the book value per common share would be $10. If 10 shares were repurchased for $8 (which is less than the original book value per share), the new book value would be $920 and the reduced number of shares would be 90, thus, resulting in a new book value per common share of $10.22, which is larger than the original $10.

How would the 5% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee's Year 2 statement of owners' equidad

1. APIC 2. RETAINED EARNINGS

Increase, Decrease. A 5% stock dividend is a true stock dividend, as opposed to a stock split effected in the form of a dividend. The fair market value of the stock dividend at declaration date is capitalized (transferred) from retained earnings to capital stock and paid-in capital.

Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise's carrying amount over its market value should be: a. Ignored. segundo. Reported as a separately disclosed reduction of retained earnings. do. Reported as an extraordinary loss, net of income taxes. re. Reported as a reduction in income before extraordinary items.

Choice "d" is correct. A loss is recognized for the merchandise's carrying amount over its market value. This results in a reduction in income before extraordinary items. Rule: Dividends declared and paid in the form of assets other than cash are recorded by the distributing corporation at fair market value at date of declaration.

On March 1, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000. At this date, Rya's common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share. What amount of the proceeds should be allocated to Rya's convertible preferred stock?

Choice "c" is correct. $48,000 allocated to preferred. Rule: Allocate "issue proceeds" of a basket purchase or sale of convertible preferred stock based on relative fair market values: Allocated Shares $ Fair Value Basis Common stock 1000 x 36 = $36,000 $32,000 Preferred stock 2000 x 27 =54, 000 48,000 Total fair value $90,000 $80,000 Allocate to preferred: 54/90 x $80,000 = $48,000

When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as: a. No par common stock. segundo. Additional paid-in capital when the subscription is recorded. do. Additional paid-in capital when the subscription is collected. re. Additional paid-in capital when the common stock is issued.

Choice "b" is correct. When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as additional paid-in capital (APIC) when the subscription is received. Entry to record subscription of 1,000 shares of common stock ($5 stated value or par value) at a price of $18 with down payment of $3 per share:

Cash (1,000 x $3) 3,000 Subscription received - c/s 15,000 Common stock subscribed (1,000 shs x $5) 5,000 Additional paid-in capital ($13 x 1,000) 13,000

Note: This is same "APIC" as if the stock had been fully paid for and issued.

A corporation issuing stock should charge retained earnings for the market value of the shares issued in a (an): a. Employee stock bonus. segundo. Pooling of interests. do. 10°/o stock dividend. re. 2-for-1 stock split.

Choice "c" is correct. 1 Oo/o stock dividend. Rule: 1. Charge retained earnings for the market value of shares issued for stock dividend of less than 20- 250/o. 2. Use par value if more than 20-25°/o stock dividend. 3. If between 20-25°/o use either par or FMV.

Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which of the following methods?

No - No. Rule: Stock dividends and stock splits are not considered income to the recipient. Therefore, investors do not record stock dividends at fair market value. They simply reallocate the investment account balance (under either method -- cost or equity) over more shares so that value per share decreases.

On January 1, Year 1, Ward Corp. granted stock options to corporate executives for the purchase of 20,000 shares of the company's $20 par value common stock at $48 per share. All stock options were exercised on December 28, Year 1. Using an acceptable option pricing model, Ward calculated total compensation cost of $240,000. The quoted market prices of Ward's $20 par value common stock were as follows:

January 1, Year 1 $45 December 28, Year 1 60

As a result of the grant and exercise of the stock options and the issuance of the common stock, Ward's additional paid-in capital increased by:

$800,000 increase to additional paid-in capital.

January 1 Journal Entry Compensation expense $240,000 APIC - Stock options 240,000

December 28 Journal Entry Cash ($48 x 20,000 shares) $960,000 APIC - Stock options $240,000 Common stock (20,000 x $20) $400,000 APIC 800,000

On January 1, Year 1, Lord Corp. granted stock options for 10,000 shares at $38 per share as additional compensation for services to be rendered over the next three years. Using an acceptable option pricing model, Lord calculated total compensation cost of $90,000. The options are exercisable during a 4-year period beginning January 1, Year 4, by grantees still employed by Lord. Market price of Lord's stock was $47 per share at the grant date. No stock options were terminated during Year 1. In Lord's Year 1 income statement, what amount should be reported as compensation expense pertaining to the options? a. $90,000 b. $40,000 c. $30,000 d. $0

The compensation should be allocated over the period for which the services are performed. Fair value of options at grant date $90,000 Services for 3 years 3 Compensation expense - Year 1 $30,000

On March 4, Year 1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, Year 1, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, Year 2. On September 30, Year 1, LVC's common stock had a market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each. What amount should Evan report on its September 30, Year 1, balance sheet for investment in stock rights? a. $4,000 b. $5,000 c. $10,000 d. $15,000

5000/(5k+95k) x 80,000=4000

Cash flow statement --During Year 2, equipment costing $40,000 was sold for cash. Depreciation expense $33,000 Increase in Accumulated depreciation (11,000) Depreciation on equipment sold $22,000 Gain on sale of equipment 13,000

What are the proceeds of the Sale I. e what are the cash flows? J/e please.

Cash 31,000 ** Acc depreciation 22,000 **** Equipment 40,000 Gain 13,000

*****33k (11k) 22,000 depreciation attributable to the equipment

Karr, Inc. reported net income of $300,000 during the current year. Changes occurred in several balance sheet accounts as follows: Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase •During the year. Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. • In December, Karr purchased equipment costing $50,000 with $20,000 cash and a 12o/o note payable of $30,000. • Depreciation expense for the year was $52,000.

In Karr's statement of cash flows. net cash used in investing activities should be a. $2,000 b. $12,000 c. $22,000 d. $35,000

Choice "a" is correct. Cash used for investing activities is computed as follows: Sale of equipment Purchase of equipment Cash used for investing $18,000 (20,000) $ 2.000

Payment for the early retirement of long-term bonds payable (carrying amount $370,000) $375,000

Distribution in Year 2 of cash dividend declared in Year 1 to preferred shareholders 31,000 Carrying amount of convertible preferred stock \in Xan, converted into common shares 60,000 Proceeds from sale of treasury stock (carrying amount at cost, $43,000) 50,000

During Year 2, Xan, Inc. had the following activities related to its financial operations: Xan uses U. S. GAAP. In Xan's Year 2 statement of cash flows, net cash used in financing operations should be:

356,000 net cash used in financing operations Payment to retire bonds $(375,000) Payment of dividend (31,000) Proceeds from Treasury stock 50,000 $(356,000)

On July 1 of the current year, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its statement of cash flows? a. An inflow equal to the present value of future lease payments at July 1, less current year principal and interest payments. segundo. An outflow equal to the current year principal and interest payments on the lease. do. An outflow equal to the current year principal payments only. re. The lease payments should not be reported in the financing activities section.

Choice "c" is correct. Cash payments made to reduce debt principal are properly reported as a financing activity. Cash interest payments would be reported as a component of cash from operating activities.

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method? a. In investment activities as a reduction of the cash inflow from the sale. segundo. In investment activities as a cash outflow. do. In operating activities as a deduction from income. re. In operating activities as an addition to income.

Choice "c" is correct. In a statement of cash flows using the indirect method, gain from the sale of used equipment for cash should be reported in operating activities as a deduction from income. Choice "a" is incorrect. In the investment activities section, cash inflow from the sale should be reported for the entire proceeds from the sale. Choice "b" is incorrect. In the investment activities section, cash outflows should be reported for purchases of fixed assets, stocks/bonds of other entities. Choice "d" is incorrect. In the operating activities section, "loss" from the sale of used equipment should be reported as an addition to income.

Payne Co. prepares its statement of cash flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows? a. As a financing cash inflow. segundo. As a financing cash outflow. do. As an addition to net income in the operating activities section. re. As a subtraction from net income in the operating activities section

Choice "c" is correct. Amortization of bond discount is an income-related item; thus, it is almost automatically an operating activity, not a financing activity. That knocks out two of the answers. Because the amortization of the discount was originally subtracted to get to net income in the first place, it is added back to net income for an indirect method statement of cash flows.

New England Co. had net cash provided by operating activities of $351 ,000; net cash used by investing activities of $420,000; and cash provided by financing activities of $250,000. New England's cash balance was $27 ,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000 and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year? a. $27,000 b. $40,000 c. $208,000 d. $248,000

Choice "c" is correct. New England's cash balance at the end of the year includes the cash balance at the beginning of the year, the net cash provided by operating activities, the net cash used by investing activities, and the net cash provided by financing activities ($27,000 + $351,000 - $420,000 + $250,000 = $208,000). The sale of the land was included in the cash from the investing activities and does not have to be considered separately. When working this type of question, be sure to distinguish between the net cash used and the net cash provided

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale securities purchased 10,000 increase Bonds payable - issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year under U. S. GAAP?

0 dollars is correct. The operating activities section includes cash flows from working capital (current assets and current liabilities) and other income statement items. Under the indirect method, net income is adjusted for non-cash items and increases/decrease in working capital items to arrive at net cash from operating activities. Increases in current assets and decreases in current liabilities are uses of cash, while decreases in current assets and increases in current liabilities increase cash. Net income $70,000 Less: Increase in inventory (40,000) Less: Decrease in AP (30,000) Net cash provided by operating activities $ 0

For the year ended December 31, Ion Corp. had cash inflows of $25,000 from the purchases, sales, and maturities of held-to-maturity securities and $40,000 from the purchases, sales, and maturities of availablefor - sale securities. What amount of net cash from investing activities should Ion report in its cash flow statement? a. $0 b. $25,000 c. $40,000 d. $65,000

Choice "d" is correct. Net cash from investing activities is $65,000 ($25,000 + $40,000) because investing activities include cash flows from both available-for-sale and held-to-maturity security transactions.

Green Co. had the following equity transactions at December 31: Cash proceeds from sale of investment in Blue Co. (carrying value - $60,000) $75,000 Dividends received on Grey Co. stock 10,500 Common stock purchased from Brown Co. 38,000 What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31 under U. S. GAAP? a. $37,000 b. $47,500 c. $75,000 d. $85,500

Choice "a" is correct. Net cash from investing activities should include the cash received from the sale of the investment in Blue Co. offset by the cash paid to purchase the common stock from Brown Co.:$75,000 Cash proceeds from sale of Blue Co. (38,000) Cash paid to purchase Brown Co. common stock Net cash received from investing activities $37,000

Tam Co. reported the following items in its year-end financial statements: Capital expenditures $1,000,000 Capital lease payments 125,000 Income taxes paid 325,000 Dividends paid 200,000 Net interest payments 220,000 What amount should Tam report as supplemental disclosures in its statement of cash flows prepared Using the indirect method? a. $545,000 b. $745,000 c. $1,125 ,000 d. $1,870 ,000

Choice "a" is correct. When the indirect method is used, a supplemental disclosure of cash paid for interest and income taxes is required. Tam will report total cash paid for interest and income taxes of $545,000 ($325,000 income taxes paid + $220,000 net interest payments).

Under IFRS, interest received during a period is reported on the statement of cash flows in: a. Operating cash flow only. segundo. Investing cash flow only. do. Operating or investing cash flow. re. Operating or financing cash flow

Choice "c" is correct. Under IFRS, interest (and dividends) received may be reported in either operating cash flow or in investing cash flow. Under U. S. GAAP, interest (and dividends) received must be reported

Under IFRS, interest paid during a period is reported on the statement of cash flows in: a. Operating cash flow only. segundo. Financing cash flow only. do. Operating or investing cash flow. re. Operating or financing cash flow.

Choice "d" is correct. Under IFRS, interest paid may be reported in either operating cash flow or in financing cash flow. Under U. S. GAAP, interest paid must be reported only in operating cash flow because interest expense is reported on the income statement.

Under IFRS, dividends paid during a period are reported on the statement of cash flows in: a. Operating cash flow only. segundo. Financing cash flow only. do. Operating or investing cash flow. re. Operating or financing cash flow

Choice "d" is correct. Under IFRS, dividends paid may be reported in either operating cash flow or in financing cash flow. Under U. S. GAAP, dividends paid must be reported in financing cash flow because dividends are paid on equity and are not reported on the income statement.

Which of the following would be reported as an investing activity in a company's statement of cash flows? a. Collection of proceeds from a note payable. segundo. Collection of a note receivable from a related party. do. Collection of an overdue account receivable from a customer. re. Collection of a tax refund from the government.

Choice "b" is correct. Loans to other entities and the consequent collection of the loans are reflected in the investing activity section of the cash flow statement.

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WSGR ALERT

Separation Pay Arrangements under the Final Section 409A Regulations

The Treasury Department and Internal Revenue Service (IRS) issued final Section 409A regulations on April 10, 2007. The final regulations are effective January 1, 2008, but taxpayers are allowed to rely on the final regulations even if they conflict with prior interim guidance.

On April 16, 2007, we issued a Client Alert covering the main highlights of the final Section 409A regulations. The present Client Alert specifically focuses on the treatment of separation pay arrangements and change of control benefits under the final regulations.

We strongly encourage all of our clients, after reading this alert, to inventory and review all arrangements that provide for separation pay and to assess Section 409A applicability and compliance.

Reminder of Section 409A Tax Impact

1. What are the tax implications if a separation pay arrangement is subject to Section 409A, but fails to comply?

The penalties for violating Section 409A of the Internal Revenue Code include immediate income tax inclusion, an additional 20 percent federal penalty tax, and interest charges (and in California, an additional 20 percent state tax). For example, employees 1 in California will be subject to adverse tax consequences under state law provisions and have total potential taxation at rates above 84 percent.

Employers will have wage reporting and withholding obligations if compensation is subject to Section 409A. IRS Notice 2006-100 provides guidance with respect to wage reporting and withholding obligations under Section 409A, and that guidance may continue to be relied upon until further IRS guidance is issued.

Reminder of Transition Period to Fix 409A Problems

2. Must existing separation pay arrangements be amended to comply with Section 409A?

Sí. Separation pay arrangements adopted before December 31, 2007, will be able to operate in good-faith compliance with Section 409A so long as they are amended to comply with the final regulations by December 31, 2007. If an arrangement is subject to Section 409A and does not comply by January 1, 2008, then the employer and the affected employee will be subject to the obligations and tax penalties discussed in question 1.

The Basics: Defining Separation Pay

3. What is "separation pay"?

"Separation pay" is compensation that an employee has a right to receive only after a separation from service (including a separation from service due to death or disability). Separation pay does not include compensation that an employee could receive without separating from service (such as an amount payable upon a change of control without a termination of employment, an unforeseeable emergency, or a payment scheduled to be paid on a date that is certain and fixed).

For example: The right to a gross-up payment for taxes owed by an employee is separation pay if separation from service is required to obtain the payment. On the other hand, the right to a gross-up payment is not separation pay if payable while in service.

4. What kind of payments and benefits are "separation payments"?

Almost any kind of compensation or benefit that is given following separation from service may be impacted by Section 409A, such as severance pay, taxable medical reimbursements, and taxable fringe benefits. These items are highlighted in the final regulations.

The Basics: Defining a Separation from Service

5. What is "separation from service" for purposes of Section 409A?

A "separation from service" occurs when an employee dies, retires, or has a termination of employment. Whether an employee has a termination of employment is based on the particular facts and circumstances. When an employee quits or is let go, and will have no future contact with the company, that is a clear termination of employment. However, there are many situations, such as those in which an employee transitions to a consulting relationship or a part-time arrangement, where it is not so clear cut.

For example: If an employee is moving to a part-time schedule or a consulting relationship, the company would need to determine whether the employee has had a "separation from service."

To determine that an employee has a separation of service, the final regulations require that the facts and circumstances indicate that there is no "reasonable anticipation" by the company or the employee that any services would be performed after a specified date, or that the level of bona fide services after that date would permanently decrease to no more than 20 percent of the average level of the services that the employee performed over the prior 36 months (or the total period during which the employee provided services to the company, if shorter). If the employee's service level decreases below this 20 percent level, he or she is presumed to have separated from service. On the other hand, the employee will be presumed to not have separated from service if he or she continues to provide 50 percent or more of the average level of services he or she provided over the measuring period. Any amount of continued service between the 20 and 50 percent levels requires analysis of facts and circumstances.

6. Is a reduced-hours schedule a separation from service?

Under the final regulations, a separation from service does not automatically occur in a reduced-hours schedule situation (including situations in which an employee is put on a reduced-hours schedule to phase into retirement). However, the final regulations permit flexibility for employers to define separation from service as including a change to a reduced level. In order to take advantage of this flexibility, employers must explicitly elect the point at which the separation of service will be deemed to occur. This election must be made no later than when the time and form of payment of the separation payments are elected or specified. The elected reduced level must be set at a specific percentage of service that is greater than 20 percent but lower than 50 percent of the average level of services provided in the immediately preceding 36 months.

For example: A separation pay arrangement may specify that a separation from service will be deemed to occur at any time that the employer reasonably anticipates that the level of services the employee will perform will be permanently reduced to a level that is 40 percent of the prior 36 months of service.

7. Who is the "employer" when discussing a separation from service?

The final regulations prevent employers from playing games (to allow a distribution) by having an employee terminate employment with one company in order to work with another company in the same controlled group. They contain special rules defining an "employer" or "service recipient" to include controlled group members using a 50 percent ownership threshold or, if specified by the employer, a range between 20 and 80 percent, so long as any percentage below 50 percent is based on legitimate business criteria.

8. Is a bona fide leave of absence treated as a separation from service?

A bona fide leave of absence (in which there is a reasonable expectation the employee will return to service with the employer) is not treated as a separation from service if it is less than six months. Even if the leave of absence is longer than six months, it still is not treated as a separation from service if the employee has a right to re-employment under an applicable law (e. g. the Family and Medical Leave Act or the Uniformed Services Employment and Reemployment Rights Act) or by the terms of a contract (e. g. an oral or written agreement that states that employment continues even if the employee is on a one-year sabbatical).

9. Does a separation from service occur in an asset sale?

Ordinarily, an asset sale (where employees are transferred in connection with such assets) is considered a separation from service by law for those employees, potentially entitling them to benefits (such as COBRA continuation coverage and 401(k) distributions) and compensation under certain circumstances. The final regulations allow the buyer and seller in a sale of substantial assets to apply the so-called "same desk" rule (so that the transaction is not deemed a separation from service) where an employee essentially is continuing in his or her same job, provided (1) the asset purchase transaction results from bona fide, arms-length negotiations, (2) all such employees are treated consistently, and (3) such treatment is specified by the closing date for the transaction. An employer, after meeting these requirements, could treat such a sale as not causing a separation from service for purposes of Section 409A.

10. Is a disability leave considered a separation from employment?

No. The employment relationship, in a disability-leave situation, is treated as continuing for a period of up to 29 months, unless it is terminated by the employer or the employee, regardless of whether the employee retains a contractual right to re-employment.

11. Can a separation from service be delayed by maintaining a salary continuation or terminal leave program?

No. The final regulations do not treat salary continuation and terminal leave programs (e. g. a leave of absence where the employee is not expected to return and is, for all intents and purposes, not going to provide service any longer) as delaying separation. The Treasury Department and the IRS have stated that they believe these types of actions are subject to manipulation and should not delay the time at which an employee is treated as having separated from service for purposes of Section 409A. In addition, terminal leave with no intent to return generally would not be treated as a bona fide leave.

The Basics: When Does Section 409A Apply?

12. When does Section 409A apply to separation pay arrangements?

The final regulations provide that a separation pay arrangement is subject to Section 409A only to the extent the arrangement provides for "deferred compensation." Under the regulations, deferred compensation is an arrangement that provides the employee a legally binding right to compensation during one taxable year that, pursuant to the terms of the arrangement, is or may be payable to the employee in a later taxable year. However, there is a short-term deferral period and certain other exceptions under which compensation paid in the next taxable year will not be considered deferred compensation for purposes of Section 409A.

13. When does the short-term deferral exception apply?

Compensation is not considered deferred for purposes of Section 409A if (1) the plan or agreement under which the payment is made does not provide for a deferral, and (2) an employee actually or constructively receives the payment on or before the last day of the applicable two-and-a-half month period ending on the later of:

the 15th day of the third month following the end of the employee's first taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture (usually March 15th of the next calendar year), or

the 15th day of the third month following the end of the employer's first taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture (this is helpful in cases where an employer pays taxes on a fiscal year basis).

This is one of the most commonly used exceptions under Section 409A.

For example: Susan is a senior vice president of a start-up technology company, which has a calendar-year tax year. Her annual salary is $275,000. Her severance agreement provides that she is entitled to $625,000 if she is terminated without cause, payable in a lump sum within 30 calendar days of her separation from service. Her severance benefit represents two times her annual salary plus $75,000, which is the amount of her most recent target bonus. Susan is terminated without cause in 2007. Because all separation payments will be paid before March 15 of the year following separation, those payments fall within the "short-term deferral" exception and are not deferred compensation for purposes of Section 409A.

Any compensation paid after this short-term deferral period pursuant to any separation arrangement is deferred compensation subject to Section 409A, unless it falls within another exception (discussed below). Unlike the other exceptions discussed below, if a series of payments is being made, that stream of payments is not split up under the short-term deferral rule such that the payments before the March 15 date are exempt while those paid after the March 15 date are not (unless the requirements for the exception described in question 16 below are satisfied). Therefore, if $1 from a stream of payments is paid after the March 15 date, the entire stream of payments is not covered by the short-term deferral exception and you must rely on the other exceptions below to avoid being subject to Section 409A. (The dates in this answer assume that the employee and employer are calendar-year taxpayers.)

Other Separation Pay Exceptions to Deferred Compensation

14. Are there other separation payments that are exempt from Section 409A, even if there might be a deferral of compensation?

Sí. The final regulations generally retain other exceptions (in addition to the short-term deferral rule described above) from the definition of deferred compensation for certain types of separation pay. The exceptions include:

arrangements providing separation pay (up to limited amounts) due to an involuntary separation from service or participation in a window program (a window program is a program that offers benefits for a limited period to encourage people to separate from service, such as an "early retirement" program);

bona fide collectively bargained arrangements;

arrangements providing for non-taxable benefits, COBRA, or expense reimbursements (e. g. reasonable moving expenses and outplacement services) for a limited period of time following separation from service;

arrangements providing in-kind benefits (e. g. a corporate car or aircraft, membership dues, or payment for financial or tax advice) for a limited period of time following separation from service; y

incidental amounts that do not exceed the Internal Revenue Code Section 402(g) limit (the deferral limit applicable to 401(k) plans and other defined contribution retirement plans, which is $15,500 in 2007).

Some of these exceptions are described further below. We also have included some examples at the end of this alert to show how the exceptions work in practice and how they interact with each other.

15. Are we limited to only one exception for each payment or can we use several if more than one applies?

You may use more than one exception. One important clarification in the final regulations is that the exceptions may be used in combination (that is, they can be used on an additive basis).

For instance, an amount of severance up to the maximum amount available under the involuntary termination/window program exception (as described below), expense reimbursements for reasonable moving expenses and outplacement expenses, and payments that do not exceed the limit on elective deferrals under Internal Revenue Code Section 402(g) all may be excluded from coverage under Section 409A due to application of the various exceptions, even if they are part of the same severance package.

16. What are the limitations on the exception for separation pay due to an involuntary separation from service or participation in a window program?

Separation pay that is paid solely due to an involuntary separation from service or participation in a window program is excepted from the rules of Section 409A, so long as such pay is:

payable no later than the end of the second taxable year of the employee following the year of separation from service; y

limited to an amount that is the lesser of (1) two times the employee's "annual rate of compensation" for the taxable year before the taxable year in which the separation of service occurs, or (2) two times the compensation limit set for tax-qualified retirement plans in Internal Revenue Code Section 401(a)(17) (this limit is $225,000 in 2007) for the year the separation from service occurs.

17. What does the IRS mean by the term "annual rate of compensation"?

Unfortunately, the term "annual rate of compensation" is largely undefined in the final regulations. IRS officials have informally stated that the annual rate of compensation should be determined by the facts and circumstances, but that such term should include annual salary and bonus amounts that are regular (and almost certain to be paid), but should not include extraordinary bonuses or income derived from the exercise of stock options. Clearly this leaves a number of issues open, but standards will emerge as a body of practice develops. One helpful piece of guidance is that the rate may be annualized for partial years of service.

18. What happens if we pay more than the dollar limits set forth in question 16 under the exception for an involuntary separation from service or participation in a window program?

One favorable change in the final regulations is that the involuntary separation exclusion will continue to apply to payments up to the limitation amount, even if the total amount of the payments due to an involuntary separation from service is above the limit, as long as the payments up to the limit are made within the required timeframe (no later than the end of the second taxable year following the employee's taxable year in which the separation occurs).

No six-month delay will be required for these payments, as typically would be required for deferred compensation paid to a specified employee (see question 36 below), because the involuntary separation/window program exception provides that amounts up to the limit are not deferred compensation.

For example: The annual salary and annual bonus of Mary, an executive, total $275,000. Under her severance agreement she is entitled to $550,000, payable over a two-year period, if she is terminated without cause, which represents two times her annual salary and bonus. Mary is terminated without cause by the company in 2007. Because certain payments will be paid after March 15 of the year following separation, those payments do not fall within the "short-term deferral" exception. Once that exception is off the table, we look to see how much of the payments can be removed from the definition of "deferred compensation" under the involuntary separation exception. Under this exception, up to $450,000 can be excluded. As a result, only the excess $100,000 ($550,000 - $450,000 = $100,000) will be subject to Section 409A requirements. If Mary is a specified employee of a public company, the excess $100,000 cannot be paid until a date six months following her termination.

19. When is a separation from service "involuntary"?

The final regulations provide that a determination of whether a separation from service is "involuntary" is based on all the facts and circumstances. However, characterization as voluntary or involuntary in the employer's documentation relating to the separation from service is presumed to be the correct characterization (although the IRS could rebut this presumption). For these reasons, it is important for employers to properly document any involuntary separation that results in separation payments. It is important that public statements and filings regarding the cause of the separation accurately describe the separation.

20. Is a termination for "good reason" considered voluntary or involuntary?

It depends. The final regulations make substantial and favorable changes with respect to a "good reason" separation from service. They provide that where a right to a payment is contingent upon a voluntary separation from service for good reason, the right may be treated in the same way as an involuntary separation from service . This treatment can only occur when:

the motivation for adding the good reason condition is not Section 409A tax avoidance; y

the good reason condition consists of action(s) taken by the employer that result in a material negative change in the employee's employment (e. g. material negative change in the duties that are required to be performed or compensation paid).

Additional factors that may be relevant in determining whether a bona fide good reason condition exists include: (1) whether payments made after a separation for good reason are the same amount and made at the same time and in the same form as payments available following an involuntary separation from service, and (2) whether the employee is required to give notice of the existence of the good reason condition and the employer has a reasonable opportunity to remedy the condition.

An amount payable on account of a good reason separation meeting the above requirements will be treated as payable on account of an involuntary separation from service. As a result, payments on a good reason separation will be eligible for the involuntary separation/window program exception if they meet the other requirements of that exception.

21. Do the final regulations provide a safe harbor for good reason terminations?

Sí. The final regulations provide a safe harbor under which a voluntary separation for good reason will be treated as an involuntary separation from service under Section 409A.

The conditions for safe harbor treatment include the following:

The amount may be payable only if the employee separates from service within two years following the initial existence of the condition giving rise to good reason.

The service provider must provide notice of the existence of the good reason condition within 90 days of its initial existence.

The employer must be provided a period of at least 30 days to remedy the good reason condition.

The amount, time, and form of payment following a separation for good reason must be substantially the same as the amount, time, and form of payment following an involuntary separation from service.

A good reason condition falling under the safe harbor must occur without the consent of the employee, and consist of a material reduction in:

the employee's base compensation;

the employee's authority, duties, or responsibilities;

the authority, duties, or responsibilities of the supervisor to whom the employee is required to report, including a requirement to report to a corporate officer or employee instead of reporting directly to the board of directors (or similar group for a non-corporate entity);

the budget over which the employee must perform the services; o

any other action or inaction that constitutes a material breach of the terms of an applicable employment agreement.

Please note that employers are not required to follow the good reason safe harbor; it is merely an opportunity offered under the final Section 409A regulations for employers to have certainty with respect to good reason terminations.

22. Are non-taxable benefits provided following a separation from service deferred compensation?

No. The final regulations clarify that a right to a benefit that is excludible from income will not be treated as a deferral of compensation for purposes of Section 409A (except in the rare circumstance that the employee has received that right in exchange for an amount that would be includible in gross income, other than a cafeteria plan described in Internal Revenue Code Section 125).

For example: Benefits that are excludible from income include health coverage, which is excludible from gross income under Internal Revenue Code Section 105.

This exception covers benefits under almost all employer-sponsored health plans.

23. Do taxable medical-benefit reimbursements provided after a separation from service constitute deferred compensation?

To the extent a medical reimbursement benefit is taxable (this is somewhat unusual but, for instance, might occur if the reimbursement is discriminatory under Internal Revenue Code Section 105(h)), the final regulations provide that they may be provided over the applicable COBRA coverage period (generally 18, 29, or 36 months) and will not constitute deferred compensation even though a legally binding right to a taxable medical benefit in a future year exists. This exclusion is limited to the period during which the employee would be entitled to COBRA continuation coverage under a group health plan of the employer if the employee elected such coverage and paid the applicable premiums.

24. Are other reimbursement arrangements provided following a separation from service deferred compensation?

The final regulations provide specific exceptions for certain post-separation reimbursement arrangements, including reimbursement for certain items deductible to an employer, reasonable outplacement benefits, and reasonable moving expenses for a limited period of time, whether or not the separation from service is voluntary or involuntary. The final regulations also permit reimbursement of any part of a loss due to the sale of a primary residence up to the amount of the loss.

Eligible expenses must be incurred by the service provider no later than the end of the second year following the year in which the separation from service occurs. Although the expenses must be incurred within this period, they may be paid later. Reimbursements must be made no later than the third year following the separation from service. If the reimbursements are not incurred and paid within the applicable timeframes, the reimbursements are a deferral of compensation and will be subject to Section 409A (unless another exception can be found to remove them).

25. Do in-kind benefits provided after a separation from service constitute deferred compensation?

The final regulations provide a specific exception for in-kind benefits (such as continued use of a corporate car or aircraft, membership dues, or payment for financial or tax advice) provided upon a separation from service. Such taxable benefits will not constitute a deferral of compensation and thus will not be subject to Section 409A, so long as they are provided by the end of the second year following the separation from service.

26. Is there an exception for small incidental payments and benefits, so we do not have to worry about Section 409A with every aspect of a separation pay arrangement?

Sí. The final regulations clarify that a taxpayer may treat certain de minimis amounts under a separation pay arrangement as not subject to Section 409A so long as the payments in the aggregate do not exceed the applicable limit under Internal Revenue Code Section 402(g) for the year of separation (this is the deferral limit applicable to 401(k) plans and other defined contribution retirement plans and is $15,500 for 2007). This is intended to avoid the application of Section 409A to small, incidental benefits under a separation pay arrangement.

Special Separation Pay Rules

27. How are separation pay arrangements with consultants and independent contractors treated under Section 409A?

The final regulations provide that Section 409A generally does not apply to an amount deferred under an arrangement between a company and a consultant (or independent contractor) if, essentially, the consultant truly is independent from the company. Specifically, the deferred amount paid to a consultant will not be subject to Section 409A if, during the taxable year in which the consultant obtains a legally binding right to a deferred amount, (1) the consultant is actively engaged in the trade or business of providing services (other than as an employee or as a director of a corporation), and (2) provides "significant services" to two or more companies to which the consultant is not related and that are not related to one another.

The final regulations retain the safe harbor contained in the prior interim guidance. Under this safe harbor, a consultant is deemed to be providing "significant services" to two or more companies if the revenues generated from the services provided to any single company or to a group of related companies during the relevant taxable year do not exceed 70 percent of the total revenues generated by the consultant from consulting work.

The final regulations adopt an additional safe harbor that provides that a consultant who has actually met the 70 percent threshold in the three immediately prior years is deemed to meet the 70 percent threshold for the current year, but only if, at the time the amount is deferred, the consultant does not know or have reason to anticipate that he or she will fail to meet the threshold in the current year.

The final regulations still require that the safe harbor arrangement, and the practices under the arrangement: (1) be bona fide, (2) arise in the ordinary course of business, and (3) be substantially the same as the arrangements and practices (such as billing and collection practices) applicable to one or more unrelated employers to whom the consultant provides substantial services and that produce a majority of the total revenue that the consultant earns from the trade or business of providing such services during the year.

The final regulations further clarify that if at the time the legally binding right to the payment arose, the arrangement was not subject to Section 409A because the consultant was an independent contractor eligible for this exclusion, the amount deferred under the arrangement during that taxable year (and earnings credited to the deferred amount) will not become subject to Section 409A in a later year just because the consultant becomes an employee, independent contractor, or other type of service provider subject to the rules of Section 409A.

The Treasury Department and the IRS are continuing to study whether a company will be permitted to rely upon a consultant's representation that the consultant meets the exclusion requirements, so that a company will know with certainty whether it is subject to the reporting requirements with respect to amounts deferred subject to Section 409A.

Please note that an employee cannot be re-classified as a consultant or independent contractor to avoid application of Section 409A, because an individual's current status as a consultant will be ignored with respect to amounts he or she earned as an employee.

28. What if we sometimes pay employees separation pay, but it is paid at our discretion (and not under a plan or agreement)?

An employee does not have a legally binding right to compensation if that compensation may be reduced unilaterally or eliminated by the employer or service recipient (that is, the compensation is subject to a substantial risk of forfeiture). Oftentimes, employers will provide that a payment is in the employer's sole discretion and no right exists until the payment amount is actually paid. If the entire amount is paid immediately, it automatically is within the short-term deferral period and is not deferred compensation. Joining a substantial risk of forfeiture with payment within the short-term deferral exception is a very common practice to avoid application of Section 409A.

However, a discretionary separation payment may be subject to Section 409A if payments can be deferred beyond the short-term deferral period after the employer has agreed to pay and no substantial risk of forfeiture exists.

29. If we have a separation pay arrangement that constitutes deferred compensation, can we cancel it and set up a new arrangement resulting in other payments?

No. The final regulations continue to provide that any amount that acts as a substitute or replacement for amounts deferred under a separate deferred compensation arrangement constitutes a payment of deferred compensation. The policy concern is that without this rule, a new payment actually would be a deferral or acceleration of a formerly non-vested payment right.

The presumption that a right to payment is not a new right, but instead is a right substituted for a non-vested right, may be rebutted by demonstrating that the employee's right to payment after the separation from service would have existed regardless of the forfeiture or cancellation.

Factors indicating that a right to payment would have existed, regardless of the forfeiture or cancellation of the right to a non-vested payment, include whether the amount to which the employee obtains a right is materially less than the present value of the forfeited non-vested amount. Another factor is that the payment consists of a type of payment customarily made to an employee who separates from service with the employer without forfeiting non-vested rights to deferred compensation (for instance, an employer's customary payment of two weeks' severance for each terminating employee).

30. Can we accelerate or delay the vesting of stock options in connection with a termination without causing a Section 409A problem?

Generally, yes. The final regulations provide that accelerating the vesting of a stock right that is not subject to Section 409A (generally, a stock right is not subject to Section 409A if it was not granted at a discount) is not the type of modification that would pull the right into the definition of deferred compensation. However, the acceleration or delay generally must occur within the original term of the stock right; otherwise, it is considered an extension of the right and may violate Section 409A (see question 31 below). If the stock right is subject to Section 409A (for instance, because the stock right was granted at a discount on the date of grant), such acceleration or delay may constitute an impermissible acceleration of a payment date or a subsequent deferral under the regulations.

Please see our prior Client Alert about stock rights under the final Section 409A regulations.

31. Can we give an employee a longer period of time after termination in which to exercise options?

Generally, yes. The final regulations substantially relaxed the rules regarding an employer's ability to amend an outstanding option (or other stock right) to provide for an additional period after termination during which an employee may exercise the option (or other stock right). The final regulations permit:

an extension of the post-termination exercise period if it is not extended beyond (1) the stock right's original expiration date, or (2) the 10th anniversary of its original date of grant, whichever falls earlier;

extension of the exercise period if the stock right is underwater (that is, when the exercise price is more than the fair market value of the underlying shares). Of course, any extension still will be limited to the timeframes allowed by the governing plan; y

the suspension of the expiration of the stock right while the holder cannot exercise the stock right because the exercise would violate applicable law or would jeopardize the ability of the employer to continue as a going concern. However, this extension cannot last more than 30 days after the date exercise would no longer violate applicable law or would not jeopardize the ability of the service recipient to continue as a going concern.

Please see our prior Client Alert about stock rights under the final Section 409A regulations.

Rules on Elections to Defer Separation Pay

The deferred compensation rules regarding elections to defer are briefly summarized below. These rules are complex and will be addressed in more detail in our next Client Alert.

32. Are there rules about when an election to defer compensation may be made with respect to separation pay?

When a deferral of compensation subject to Section 409A is made, the election must be made no later than the end of the year before the year for which the compensation is earned in order to comply with Section 409A (and to avoid subjecting the taxpayer to the taxes described above).

With respect to separation pay paid after actual (voluntary or involuntary) separation from service, the final regulations provide that the initial deferral election may be made at any time before the employee obtains a legally binding right to the payment so long as: (1) the employee had no prior right to such separation pay, and (2) the separation pay is subject to bona fide arms-length negotiations.

Therefore, the time and form of payment must be fixed at the time a separation pay arrangement is entered into and before the employee has a choice between a current and a deferred payment.

33. Can an employee change an election with respect to the time or form of payment?

Yes, but in order to comply with Section 409A, any change in the time or form of payments under a separation pay arrangement is required to meet the rules of Section 409A governing subsequent deferral elections and accelerated payments.

Generally, a subsequent election to defer a payment or change the form of payment of an amount of deferred compensation may only be made if: (1) the subsequent payment may not be made less than 12 months before the date the first amount was scheduled to be paid; (2) the election may not take effect until at least 12 months after the date on which the subsequent election was made; and (3) the payment with respect to which the subsequent election is made is deferred for a period of not less than five years from the date such payment would have otherwise been made (the "five-year/one-year" rule).

34. How do we fix the time and form of payment with respect to reimbursement and in-kind benefits?

The final regulations provide that non-taxable reimbursements, certain taxable medical reimbursements, and in-kind benefits generally are not subject to Section 409A if paid within the time period discussed above, However, the final regulations recognize that there are difficulties in fixing the time and form of reimbursement and in-kind benefits to meet such timing requirements. The final regulations provide that a right to reimbursement or in-kind benefits will meet the requirements of a fixed time and form of payment if certain requirements are satisfied. A reimbursement plan must provide for the reimbursement of expenses incurred during an objectively defined period in which the amount of reimbursable expenses incurred or in-kind benefits available in one taxable year cannot affect the amount of reimbursable or in-kind benefits available in a different taxable year. In addition, the reimbursement payment must be made no later than the end of the employee's taxable year following the taxable year in which the expense was incurred. Reimbursement or in-kind benefit rights may not be subject to liquidation or exchange for another benefit.

For example: A right to reimbursement of membership fees (e. g. for a professional organization) incurred for each of three specified and consecutive calendar years by a former employee, where he or she is entitled to reimbursement of the expenses incurred each year without regard to the expenses year to year, and where it cannot be exchanged for the right to cash or any other benefit, has a fixed time and form of payment, so long as the reimbursement occurs no later than the end of the calendar year following the year in which the expense is incurred. In contrast, a right to reimbursement of membership fees of up to $30,000 over three years would not meet the requirement of a fixed time and form of payment because the extent to which the former employee incurred an expense in one year would necessarily affect the amount available for reimbursement in a subsequent year.

35. Are there written plan requirements under Section 409A for separation pay arrangements?

Sí. The employer must establish and maintain a written plan in compliance with Section 409A if the payments underlying the arrangement are subject to Section 409A. Under the final regulations, an employer establishes a plan on the latest of (1) the adoption date, (2) the effective date, or (3) the date on which the material terms of the plan are set forth in writing. The employer may set forth the material terms of the plan in one or more written documents. The material terms include the amount (or formula to determine the amount) of deferred compensation that the participant will receive and the time and form of the participant's payment. In addition, with respect to a public company, the plan must specifically provide for a six-month payment delay for "specified employees" (as discussed in question 36 below). Because of this requirement, if you are an employer who has verbal agreements to pay certain amounts of separation pay or benefits which qualify as "deferred compensation," those agreements should be put in writing by December 31, 2007.

Payment Date Requirements for Specified Employees

36. Are the prior rules requiring delay of deferred compensation payments to "specified employees" adopted by the final regulations?

Sí. The statutory language of Section 409A provides that with respect to specified employees, a payment of deferred compensation on account of a separation from service may not occur before the date that is six months after the date of separation from service. However, the final regulations provide that payments that are excepted from Section 409A are not subject to the six-month delay. As a result, the six-month delay may be less painful than previously thought. For example, payments that are made in a single lump sum on an involuntary separation from service or paid in an amount, up to the dollar limits prescribed, under the involuntary separation from service and window program exception can be paid without a six-month delay to a specified employee.

37. Who is a "specified employee"?

A "specified employee" is a key employee of a corporation whose stock is publicly traded on an established securities market. Key employees are determined according to the rules found in Internal Revenue Code Section 416(i), which applies a cap on the number of key employees. Specifically, all 5 percent owners of the corporation, 1 percent owners of the corporation with compensation greater than $150,000, and officers of a corporation with compensation greater than $130,000 will be considered key employees, but no more than 50 officers will be key employees (or, if lesser, the greater of (a) three, or (b) 10 percent of the employees).

The final Section 409A regulations also clarify that officers of foreign subsidiaries may now be excluded from this calculation, although Internal Revenue Code Section 416(i) and the underlying regulations do not make a distinction based on U. S. or worldwide officer status. However, employers might want to include foreign officers when determining key employees (despite the administrative burden in gathering foreign-officer compensation data) to reduce Section 409A exposure to U. S. officers when determining key employees.

Please note that there is a statutory exception that permits an employer to exclude (for purposes of determining the number of officers taken into account), officers who are: (1) employees who have not completed six months of service; (2) employees who normally work less than 17 ½ hours per week; (3) employees who normally work less than 6 months during any year; (4) employees who have not attained age 21; or (5) employees covered by a collective bargaining agreement.

38. If a company is traded only on a foreign stock market, are its employees subject to the "specified employee" rule?

Sí. The "specified employee" rules will apply to the employees of a company traded only on a foreign stock market. This is because the final regulations clarify that an established securities market includes a foreign stock market (e. g. the London Stock Exchange and AIM Market).

39. Are there changes under the final regulations for determining key employees?

The regulations provide that employers can use any definition of "compensation" found in Internal Revenue Code Section 415 (the compensation rules that are normally applicable to tax-qualified retirement plans) for purposes of identifying key employees, provided that the definition is applied consistently to all employees of the employer. Further, the employer may use a definition of compensation for identifying specified employees regardless of whether another Internal Revenue Code Section 415 definition of compensation is being used for purposes of its tax-qualified retirement plan. However, it may be more convenient for an employer to have these definitions match.

40. Are there changes in the final regulations with respect to the specified employee effective date?

The final regulations provide that an employer may use a specified employee effective date that is earlier than April 1. Generally, the employees identified as of an identification date would become specified employees on the April 1 following the identification date. However, the regulations permit an employer to select an earlier specified employee identification date upon which the new list of specified employees will become effective. Any change to the specified employee effective date may not become applicable until 12 months following the initial change.

The regulations provide December 31 as the default specified employee identification date and April 1 following the identification date as the default date for situations in which an employer does not specify a date in its separation pay arrangements and deferred compensation plans.

41. How do we identify an employee who would have become a specified employee if it weren't for his termination?

The final regulations clarify that the six-month delay requirement applies only when the employee is a specified employee as of the date of the separation from service, even if he or she would have subsequently become a specified employee if the separation had not occurred.

42. How do we treat specified employees after a change of control?

The final regulations significantly alter the identification of specified employees following corporate transactions such as mergers, spin-offs, and initial public offerings (IPOs). The final regulations set forth procedures for determining: (1) the next specified employee identification date; (2) the first specified employee effective date following the merger or transaction; and (3) rules for the period after the date of the merger or transaction and before the next specified employee effective date.

The procedures vary depending on whether the acquirer and target are publicly or privately held. For instance, in a transaction in which both parties are publicly held, the specified employees immediately following the merger generally will consist of the 50 most highly compensated service providers of the combined company, although alternate methods of determining the specified employees may be set within a short timeframe following the merger. On the other hand, when a public company acquires a private company, the list of specified employees immediately following the transaction will be those who were already designated as the specified employees of the public company before the transaction, and the employees from the private company get a "pass" until the next specified employee effective date. There are additional procedures set forth for spin-off and IPO scenarios.

We encourage employers who will be entering into public-public mergers, public-private mergers, spin-offs, and IPOs to consider specified employee determinations and identify any Section 409A impact prior to any such merger or transaction.

43. Can we accelerate the payment of a separation payment if a specified employee dies, becomes disabled, or has an unforeseeable emergency?

Sí. The final regulations retain the prior interim guidance rule that a payment may be made, without any six-month delay, following a specified employee's death after his or her separation from service (that is, the payment may be accelerated). However, on the occurrence of disability, unforeseeable emergencies, or change of control after a separation from service, the payment must continue to be delayed. On the other hand, payment does not need to be delayed if a payment is initially made due to disability, unforeseeable emergencies, or change of control and a separation from service occurs afterwards.

44. Are there other instances in which we can accelerate a payment for a specified employee?

The final regulations provide that the required delay of a payment to a specified employee after separation from service is not violated in situations in which the payment is made before the end of the six-month required delay period due to a domestic relations order, to satisfy a federal, state, local, or foreign ethics law, or to pay certain employment taxes.

45. Can you illustrate how some of the separation pay rules work together in a few examples?

Sí. Below are two practical examples of how the rules work. The first example illustrates the use of the separation pay exceptions. The second example illustrates the interaction of the separation pay exceptions with the specified employee rules.

Example 1: Pat is the general counsel to a large private company and is located in the United States. Pat's annual salary and annual bonus total $475,000. Under his employment agreement, Pat is entitled to two times his annual salary and bonus ($950,000) if Pat is terminated without cause or if Pat terminates his employment for good reason, payable over a two-year period beginning immediately following termination of employment. Pat also is entitled to company-paid COBRA continuation coverage for 18 months following termination of employment (value of $23,500). Pat also is entitled to use the company-leased car for its remaining lease term of 12 months (value of $14,000). Therefore, Pat could receive up to $987,500 in benefits under the severance provisions of his employment agreement.

Pat terminates his employment for good reason with the company in 2007 because the company has changed its policies with respect to his duties as head of the legal department. They now require that Pat report to a senior vice president, rather than directly to the board of directors of the company. Under the severance provisions of his employment agreement, such change in duties is considered a material and adverse change in Pat's employment. In addition, under the same severance provisions, Pat must give the company 30 days to cure the material and adverse change. The company does not cure and Pat's employment terminates.

Answer to Example 1: Pat's payments extend well past the first two-and-a-half months of the calendar year following the year Pat is terminated. As a result, the short-term deferral exception does not apply and some of the payments may be subject to Section 409A. However, other exceptions may apply and (hopefully) reduce Pat's exposure under Section 409A.

a. Involuntary separation from service exception

Pat's termination for good reason likely will be treated as an involuntary termination because: (1) Pat's benefits payable after termination for good reason are the same amount and made at the same time and in the same form as payments that would be available after an involuntary separation from service; (2) Pat is required to give notice of the existence of the good reason condition and reasonable opportunity for the employer to remedy the condition; and (3) the action taken by the company in this case probably results in a material negative change in Pat's employment.

As a result, certain portions of the $987,500 in payments may be excepted from Section 409A because of the involuntary separation from service exception. This exception will be limited in this case to $450,000 (two times the compensation limit of $225,000 set forth in Internal Revenue Code Section 401(a)(17) for 2007). As result, $450,000 of Pat's severance payments is not subject to Section 409A.

Please note, however, that this agreement does not fall within the new safe harbor found in the final Section 409A regulations because it does not require Pat to provide notice of the existence of the good reason condition within a period not to exceed 90 days from its initial existence. Therefore, this factual determination regarding the finding of good reason by the company could be subject to scrutiny by the IRS in the future.

segundo. The non-taxable benefit exception

The $23,500 in company-paid COBRA continuation coverage for 18 months will not be subject to Section 409A because it is a non-taxable benefit under Internal Revenue Code Section 105 (which does not require current employment to exempt such benefits from taxation). Please note that it is not a taxable benefit under Internal Revenue Code Section 105(h) due to the fact the company's health plan is fully insured and Internal Code Section 105(h) only applies to self-insured health plans. Therefore, the $23,500 will not be treated as a deferred compensation for purposes of Section 409A. Further, the exclusion of this $23,500 amount will not run concurrently with the aforementioned $450,000 exclusion because these exceptions work on an additive basis.

do. In-kind benefit exception

Pat's entitlement to use the company-leased car for its remaining lease term of 12 months, which is valued at $14,000, will not constitute a deferral of compensation because it is an in-kind benefit under Section 409A. In addition, the car benefit will not be subject to Section 409A because it is provided by the end of the second year following Pat's separation from service.

Therefore, $500,000 of Pat's severance payments ($987,500 - (450,000 + $14,000 + $23,500) = $500,000) will be subject to Section 409A, but since the payments will be paid according to the fixed schedule set in Pat's original agreement (which will make such payments comply with Section 409A), it will not be subject to any additional tax under Section 409A. Overall, $487,500 is not subject to Section 409A.

Example 2: Same facts as in Example 1, except that the company's stock is traded publicly on the New York Stock Exchange and Pat has been one of the top 50 highest-paid officers for several years.

Answer to Example 2: Pat should be considered a specified employee because Pat is a U. S. employee and cannot be excluded due to the optional foreign officer exclusion. Further, there are no facts that Pat can be excluded due to the part-time officer exclusions found in Internal Revenue Code Section 416(i). Because the company's stock is traded publicly, the specified employee rules under final Section 409A regulations apply and Pat will be considered a specified employee. Therefore, any payment subject to Section 409A must be delayed for at least six months after separation from service.

The involuntary separation from service exception, non-taxable benefit exception, and in-kind benefit exception continue to apply. Any payment subject to Section 409A must be delayed for at least six months after separation from service. Therefore, the six-month delay will not apply to the payments representing $487,500 because amounts paid pursuant to the aforementioned exceptions are not subject to Section 409A. However, payments subject to Section 409A must be delayed at least six months from the separation from service date (that is, the separation payments representing the $500,000 must be delayed six months from Pat's separation date).

Employers should perform the following action items within the next several months:

Inventory all arrangements that provide for separation pay.

Review all such separation pay arrangements to determine whether they are subject to Section 409A and amend them as necessary to ensure compliance with the final regulations.

With respect to informal separation pay arrangements, determine to what extent they must now be formalized in a plan or in agreements.

If the employer is a public company, develop specified employee determination procedures.

For More Information

This Client Alert is intended only as a general summary of the impact of the final Section 409A regulations on separation pay arrangements. We strongly advise you to seek professional assistance with respect to your specific issues.

If you have any questions regarding this Client Alert, please contact any member of the Wilson Sonsini Goodrich & Rosati Employee Benefits & Compensation practice:

1 For the remainder of this alert, the term "employee" should be read to include a non-employee service provider unless we clearly indicate otherwise.

Please click here for a printable version of this Client Alert.

Circular 230 Compliance . To ensure compliance with requirements imposed by the IRS, we inform you that any U. S. federal tax advice contained in this memorandum is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Marketing Automation Platform

State of Delaware - Search and Services/Information

TITLE 8

Corporations

CHAPTER 1. GENERAL CORPORATION LAW

Subchapter II. Powers

§a; 121 General powers.

(a) In addition to the powers enumerated in § 122 of this title, every corporation, its officers, directors and stockholders shall possess and may exercise all the powers and privileges granted by this chapter or by any other law or by its certificate of incorporation, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes set forth in its certificate of incorporation.

(b) Every corporation shall be governed by the provisions and be subject to the restrictions and liabilities contained in this chapter.

§a; 122 Specific powers.

Every corporation created under this chapter shall have power to:

(1) Have perpetual succession by its corporate name, unless a limited period of duration is stated in its certificate of incorporation;

(2) Sue and be sued in all courts and participate, as a party or otherwise, in any judicial, administrative, arbitrative or other proceeding, in its corporate name;

(3) Have a corporate seal, which may be altered at pleasure, and use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced;

(4) Purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of its property and assets, or any interest therein, wherever situated;

(5) Appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation;

(6) Adopt, amend and repeal bylaws;

(7) Wind up and dissolve itself in the manner provided in this chapter;

(8) Conduct its business, carry on its operations and have offices and exercise its powers within or without this State;

(9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof;

(10) Be an incorporator, promoter or manager of other corporations of any type or kind;

(11) Participate with others in any corporation, partnership, limited partnership, joint venture or other association of any kind, or in any transaction, undertaking or arrangement which the participating corporation would have power to conduct by itself, whether or not such participation involves sharing or delegation of control with or to others;

(12) Transact any lawful business which the corporation's board of directors shall find to be in aid of governmental authority;

(13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, and make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of (a) a corporation all of the outstanding stock of which is owned, directly or indirectly, by the contracting corporation, or (b) a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, or (c) a corporation all of the outstanding stock of which is owned, directly or indirectly, by a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation, and make other contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation;

(14) Lend money for its corporate purposes, invest and reinvest its funds, and take, hold and deal with real and personal property as security for the payment of funds so loaned or invested;

(15) Pay pensions and establish and carry out pension, profit sharing, stock option, stock purchase, stock bonus, retirement, benefit, incentive and compensation plans, trusts and provisions for any or all of its directors, officers and employees, and for any or all of the directors, officers and employees of its subsidiaries;

(16) Provide insurance for its benefit on the life of any of its directors, officers or employees, or on the life of any stockholder for the purpose of acquiring at such stockholder's death shares of its stock owned by such stockholder.

(17) Renounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or 1 or more of its officers, directors or stockholders.

§a; 123 Powers respecting securities of other corporations or entities.

Any corporation organized under the laws of this State may guarantee, purchase, take, receive, subscribe for or otherwise acquire; own, hold, use or otherwise employ; sell, lease, exchange, transfer or otherwise dispose of; mortgage, lend, pledge or otherwise deal in and with, bonds and other obligations of, or shares or other securities or interests in, or issued by, any other domestic or foreign corporation, partnership, association or individual, or by any government or agency or instrumentality thereof. A corporation while owner of any such securities may exercise all the rights, powers and privileges of ownership, including the right to vote.

§a; 124 Effect of lack of corporate capacity or power; ultra vires.

No act of a corporation and no conveyance or transfer of real or personal property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to do such act or to make or receive such conveyance or transfer, but such lack of capacity or power may be asserted:

(1) In a proceeding by a stockholder against the corporation to enjoin the doing of any act or acts or the transfer of real or personal property by or to the corporation. If the unauthorized acts or transfer sought to be enjoined are being, or are to be, performed or made pursuant to any contract to which the corporation is a party, the court may, if all of the parties to the contract are parties to the proceeding and if it deems the same to be equitable, set aside and enjoin the performance of such contract, and in so doing may allow to the corporation or to the other parties to the contract, as the case may be, such compensation as may be equitable for the loss or damage sustained by any of them which may result from the action of the court in setting aside and enjoining the performance of such contract, but anticipated profits to be derived from the performance of the contract shall not be awarded by the court as a loss or damage sustained;

(2) In a proceeding by the corporation, whether acting directly or through a receiver, trustee or other legal representative, or through stockholders in a representative suit, against an incumbent or former officer or director of the corporation, for loss or damage due to such incumbent or former officer's or director's unauthorized act;

(3) In a proceeding by the Attorney General to dissolve the corporation, or to enjoin the corporation from the transaction of unauthorized business.

§a; 125 Conferring academic or honorary degrees.

No corporation organized after April 18, 1945, shall have power to confer academic or honorary degrees unless the certificate of incorporation or an amendment thereof shall so provide and unless the certificate of incorporation or an amendment thereof prior to its being filed in the office of the Secretary of State shall have endorsed thereon the approval of the Department of Education of this State. No corporation organized before April 18, 1945, any provision in its certificate of incorporation to the contrary notwithstanding, shall possess the power aforesaid without first filing in the office of the Secretary of State a certificate of amendment so providing, the filing of which certificate of amendment in the office of the Secretary of State shall be subject to prior approval of the Department of Education, evidenced as hereinabove provided. Approval shall be granted only when it appears to the reasonable satisfaction of the Department of Education that the corporation is engaged in conducting a bona fide institution of higher learning, giving instructions in arts and letters, science or the professions, or that the corporation proposes, in good faith, to engage in that field and has or will have the resources, including personnel, requisite for the conduct of an institution of higher learning. Upon dissolution, all such corporations shall comply with § 8530 of Title 14. Notwithstanding any provision herein to the contrary, no corporation shall have the power to conduct a private business or trade school unless the certificate of incorporation or an amendment thereof, prior to its being filed in the office of the Secretary of State, shall have endorsed thereon the approval of the Department of Education pursuant to Chapter 85 of Title 14.

Notwithstanding the foregoing provisions, any corporation conducting a law school, which has its principal place of operation in Delaware, and which intends to meet the standards of approval of the American Bar Association, may, after it has been in actual operation for not less than 1 year, retain at its own expense a dean or dean emeritus of a law school fully approved by the American Bar Association to make an on-site inspection and report concerning the progress of the corporation toward meeting the standards for approval by the American Bar Association. Such dean or dean emeritus shall be chosen by the Attorney General from a panel of 3 deans whose names are presented to the Attorney General as being willing to serve. One such dean on this panel shall be nominated by the trustees of said law school corporation; another dean shall be nominated by a committee of the Student Bar Association of said law school; and the other dean shall be nominated by a committee of lawyers who are parents of students attending such law school. If any of the above-named groups cannot find a dean, it may substitute 2 full professors of accredited law schools for the dean it is entitled to nominate, and in such a case if the Attorney General chooses 1 of such professors, such professor shall serve the function of a dean as herein prescribed. If the dean so retained shall report in writing that, in such dean's professional judgment, the corporation is attempting, in good faith, to comply with the standards for approval of the American Bar Association and is making reasonable progress toward meeting such standards, the corporation may file a copy of the report with the Secretary of Education and with the Attorney General. Any corporation which complies with these provisions by filing such report shall be deemed to have temporary approval from the State and shall be entitled to amend its certificate of incorporation to authorize the granting of standard academic law degrees. Thereafter, until the law school operated by the corporation is approved by the American Bar Association, the corporation shall file once during each academic year a new report, in the same manner as the first report. If, at any time, the corporation fails to file such a report, or if the dean retained to render such report states that, in such dean's opinion, the corporation is not continuing to make reasonable progress toward accreditation, the Attorney General, at the request of the Secretary of Education, may file a complaint in the Court of Chancery to suspend said temporary approval and degree-granting power until a further report is filed by a dean or dean emeritus of an accredited law school that the school has resumed its progress towards meeting the standards for approval. Upon approval of the law school by the American Bar Association, temporary approval shall become final, and shall no longer be subject to suspension or vacation under this section.

§a; 126 Banking power denied.

(a) No corporation organized under this chapter shall possess the power of issuing bills, notes, or other evidences of debt for circulation as money, or the power of carrying on the business of receiving deposits of money.

(b) Corporations organized under this chapter to buy, sell and otherwise deal in notes, open accounts and other similar evidences of debt, or to loan money and to take notes, open accounts and other similar evidences of debt as collateral security therefor, shall not be deemed to be engaging in the business of banking.

§a; 127 Private foundation; powers and duties.

A corporation of this State which is a private foundation under the United States internal revenue laws and whose certificate of incorporation does not expressly provide that this section shall not apply to it is required to act or to refrain from acting so as not to subject itself to the taxes imposed by 26 U. S.C. §a; 4941 (relating to taxes on self-dealing), § 4942 (relating to taxes on failure to distribute income), § 4943 (relating to taxes on excess business holdings), § 4944 (relating to taxes on investments which jeopardize charitable purpose), or § 4945 (relating to taxable expenditures), or corresponding provisions of any subsequent United States internal revenue law.

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Securities Transaction Tax (STT) is the tax payable on the value of taxable securities transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004.

What all is covered by Securities? Securities definition is as per section 2(h) of the Securities Contracts (Regulation) Act, 1956, but for our purpose, let’s just simply say Securities mean Equity Shares and Equity Derivatives (i. e. Futures and Options). Full definition of Securities is given in Appendix, for information.

What are taxable transactions?

Purchase and Sale of securities through a recognised stock exchange in India. STT is not applicable on off-market transactions.

What rate is STT payable?

STT is applicable at different rates depending upon the security (whether equity or derivative) and the transaction (whether purchase or sell). Current STT rates are given below. Note that Service Tax, Surcharge and Education Cess are not applicable on STT.

STT applicable for Equity Transactions

Purchase: 0.10% of Turnover i. e. (Number of Shares * Price)

Sell: 0.10% of Turnover i. e. (Number of Shares * Price)

Kindly note that the STT rates were revised in 2012 Budget and the above rates came in effect from 1st July 2012. STT rates for Equity Delivery transactions (Both Purchase and Sale transaction) was reduced from 0.125% to 0.10%. There was no other change in the STT rates.

Taxation of profit or loss from securities transactions depends on whether the activity of purchasing and selling of shares / derivatives is classified as investment activity or business activity. Treatment of STT also depends upon whether the income from these securities transactions are included under the head “Income from Capital Gains” or under the head ‘Profits and Gains of Business or Profession’.

Scenario 1: ‘Income from Capital Gains’

This refers to the scenario where the assessee is either Salaried or is engaged in some other business or profession and trading in securities is not the main line of business. In such cases gains or losses from securities transactions are taxed under the head “Income from Capital Gains”. Gains or losses are subject to Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) tax depending upon the period of holding, i. e. if the holding period is less than 1 year, gains are classified as STCG and if the holding period is equal to or greater than 1 year, gains are classified as LTCG. Any equity share, which has been sold through a recognised stock exchange and on which STT has been paid, is entitled to exemption from LTCG under Section 10 (38) of the Act. Similarly, in case of STCG of such shares, the gains shall be taxed only at 15%, plus surcharge and education cess under section 111A of the Act.

Important points to note:

STCG and LTCG rates of 15% and NIL are available only if the specified security is sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange in India, will not be covered

the purchase of the specified securities could be through any mode and need not be through a recognised stock exchange

The exemption is not available to transactions where STT has not been paid

Since LTCG is exempt, Long Term Capital Loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse

As per section 40(a)(ib) of the Income tax Act, STT cannot be claimed as an expense in computing the income chargeable under Capital Gains

Scenario 2: ‘Profits and Gains of Business or Profession’

This refers to the scenario where main business of the assessee is trading in securities. In such cases the gains or losses are classified as business income, which is taxed at the regular rate of income-tax. STT paid in respect of taxable securities transactions entered into in the course of business shall be allowed as deduction under section 36 of the Income-tax Act. Until 31 st March 2008. the amount of STT paid was allowed as rebate under section 88E of the Income-tax Act. However, with effect from 1 st April 2008. rebate available under section 88E has been discontinued.

“Securities” is defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, to include:

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(iv) security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(v) Government securities;

(vi) such other instruments as declared by the Central Government; y

The Employee Stock Purchase Plans (ESPP), also known as Section 423 plans, is a kind of employee stock option (ESO) that obtains a favorable tax treatment from the government. Any ESO can be an ESPP provided that the ESO meets the restrictions and requirements set forth by Section 423 of the United States Internal Revenue Code. Like any other stock option, the ESPP gives the holder of the option, in this case the employee, the right to buy shares of the company’s stocks at a specified option price, within a specified period. This option price cannot be less than 85% of the stock price of the corporation at the time of grant nor the period of exercise longer than five years or 27 months, depending on the option price, from the time of grant.

Part of the ESPPs tax benefits is that there is no tax levied on the employee upon the grant of the ESPP or upon the exercise of the option. However, a tax is levied if (a) the option price is less than the current market value of the corporation’s stock at the time of grant of the ESPP and (b) the stock option was sold by the employee or the employee dies while the ESPP can still be exercised. This tax shall be treated as ordinary income tax and computed from either: (1)the difference of the option price and market value of the corporation’s stock at the time of grant or (2)the difference between the exercise or option price and the stock price at the time of disposition or death of the employee, whichever of 1 or 2 is lower. Like in ISO, ESPPs will also be taxed if it is disposed within the time of the statutory holding period which is two years from the time of grant or one year from the time of exercise of the option, whichever is later. If the stocks are disposed within the statutory holding period then this is called a disqualifying disposition. If the stocks were sold after the holding period then this is called a qualifying disposition.

In a disqualifying disposition the employee faces two kinds of taxes: the first one is an ordinary income tax from the difference of the option price and the prevailing market stock price at the time of exercise and the second one is the capital gains tax computed from the amount by which the option price exceeds the proceeds of the disposition. Like in ISOs, disposition includes the sale, legal transfer, exchange or gift of the stock option or stocks.

If the stocks were disposed of after the holding period then this is a qualifying disposition and lesser tax is imposed than in a disqualifying disposition. In qualifying disposition only capital gains tax is levied on the amount by which the option price exceeds the proceeds of the disposition.

In general, employers have no tax deductions for ESPPs except when there is a disqualifying disposition by the employee. Such tax deduction by the employer will be equal to the ordinary income tax of the employee because of the ESPPs and the deduction shall happen in the year of disposition of stocks by the employee.

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Intangible Personal Property

Abstracto

Intangible personal property is property that has no intrinsic value but is merely representative or evidence of value. Common examples include securities (both public and private), copyrights, royalties, patents, personal service contracts, installment obligations, life insurance and annuity contracts, and partnership interests. This memorandum examines the most common types and forms of intangible personal property that are considered for contribution to charity, and the special rules that apply to charitable deductions for income, gift, and estate tax purposes.

Introducción

Intangible personal property is property that has no intrinsic value but is merely representative or evidence of value. 1 Described another way, intangible personal property is personal property (other than real property) whose value stems from its intangible elements rather than from its specific tangible (physical) elements. 2

Although the Code does not provide a concise definition of intangible personal property, it does provide several examples. For example, section 936(h)(3)(B) defines intangible property to mean any--

copyright, literary, musical, or artistic composition;

patent, invention, formula, process, design, pattern, or know-how;

trademark, trade name, or brand name;

franchise, license, or contract;

method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data; o

any similar item, which has substantial value independent of the services of any individual.

With respect to charitable gift planning, the most common types of intangible personal property that gift planners encounter include securities (both public and private), copyrights, royalties, patents, personal service contracts, installment obligations, life insurance and annuity contracts, and partnership interests.

Intangible property is also frequently "bundled" with tangible or real property. Examples include a work of art and its copyright, or mineral rights and the real property from which the minerals are derived. The deductibility of such contributions depends on a variety of factors that frequently depend on whether the interests are given in combination or separately.

The balance of this memorandum examines the most common types and forms of intangible personal property that are considered for contribution to charity, and the special rules that apply to charitable deductions for income, gift, and estate tax purposes. Due to their scope and complexity, however, publicly traded securities and privately-held business interests (which includes corporations, partnerships, and limited liability companies) are the subjects of separate memoranda.

General Tax Deduction Rules

It is important to note that contributions of intangible personal property are not subject to the same rules as apply to gifts of tangible personal property. Specifically, the related-use and future interest rules do not apply to gifts of intangible assets. As will be discussed, however, the partial interest rule and Section 170 reduction rules (applicable to contributions of ordinary income property) frequently come into play with respect to transfers of intangible assets.

For gift and estate tax deduction purposes, intangible personal property is subject to the same general rules as apply to tangible personal property and real property. Specific rules and exceptions are discussed in connection with each type of intangible asset.

Copyrights

Under Title 17 of the United States Code, the holder of a copyright has the exclusive right:

to reproduce the copyrighted work in copies or phonorecords;

to prepare derivative works based upon the copyrighted work;

to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly;

and in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission. 3

Works Subject to Copyright

Copyright protection is generally offered to original works of authorship which include literary works; musical works, including any accompanying words; dramatic works, including any accompanying music; pantomimes and choreographic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings; and architectural works. 4

Copyright protection for an original work of authorship does not, however, extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work. 5 Such "process-oriented" rights are subject to patent law as described in U. S.C. Title 35, discussed supra. Nor is copyright protection extended to an individual who performs work for hire; rather, the employer or other person for whom the work was prepared is considered the owner of the copyright. 6

Duration of Copyright

In 1976, Title 17 was revised in its entirety. 7 One of the most significant revisions deals with the duration of an owner's copyright.

Works created on or after January 1, 1978

If a work was created on or after January 1, 1978, the duration of the copyright endures for a term consisting of the life of the author and fifty years after the author's death. In the case of a joint work prepared by two or more authors who did not work for hire, the copyright endures for a term consisting of the life of the last surviving author and fifty years after such last surviving author's death. In the case of an anonymous work, a pseudonymous work, or a work made for hire, the copyright endures for a term of seventy-five years from the year of its first publication, or a term of one hundred years from the year of its creation, whichever expires first. 8

Works created before January 1, 1978

If a work was created before January 1, 1978, the duration of the copyright depends on when the work itself was published or copyrighted. If the work was created but not yet published or copyrighted prior to January 1, 1978, the duration of the copyright is the same as for works created on or after January 1, 1978. 9 Conversely, any copyright, the first term of which is subsisting on January 1, 1978, shall endure for 28 years from the date it was originally secured. Such copyrights are not renewable, as was permitted under pre-1976 law.

Transferring Ownership of Copyright

Section 202 provides that ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied. 10 Accordingly, the transfer of ownership of any material object in which the work is first fixed does not of itself convey any rights in the copyrighted work embodied in the object; nor, in the absence of an agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object.

Based on this distinction, the owner of a material object subject to copyright can contribute the object, the copyright, or both. As will be discussed momentarily, charitable deductions for such transfers may be limited or unavailable.

The ownership of a copyright may be transferred in whole or in part by any means of conveyance or by operation of law, and may be bequeathed by will or pass as personal property by the applicable laws of intestate succession. 11 Such transfers must be evidenced in writing by instrument of conveyance, or a note or memorandum of the transfer, which is signed by the copyright owner or owner's agent. 12 The final step in transferring a copyright involves sending the original or a certified copy of the original instrument of transfer to the Register of Copyrights, along with the applicable fee (as prescribed in Title 17, Section 708) for recording. The document will be returned with a certificate of recordation. 13

Income Tax Deduction Considerations

The income tax deductibility for a contribution of a copyright is based on three primary questions:

Is the copyright in the hands of the donor considered a capital asset or ordinary income property?

Is the copyright subject to depreciation recapture?

Does the contribution satisfy the "partial interest rule?"

Tax Character of Copyright

Reg. §1.1221-1(c)(1) states, "A copyright, a literary, musical, or artistic composition, and similar property are excluded from the term "capital assets" if held by a taxpayer whose personal efforts created such property, or if held by a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such property. For purposes of this subparagraph, the phrase "similar property" includes for example, such property as a theatrical production, a radio program, a newspaper cartoon strip, or any other property eligible for copyright protection (whether under statute or common law), but does not include a patent or an invention, or a design which may be protected only under the patent law and not under the copyright law."

In brief, a copyright is considered to be a capital asset unless --

it is owned by the taxpayer who created the copyrighted property;

it is was received by a taxpayer as a gift from the creator of the copyrighted property. 14

The IRS and courts have further delineated the tax character of copyrights:

Rev. Rul. 60-226 holds that the consideration received by a proprietor of a copyright for a grant transferring the exclusive right to exploit the copyrighted work in a medium of publication throughout the life of the copyright shall be treated as proceeds from a sale of property [emphasis added], regardless of whether the consideration received is measured by a percentage of the receipts from the sale, performance, exhibition, or publication of the copyrighted work, or is measured by the number of copies sold, performances given, or exhibitions made of the copyrighted work, or whether such receipts are payable over a period generally coterminous with the grantee's use of the copyrighted work. 15

If, however, the seller [or presumably, a donor] transfers less than the exclusive right to exploit the copyright in a specified medium, or when the transfer does not last for the duration of the copyright, the transfer is not considered a sale of a capital asset. 16 Further, a copyright is not a capital asset if its owner holds it primarily for sale to customers in the ordinary course of business. 17

Deduction Rule: Assuming the copyright is transferred to a public charity as described in IRC §170(b)(1)(A), if it is considered ordinary income property or short-term capital gain property, the donor's income tax charitable deduction is limited to their adjusted cost basis, subject to the 50-percent deduction limitation. If the copyright is considered a long-term capital asset, the donor's deduction is based on its fair market value, subject to the 30-percent deduction limitation.

Depreciation Recapture

Section 1.167(a)-6(a) of the regulations provides that the cost or other basis of a patent or copyright shall be depreciated over its remaining useful life. If a patent or copyright becomes valueless in any year before its expiration the unrecovered cost or other basis may be deducted in that year. In the event the taxpayer sells a copyright, any depreciation previously claimed by the taxpayer is recaptured as ordinary income. 18 For purposes of determining a donor's income tax charitable deduction, the fair market value of the copyright is reduced by this ordinary income element. 19

Partial Interest Rule

As was previously mentioned, for purposes of Title 17, a copyright and the material object in which the work is embodied are distinguishable assets. It seems logical, therefore, that an individual can contribute a copyright while retaining the material object, or contribute the object while retaining the copyright and, in either case, enjoy an income tax charitable contribution deduction. However, Title 17 and Title 26 (the repository of the Internal Revenue Code) represent mutually exclusive bodies of law.

In general, a transfer to charity of a copyright without the underlying tangible asset in which the work is embodied constitutes a gift of less than the donor's entire interest in the property because such transfers do not qualify for one the exceptions described in section 170. 20 With certain exceptions discussed below, a transfer of a copyright without the underlying tangible asset is not deductible for income, gift, or estate tax purposes.

The regulations cite as an example an outright gift of an interest in original historic motion picture films to a charitable organization where the donor retained the exclusive right to make reproductions of such films and to exploit such reproductions commercially. 21 In such case, an income tax charitable deduction was denied. This rule is distinguished by a private ruling in which an income tax charitable deduction was permitted for a gift of a copyright where the tangible asset, a book with a large circulation, had little intrinsic value. 22

In summary, a copyright owned by other than the creator (or a donee of the creator) of the copyrighted work might qualify as a capital asset, thereby qualifying for fair market value deduction. In order to qualify for deduction, however, the donor must transfer their entire interest in the property. If a donor owns both the copyright and the material object which embodies the work (which itself has intrinsic value), both must be contributed (in which case, the related-use rule will come into play with respect to the deductibility of the tangible asset). If the donor owns and transfers only the copyright, or certain rights bundled thereunder, the partial interest rules should not apply, because it constitutes the donor's entire interest in the property.

Special Estate Tax Exception for Qualified Contributions of Art

As was previously mentioned, the partial interest rule generally applies for income, gift, and estate tax purposes. With respect to the estate tax charitable deduction, however, a special exception to the partial interest rule applies. The regulations provide that "qualified contributions" of works of art and copyrights are treated as separate properties. 23 Thus, a deduction is allowable under section 2055 for a qualified contribution of a work of art, whether or not the related copyright is simultaneously transferred to a charitable organization.

For purposes of this rule, the term "work of art" means any tangible personal property with respect to which a copyright exists under Federal law. 24 The term "qualified contribution" means any transfer of property to a qualified organization if the property can be placed to a use that is related to its tax-exempt purpose. 25

A "qualified organization" means any organization described in section 501(c)(3) other than a private non-operating foundation (as defined in section 509). The regulations provide several examples that clarify the application of this rule:

Example (1) . A, an artist, died in 1983. A work of art created by A and the copyright interest in that work of art were included in A's estate. Under the terms of A's will, the work of art is transferred to X charity, the only charitable beneficiary under A's will. X has no suitable use for the work of art and sells it. It is determined under the rules of section 1.170A-4(b)(3) that the property is put to an unrelated use by X charity. Therefore, the rule of paragraph (e)(1)(ii)(a), which treats works of art and their copyrights as separate properties, does not apply because the transfer of the work of art to X is not a qualified contribution. To determine whether paragraph (e)(1)(i) of this section applies to disallow a deduction under section 2055, it must be determined which interests are treated as passing to X under local law.

(i) If under local law A's will is treated as fully transferring both the work of art and the copyright interest to X, then paragraph (e)(1)(i) of this section does not apply to disallow a deduction under section 2055 for the value of the work of art and the copyright interest.

(ii) If under local law A's will is treated as transferring only the work of art to X, and the copyright interest is treated as part of the residue of the estate, no deduction is allowable under section 2055 to A's estate for the value of the work of art because the transfer of the work of art is not a qualified contribution and paragraph (e)(1)(i) of this section applies to disallow the deduction.

Example (2) . B, a collector of art, purchased a work of art from an artist who retained the copyright interest. B died in 1983. Under the terms of B's will the work of art is given to Y charity. Since B did not own the copyright interest, paragraph (e)(1)(i) of this section does not apply to disallow a deduction under section 2055 for the value of the work of art, regardless of whether or not the contribution is a qualified contribution under paragraph (e)(1)(ii)(c) of this section.

patentes

The patent laws of Title 35 of the United States Code protects the intellectual property rights of those who invent or discover any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. Patents are issued in the name of the United States of America, under the seal of the Patent and Trademark Office. They grant to the patentee, his or her heirs, or assigns the right to exclude others from making, using, offering for sale, or selling the property subject to the patent throughout the United States, or importing the property into the United States.

Term of Patent

Patents are granted for a term beginning on the date on which the patent issues and ending 20 years from the date on which the application for the patent was filed in the United States or, if the application contains a specific reference to an earlier filed application or applications under section 120, 121, or 365(c) of Title 35, from the date on which the earliest such application was filed. If the issue of an original patent is delayed for various administrative reasons, the term of the patent shall be extended for the period of delay, but in no case more than five years. 26

Transfer of Ownership of Patent

Section 261 of U. S.C. Title 35 provides that applications for patent, patents, or any interest therein, are assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.

A certificate of acknowledgment under the hand and official seal of a person authorized to administer oaths within the United States, or, in a foreign country, of a diplomatic or consular officer of the United States or an officer authorized to administer oaths whose authority is proved by a certificate of a diplomatic or consular officer of the United States, or apostille of an official designated by a foreign country which, by treaty or convention, accords like effect to apostilles of designated officials in the United States, provides prima facie evidence of the execution of an assignment, grant or conveyance of a patent or application for patent.

An assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.

In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners. 27

Income Tax Deduction Considerations for Contributions Prior to June 4, 2004

The income tax deductibility for a contribution of a patent is based on three primary questions:

Is the patent in the hands of the donor considered a capital asset or ordinary income property?

Is the patent subject to depreciation recapture?

Does the contribution satisfy the "partial interest rule?"

Tax Character of Patent

IRC §1235 provides in part that a transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or undivided interest therein which includes a part of all such rights, by any holder shall be considered a transfer of a sale or exchange of a capital asset held for more than one year. Income is realized on transfer regardless of when payment is received and whether the patent ever produces income.

Deduction Rule: Provided section 1235 would apply if the patent were sold or exchanged, a charitable contribution of the patent (or undivided fractional interest therein) is considered a transfer of capital gain property. Therefore, regardless of the donor's holding period, provided the patent is contributed to a public charity, the donor's income tax charitable deduction is based on the fair market value of the patent and is subject to the 30-percent limitation. If the patent is transferred to a private non-operating foundation, the deduction is limited to the lesser of the patent's fair market value or the donor's adjusted cost basis in the patent. The deduction is subject to the 50-percent limitation.

Effect of Depreciation Recapture

Section 1.167(a)-6(a) of the regulations provides that the cost or other basis of a patent or copyright shall be depreciated over its remaining useful life. Its cost to the patentee includes the various Government fees, cost of drawings, models, attorneys' fees, and similar expenditures. 28 If a patent or copyright becomes valueless in any year before its expiration the unrecovered cost or other basis may be deducted in that year. In the event the taxpayer sells a patent, any depreciation previously claimed by the taxpayer is recaptured as ordinary income. 29 Depreciation recapture can be avoided by donating the patent to charity; however, for purposes of determining a donor's income tax charitable deduction, the fair market value of the patent is reduced by amount that would have been recaptured as ordinary income element had the donor sold the patent instead. 30

Income Tax Deduction Considerations for Contributions Prior After June 3, 2004

On October 22, 2004 President Bush signed H. R. 4520, a $140 billion gross corporate tax cut package that replaced the extraterritorial income exclusion with tax breaks for domestic manufacturers and multinational corporations. Included in the package was a modification of the rules governing contributions of patents and intellectual property.

The new law, which is effective for contributions after June 3, 2004 limits deductions for contributions of patents or other intellectual property (other than certain copyrights or inventory) to the lesser of the donor's adjusted cost basis and fair market value. In addition, the donor can deduct additional amounts based on a percentage of the "qualified donee income" ("QDI") the charitable donee subsequently receives from the contributed property. "Qualified donee income" is defined as the net income received or accrued by the donee that is properly allocable to the intellectual propert itself (as opposed to the activity in which the property is used). The amount of QDI that can be claimed as an additional deduction is based on a sliding-scale:

Taxable Year of Donor

Deduction Permitted for Such Taxable Year

Taxable years thereafter

No Deduction Permitted

An additional charitable deduction is allowed only to the extent that the aggregate of the amounts that are calculated pursuant to the sliding-scale exceed the deduction of the amount claimed upon the contribution of the patent or intellectual property.

No additional deductions are permitted for income following the expiration of the patent of intellectual property, or after the tenth anniversary of the date of contribution. The donor must notify the charity at the time of contribution that he or she intends to claim additional deductions and is required to obtain written substantation of QDI from the charitable donee for each year that such deductions are claimed. In addition, the charitable donee is required to file an information return that reports the QDI and other information related to the contribution.

If the donor's and charitable donee's taxable years are different, the donor must properly allocate the QDI to the end of his or her taxable year. Additional deductions from QDI are not available for contributions to private nonoperating foundations.

Partial Interest Rule

In order for the transfer to avoid violating the partial interest rule, the donor must transfer "all substantial rights to the patent" (or an undivided fractional interest in the same) as described in Reg. §1.1235-2(b).

Holder Defined

Of particular interest is the definition of the term, "holder." A holder includes any individual --

whose efforts created the patent property, and who would qualify as the "original and first" inventor, or joint inventor, within the meaning of Title 35 of the United States Code, or

who purchased the patent property prior to the actual reduction of the invention to practice, provided such individual was neither an employee or relative of the inventor.

A partnership cannot be a holder; however, each member of the partnership who is an individual may qualify. 31

Based on this definition, the creator of the patent can claim a fair market value deduction. This is distinguishable from contributions of tangible personal property or a copyright by their creator, which are considered ordinary income property and, therefore, limited to the lesser of the property's fair market value or the creator's adjusted cost basis.

Rev. Rul. 58-260 illustrates the application of these rules. An inventor and owner of a patented process granted a nonexclusive license to a corporation (which he and his wife owned) to practice the process and sell the products that were developed. In the request for ruling, the inventor proposed to transfer an undivided one-fourth interest in his patent to the charitable organization. The ruling held that the inventor would be entitled to a charitable contribution income tax deduction in the year of transfer for the patent's fair market value. 32

In Ltr. Rul. 8144052. a university biophysics professor developed an anti-cancer drug. Under the terms of the professor's employment agreement, any patent rights applicable to such discoveries would be transferred to a corporation in exchange for a five-percent royalty. The professor proposed to transfer his entire royalty interest to a private foundation.

The ruling held that transfer of the patent rights in the drug in exchange for the five-percent royalty interest would be considered a sale for which the professor would realize capital gain. Further, because the University had furnished all costs associated with the drug's development, the professor's cost basis was zero. The Service further ruled that because the patent was considered capital gain property, the professor's deduction would, based on capital gain rules that existed at the time of the ruling, be limited to 60-percent of the fair market value of the property. This was the same amount that was realized by the professor under the sale.

A subsequent ruling on nearly identical facts clarified two issues left unanswered in the prior ruling: 1) the royalty income will not be income to the inventor after his contribution to the foundation, and 2) the transfer of the partial interest is not a prohibited act of self-dealing. 33

Patent Royalties and Unrelated Business Income

Income generated by a patent is generally characterized as royalty income and thereby excepted from characterization as unrelated business income. 34 However, Rev. Rul. 73-193 holds that the exception does not apply if the organization holds bare legal title to inventions only for the purpose of performing patent development and management services for the account of the beneficial owners (i. e. the educational or scientific institutions and the inventors on their staffs). 35

Distinguishable from Rev. Rul. 73-193, Rev. Rul. 76-297 holds that amounts received from licensees by an exempt organization, the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties, constitute royalty income that is excludable in computing unrelated business taxable income. 36

Royalty Intrests

A "royalty" is defined in part as "amounts received for the privilege of using patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property." 26

For purposes of this discussion, it is important to note that a royalty is a payment for the right to use one of the aforementioned property rights. Accordingly, unless otherwise specified, the transfer of a royalty does not include the property or property right which produces it. For example, a work of art is distinguishable from its copyright; so is a royalty received by the copyright owner for right to produce and sell reproductions of the artwork distinguishable from the copyright itself.

Income Tax Deduction Considerations

The first step in evaluating the deductibility of a charitable contribution of a royalty interest is to determine the tax character of the royalty. Although most royalties are considered pure ordinary income assets, others such as certain mineral royalties, discussed supra, are considered interests in real property and, therefore, capital assets.

Transfer on Income Rights Deemed Assignment of Income

In Moore v. Commissioner . a gift of a royalty interest by an author to his children, whereby the author retained the copyright, was held by the court to be an assignment of income. 27 In such case, the author remained liable for the payment of income tax attributable to the royalty payments as they were received. Although we find no case law in which a royalty is assigned to charity exclusive of a patent or copyright, we believe that Moore offers analogous guidance.

Income recognition can be avoided if the donor transfers the property right (e. g. copyright or patent) along with its royalty income rights. As a result, the donor transfers the right that produces the income rather than merely assigning the income from a retained asset.

Application of Reduction Rule

Although the transfer of a property right along with its royalty income will relieve the donor of recognition of income attributable to the royalty payments, it may not produce an income tax charitable deduction. In Forrer v. Commissioner . an author transferred the publication rights for a published book to Johns Hopkins University. The donor claimed an income tax charitable deduction in the amount of $77,350 based on the appraised value of the royalty payments under the contract. The IRS challenged the deduction on the basis that 1) the taxpayer acknowledged he had no cost basis in the book; 2) if the taxpayer had sold the book, the proceeds would be taxable as ordinary income under IRC §1221(3), and 3) the royalty payments under the contract were also ordinary income. With no basis in the book, there was no basis in the publishing rights. Accordingly, the court denied the deduction.

Comment: It is interesting to note the IRS did not challenge the contribution deduction on the basis of a violation of the partial interest rule.

Unrelated Business Income Considerations

Code section 512(b)(2) provides that one of the modifications to be taken into account in determining unrelated business taxable income includes "all royalties (including overriding royalties and net profits income) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with all such income." These items are excluded in determining UBTI; however, Reg. §1.512(b)-1 cautions that all the facts and circumstances of each case must be examined to determine whether a particular item of income falls within any of the modifications provided in IRC §512(b).

Royalties from Working Oil and Gas Interests

Royalties from interests in oil and gas fall into three distinguishing categories:

Working or operating interests

Carved out production payments

Interests transferred by an operator

Working or Operating Interests

A working or operating interest is defined as an interest in oil and gas in place that is burdened with the cost of development and operation of the property.

Where an individual owns subsurface minerals in place and grants the right to develop those minerals to an operator in exchange for a lease bonus and a percentage of all minerals found, such income is generally considered a non-operating interest. Income from a non-operating interest is characterized as royalty income provided the owner does not participate in exploration, completion, or operating costs. 28

If the owner of the non-operating interest transfers a royalty, overriding royalty interest, or net profits interest to charity, such interests are considered interests in real property and are treated, for income tax deduction purposes, as long-term capital gain property (provided such interests are held for at least one-year), unless the interest is used by the donor in a trade or business. In the latter case, the property is characterized under IRC §1231 and is subject to the reduction rules applicable to ordinary income property. 29 Recapture of intangible drilling costs is not applicable to non-operating interests and, therefore, has no effect on the charitable deduction. 30

Carved Out Production Payments

An operator may seek outside financial resources for exploration, development, and operating expenses by carving out a portion of the production payments to an investor. 31 Such amounts are considered a mortgage on the property. 32 Thus, if a charitable donee is given an interest in carved out production payments, such payments will most likely be characterized as debt-financed unrelated business income. 33

Overriding Royalties or Net Profits Interest Contributed by an Operator

The transfer of an overriding royalty interest or net profits interest by the owner of an operating interest under an oil and gas lease to charity will not usually qualify for a charitable contribution deduction under IRC §170(a) because the contributed interest is less than the taxpayer's entire interest within the meaning of IRC §170(f)(3) and is not an undivided portion of the taxpayer's entire interest. 34

Ltr. Rul. 9205012 offers an interesting exception to this rule. In the request for ruling, a subsidiary corporation proposed to transfer an overriding royalty interest that had been conveyed to it by its parent to charity. Although the royalty interest was considered a partial interest of both corporations when taken as a whole, it was the entire interest of the subsidiary. The Service held that, for purposes of applying the partial interest rule of section 170(f)(3)(A), the ownership of a property interest by one member of an affiliated group of corporations need not be attributed to other members of the group. The Service also noted that the facts presented in the ruling were so unambiguous that it concluded the overriding royalty interests were not created to avoid compliance with the partial interest rule.

Personal Service Contracts

With respect to the transfer of a personal service contract (e. g. an athletic player contract), it is a basic principle of federal income tax law that income is taxed to the taxpayer who earns it, whether or not the taxpayer chooses to divert the receipt of such income to a third party. The courts have consistently held that such transfers are considered an anticipatory assignment of income. 35 Thus, an assignment or similar transfer of compensation for personal services to another individual or entity is ineffectual to relieve the taxpayer from income tax liability on such compensation.

Although we find no authority directly on point, the taxpayer should be able to claim a charitable contribution deduction for amounts as they are received by the charitable organization, subject to the percentage limitations of section 170.

Personal Services

It is important to distinguish a gift of a personal service contract from a gift of personal services. A contribution of personal services to charity is not deductible. 36 However, out-of-pocket expenses directly attributable to performing charitable services are, based on the facts and circumstances, deductible. 37

It is interesting to note that IRC §170(j) (added by the Tax Reform Act of 1986) provides that charitable deductions are allowed for travel expenses, including the cost of meals and lodging, incurred in the course of performing services away from home for a charitable organization, "provided there is no significant element of personal pleasure, recreation, or vacation in the travel." The authors believe this test to be subjective, however.

For example, In McCollum v. Commissioner . which preceded the IRC §170(j) requirement, the court was unimpressed by the IRS' argument that the petitioners were not entitled to deduct expenses as charitable contributions to the National Ski Patrol because of the fact, principally, that they enjoyed skiing, enjoyed the work that they were doing, and enjoyed the camaraderie of the other members of the ski patrol. 38

The court added, "Surely, the individual who was allowed to deduct out-of-pocket expenses in connection with his voluntary services in the Civil Air Patrol, by Rev. Rul. 58-279. supra, must have been an ardent flier and must have enjoyed flying while on duty with the Civil Air Patrol. Surely, also, the many other volunteers who have been allowed deductions by numerous cases and revenue rulings for expenses incurred in the rendition of services to the Red Cross, churches, hospitals, etc. must have enjoyed and been enthusiastic about the voluntary work that they were doing. We find that an enthusiasm for and an enjoyment of skiing or any other activity engaged in while performing voluntary services for a charitable organization are not grounds for disallowing deduction for out-of-pocket expenses incurred in connection therewith that would otherwise be deductible. If the rule were otherwise, it seems that the regulation would be rendered virtually meaningless." 39

With the enactment of section 170(j), the rule is now otherwise; however, at least one court has prospectively placed the Service on notice that it may be difficult to enforce.

Installment Obligations

The transfer of an installment obligation (such as a note secured by a deed of trust or mortgage carried by the seller of real property) to charity is considered a taxable disposition resulting in acceleration of all unrealized gain to the donor. An income tax charitable deduction is allowed for the fair market value of the obligation, however. 40

Example 1: Mr. Jones sells real property (having a $100,000 adjusted cost basis) for $1,000,000. As consideration, Jones receives a $100,000 down payment and carries the $900,000 balance via a first trust deed bearing a 30-year amortization at 7 percent.

Immediately after sale, Jones contributes the trust deed to a public charity. In this case, Mr. Jones will recognize all unrealized gain attributable to the installment obligation -- $810,000. He will, however, be entitled to an income tax charitable deduction for the fair market value of the installment obligation. Because the obligation consists of other than cash or publicly-traded securities, and the deduction exceeds $5,000, the valuation must be established by an independent appraisal. As an illiquid asset, the obligation may be subject to a valuation discount from its principal balance. The resulting deduction will be subject to the 30-percent deduction limitation (provided the deferred gain was long-term capital gain).

In this example, the donor might have "phantom" capital gain in the year of the transfer if 1) the percentage limitations or three-percent itemized deduction floor preclude using the entire deduction in the year of transfer, or 2) if the realized gain exceeds the discounted fair market value of the obligation. This problem can be exacerbated if the obligation is transferred to a vehicle that provides only a partial income tax charitable deduction such as a bargain sale, charitable remainder trust, charitable gift annuity, or pooled income fund; or to one that provides no income tax deduction at all, such as a "nongrantor" charitable lead trust.

Installment Obligation as Charitable Trust Investment

Even though the transfer of an installment obligation to a charitable remainder trust, pooled income fund, or "nongrantor" charitable lead trust is considered a taxable disposition under IRC §453B, the creation by the trustee of a note within such trust causes no adverse tax consequences. The trust will not have debt-financed income because it is serving as lender rather than borrower.

There are several concerns regarding a trustee carrying paper, however. The first is security. If the borrower defaults, is the trustee prepared to foreclose and can the trust and income recipients withstand the loss of income? The second concern is valuation. Will the note be discounted and will such discount effect the annual income amount? With respect to a note secured by real property, in the event of a foreclosure, a lender/trustee may face CERCLA liability, may have to service a prior lien, or may receive UBTI from the property.

Transfer of Installment Obligations to Defective Grantor Lead Trust

The same valuation discount that diminishes the attractiveness of transferring installment obligations to charity via retained income gift vehicles may give rise to another planning opportunity. Consider the following scenario:

Example 2: Using the same facts as presented in Example 1, Mr. Jones desires to make a charitable gift and transfer the value of the note to his children.

Instead of making an outright gift of the note to charity, Jones transfers the note to an "intentionally defective" nonreversionary grantor charitable lead annuity trust. Because a grantor trust and the trustor are treated as one entity for income tax purposes, there is no taxable disposition under 453B. The trustor continues to report capital gain under the installment method as payments are received by the trust; however, he also receives an income tax charitable deduction in the year the trust is created for the present value of the annuity payments to charity. Further, because the remainder interest will be paid to his children, he will also receive a gift tax charitable deduction in the same amount.

Further information regarding this concept can be found in the Gift Vehicle Review - Charitable Lead Trust section of the Reading Room.

Life Insurance Contracts

The sale of a cash value life insurance contract results in the seller realizing ordinary income to the extent the sales price exceeds the owner's basis in the contract. 41 Therefore, when an insurance contract is transferred to a charity, the donor's income tax charitable deduction is based on the lesser of fair market value or adjusted cost basis under the reduction rules applicable to ordinary income property. The donor's basis in the contract is equal to the aggregate premiums paid, less dividends paid and outstanding policy loans. For non-modified endowment contracts, partial withdrawals from cash value are considered made on a first-in-first-out (FIFO) basis. Therefore, partial withdrawals are considered made first from basis. For modified endowment contracts (and deferred annuity contracts), withdrawals are considered made on a last-in-first-out basis (LIFO). Therefore, a reduction in basis does not occur until all gain in the contract has first been withdrawn.

Caution: The transfer of an insurance contract having outstanding policy loans may cause the charitable donee to have "debt-financed income" under IRC §514(c)(1)(A).

If the policy is considered paid-up, the fair market value is based on the single premium amount it would cost for a comparable policy having an equal death benefit for an individual the same age as the insured. 42 If the cash surrender value of the contributed policy exceeds the policy's replacement cost, the donor could arguably use the interpolated terminal reserve. 43

If the policy requires additional premiums, the fair market value is the policy's interpolated terminal reserve on the date of transfer, adjusted for the proportionate value of premiums paid that cover the period of time extending beyond the date of the gift. 44

Insurable Interest Concerns

In 1991, the IRS ruled that a gift of a newly issued life insurance policy to charity and gifts of future premium payments were not deductible for income tax and gift tax purposes.

Reason: Under local law (New York), the charity did not have an insurable interest. Therefore, the executor of the estate could maintain an action to recover the death benefit. Since the possibility of the charity's rights in the policy being divested was not so remote as to be negligible, the transfer would be considered a nonqualified gift of a partial interest. 45

New York and many other states subsequently amended the definition of insurable interest to accommodate charitable gifts of life insurance (Maryland's amendment even made specific mention of charitable remainder trusts and pooled income funds). The ruling, however, cast a cloud of doubt over the use of life insurance as an investment vehicle within charitable remainder unitrusts. In the case of a two-life trust with one of the income recipients being insured (or both via separate policies), the possibility that the proceeds will be used to provide benefits to a noncharitable survivor income recipient may be distinguishable. Refer to local law.

Life Insurance Contract as Charitable Remainder Trust Investment

In 1979, the Service approved the funding of a charitable remainder unitrust with life insurance. In that ruling, a husband transferred a life insurance policy on his life to a unitrust that named his wife as the sole life income recipient. The husband then made premium payments directly to the insurance company. The trust was deemed a qualified trust to which contributions were deductible (provided the recipient trust could not be changed at the option of the insured). Further, each additional premium payment was considered an additional contribution to the trust for which the husband was allowed a deduction equal to the present value of the remainder interest. 46

In Ltr. Rul. 8745013. an individual proposed to transfer appreciated non-income producing real property to a charitable remainder unitrust. The trustee intended to sell the property and use the proceeds to buy life insurance on the lives of the income recipients.

Ruled: If the trustee borrows from an insurance policy and invests proceeds to create income, acquisition indebtedness under IRC §514(c)(1)(A) will exist. The transaction will not violate Reg. §§1.664-1(a)(3) and 1.664-3(a)(4) under specified conditions. A life insurance contract was not considered a jeopardizing investment under IRC §4944 under specified conditions.

Grantor Trust Concerns

In a request for private ruling, a donor proposed to create charitable remainder trust payable for the life of the donor and his wife. Upon creating the trust, the donor would transfer to the trust a policy of insurance on his life, together with other assets. The donor would also assign ownership of the policy to the trustee, and the trustee will designate the trust as the beneficiary of the policy. The donor would serve as trustee.

The governing instrument also provides that the unitrust amount will be the lesser of the trust's income, as defined in section 643(b) of the Code, or five percent of the net fair market value of the trust's assets valued annually. The unitrust amount for any year will include any amount of the trust's income in excess of the amount required to be distributed under the general rule above to the extent the aggregate amounts paid in prior years was less than the aggregate amounts computed as five-percent of the net fair market value of the trust's assets on the valuation dates.

The governing instrument will provide that premiums on the insurance will be charged to the trust's principal account. Any proceeds paid on the insurance upon the death of the insured, any dividends paid on the insurance during the life of the insured, any withdrawals made from the insurance during the life of the insured, and any amount paid on the surrender of the insurance during the life of the insured will be credited to the trust's principal account. No part of any such receipt shall be credited to the trust's income account notwithstanding any statute, rule, or convention to the contrary. In addition, local (state) law has no statutory provision concerning underproductive property that would allocate to income a portion of the proceeds received from the sale or other disposition of underproductive assets.

Rulings were requested on (a) whether the existence or exercise of the trustee's power to pay annual premiums on an insurance policy on the donor's life causes the donor to be treated as the owner of all or any portion of the trust under section 677(a)(3), and (b) whether the existence or exercise of such power disqualifies the trust as a charitable remainder unitrust under section 664.

Section 677(a)(3) of the Code provides that the grantor is treated as the owner of any portion of a trust whose income, without the approval or consent of any adverse party, is or in the discretion of the grantor or a nonadverse party, or both, may be, applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse (except policies of insurance irrevocably payable for a purpose specified in section 170(c), relating to definition of charitable contributions).

In the present situation, any amount received by the trust with respect to insurance policies on the donor's life, whether received during the donor's life or upon his death, is allocated to the trust's principal, and not to income. Because the trust is a net income unitrust within the meaning of section 664(d)(3) of the Code and section 1.664-3(a)(1)(i)(b) of the regulations, the unitrust amount payable to the noncharitable recipients is limited to the trust's income (as defined in section 643(b)) if such income is less than the fixed percentage of net value of the trust's assets. Because amounts received on account of insurance policies on the donor's life will not be allocated to income under the terms of the governing instrument, these amounts will not be used in computing the amount of the trust's income and thereby will not be used in determining the income limitation on the unitrust amount payable to the noncharitable recipients. Rather, amounts received on account of insurance policies on the life of the donor will be allocated to principal and will become part of the remainder that is payable to qualified charitable organizations.

The Service concluded that under these circumstances the insurance policy on the donor's life is irrevocably payable for a charitable purpose within the meaning of the parenthetical of section 677(a)(3) of the Code. Because the policy is so payable, the existence or exercise of the trustee's power to pay annual premiums on the insurance policy on the donor's life does not cause the donor to be treated as the owner of all or any portion of the trust under section 677(a)(3) of the Code. 47

Tax Deferred Annuity Contracts

The transfer of an existing tax deferred annuity contract to charity can present special tax problems for the donor. Because of changes in the annuity rules made in 1987, a distinction is made between contracts issued before and after April 22, 1987.

Annuity Contracts Issued before April 22, 1987

The transfer of a tax deferred annuity contract that was issued prior to April 22, 1987 to a charitable organization will cause the donor to recognize income in the year in which the trust receives proceeds from the contract. The amount of the recognized income is equal to the excess of the value of the contract over its basis.

In Friedman v. Commissioner . the taxpayer argued that a gift of four endowment life insurance policies to charity constituted a gift of appreciated property. As such, the donor, upon contribution, would not recognize any gain in the contract. The Court, however, characterized the appreciation element as "earned but unpaid income" rather than gain. Therefore, the donor's contribution was tantamount to an anticipatory assignment of income. Because the donor could have received the income by surrendering the policies, the court concluded that the donor would recognize income in the year in which the recipient charity actually received the policy proceeds. While the case law cites a lump-sum payment, periodic payments received by charity should have no effect on this outcome. 48

In addition to recognition of income, the timing of the recognition presents a potential charitable deduction tax trap for the donor. Normally, when ordinary income property is transferred to charity, the donor's income tax deduction is limited to the lesser of fair market value or cost basis. 49 However, this rule does not apply when, by reason of the transfer of the contributed property, ordinary income or capital gain is recognized by the donor in the same year in which the contribution is made 50. When this exception is applied, the deduction is based on the full fair market value of the contract.

In effect, if a charitable donee does not surrender a pre-April 22, 1987 annuity contract in the same year as it is received, the donor's deduction will be limited to the lesser of fair market value or basis. In addition, the donor will recognize income in any tax year in which the charity (or charitable trust) receives contract proceeds.

Annuity Contracts Issued after April 22, 1987

If an individual who holds an annuity contract that was issued after April 22, 1987 transfers it without full and adequate consideration, the individual is treated as having received an amount equal to the excess of the cash surrender value, at the time of transfer, over the investment in the contract at that time. 51 The donor recognizes income in the same year as the transfer regardless of when the beneficiary (charity or charitable trust) receives proceeds from the contract.

Because the recognition of income is linked to the year of transfer, a donor's charitable contribution income tax deduction is based on the full fair market value of the contract. 52

Opciones

An option is a contractual right made by one party to sell property to another party for a fixed price for a stated period of time. The most common types of options used in conjunction with charitable gift planning include --

Listed Equity and Non-Equity Options

Listed equity and non-equity options are discussed in Publicly Traded Securities.

Employee Stock Options

An employee stock option is an offer made by a corporation to an employee to sell stock in the corporation to the employee at a bargain price for a stated period of time. Employee stock options fall into two general categories: (a) nonstatutory options, and (b) statutory options.

Nonstatutory Employee Stock Options

Nonstatutory employee stock options are governed by IRC §83. Under section 83(a), property transferred to an employee or independent contractor in connection with the performance of services is not taxable until it has been transferred to such person and become substantially vested in such person. At that time, the property received by the employee is considered compensation income taxable as ordinary income.

With respect to nonstatutory stock options, the mere grant of an option to purchase stock does not constitute a transfer of property unless the option itself has a "readily ascertainable value" at the time of grant. 53 The value is not readily ascertainable unless --

the option is actively traded on an established market at the time of the grant, or

the taxpayer can show that all of the following conditions exist at the time of the grant:

The option is transferable by the optionee;

The option is exercisable immediately in full by the optionee;

The option or the property subject to the option is not subject to any restriction or condition (other than a lien or other condition to secure the payment of the purchase price) which has a significant effect upon the fair market value of the option; y

The fair market value of the option privilege is readily ascertainable in accordance with paragraph (3) of Reg. §1.83-7(b).

Compensation income is generally recognized when a nonstatutory option is exercised, sold, or otherwise disposed of in an arm's length transaction. 54 The amount recognized is equal to the excess of the fair market value of the stock subject to the option on the date of exercise or transfer, over the exercise price of the option. Further, the compensation income recognized by the employee will constitute "wages," under section 3401 of the Code, that are subject to federal income tax withholding. 55

a. Section 83(b) Election

As an alternative to realizing income on exercise, the employee can make an election to recognize compensation income when the option is granted. 56 In such case, the amount recognized is equal to the difference between the strike price of the option and the fair market value of the stock on the date of grant. When the employee subsequently exercises the option, no income is realized on the subsequent exercise of the option; however, gain is realized when the optionee subsequently sells the stock. The optionee's basis in the acquired shares is the amount paid for the shares increased by the amount included in gross income under section 83(b) at the time of grant. In other words, the basis is the fair market value of the stock on the date of grant.

According to the Internal Revenue Service , 57 the 83(b) election is not available with respect to a stock option, unless the option is actively traded on an established market. This is a difficult pre-condition to the 83(b) election. If the section 83(b) election is available, it must be filed no later than 30 days following the grant of the option with the IRS office with which the person rendering the services files his or her income tax return. 58 In addition, a copy of the election must be included with that employee's income tax return for the taxable year in which the property is transferred. 59 In addition, state filing requirements may apply.

Planning Tip: Assuming it is possible to make an 83(b) election, taxpayers may wish to consider doing so even if it results in some current income tax. By making the election, any gains from the subsequent sale of optioned shares are considered capital gains rather than compensation income. As a result, provided the shares are held for at least one year after exercise, gains from sale of are taxable at favorable capital gains rates without mandatory withholdings. And as will be discussed further, the conversion of stock into a capital asset via the 83(b) election sets the stage for charitable applications.

segundo. Inter Vivos Charitable Transfers of Nonstatutory Stock Options

The regulations provide that if the option is sold or otherwise disposed of in an arm's length transaction, sections 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as sections 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option. 60

An arm's length inter vivos transfer of an unexercised, nonqualified stock option to a charitable organization or charitable trust will result in ordinary income to the employee in an amount equal to the spread between the exercise (strike) price and the fair market value of the stock on the date of transfer. Furthermore, because the employee has no cost basis in the option and all gain is considered ordinary income, no income tax charitable deduction is available for IRC §170(b)(1)(E). Accordingly, the employee will have phantom ordinary income with no offsetting charitable deduction. 61

1. Retained Control Delays Income Recognition

Ltr. Rul. 9737016 offers a creative alternative to the recognition of compensation upon transfer of a nonqualified option to charity. In that ruling an employee proposed to transfer nonqualified stock options through an intermediary to a qualified charitable organization. The employee would, however, retain during his lifetime a power that would require the charitable donee to obtain his permission to exercise the options. If he died, the charity could immediately exercise the options without regard to any specified exercise dates.

The Service ruled that because the employee retained a power restricting the exercise of the option, the charitable gift was not complete until the power lapsed. Therefore, the employee would not recognize compensation income or receive a charitable deduction until the options were exercised.

The ruling also confirmed that compensation income recognized in connection with the exercise of a nonqualified stock option is subject to withholdings and that the charitable donee would be required to pay the required withholding tax to the company.

2. Exercise Followed by and Contribution of Stock without Section 83(b) Election

As an alternative to transferring an unexercised option, the employee can exercise the option and contribute optioned shares. However, the employee must provide the exercise price and will have ordinary income to the extent the fair market value of the stock exceeds the exercise price.

The optionee's basis in the optioned shares is the fair market value of the shares on the date of exercise. The exercise date establishes the holding period of stock in the hands of the optionee for capital gains purposes. Therefore, if exercised shares are transferred to charity within one year of exercise, the donor's income tax charitable deduction will be limited to the lesser of fair market value and basis.

If the donor transfers exercised shares held at least one year following exercise, the income tax charitable deduction is based on the fair market value of the shares (provide the stock is publicly traded or, if not, is transferred to a public charity). Although the donor may be able to claim a larger charitable deduction (provides the shares have appreciated), the donor will not be able to claim the charitable deduction in the same year he or she realizes income from the exercise of the option.

3. Exercise Followed by and Contribution of Stock with 83(b) Election

As mentioned previously, an employee can avoid recognition of compensation income upon exercise of a nonqualified option by electing to take the "in the money" portion of the option into income when the option is granted. More importantly, the election converts potential ordinary income into potential capital gains that can be eliminated or delayed through a carefully designed charitable gift.

do. Testamentary Charitable Transfers of Nonstatutory Employee Stock Options

As an alternative to lifetime transfers, nonstatutory options may, subject to plan provisions, be transferred to charity on a testamentary basis. In this way, the optionee will avoid recognition of compensation on transfer and exercise by the donee.

Reg. 1.421-6(d)(5) provides that if an employee dies before realizing compensation from a nonstatutory employee stock option, compensation income is realized by the person who transfers or exercises the option, or the person who receives property subject to a restriction which has a significant effect on its value. For example, this rule is applicable --

(i) when an option not having a readily ascertainable fair market value is granted to an employee, and he dies before transferring or exercising the option;

(ii) when an option not having a readily ascertainable fair market value is granted to the employee, and he dies after the transfer of the option in a transaction which is not at arm's length, but before the option is exercised; o

(iii) when an option not having a readily ascertainable fair market value is granted to another person, and the employee dies before realizing all of the compensation which would result from any transfer or exercise of the option.

If the option is one which was granted to the employee and he or she dies before transferring or exercising the option, the option shall be considered a right to receive income in respect of a decedent to which the rules of section 691 apply. In any such case, if the option is transferred, section 691 provides that the amount received for such transfer or the fair market value of the property transferred at the time of transfer, whichever is greater, is income realized at the time of such transfer. Moreover, if a transfer is subject to this rule, it will be treated as a transfer in an arm's length transaction.

In application, if an unexercised nonstatutory employee stock option is transferred on a testamentary basis to a charitable organization or trust, income will be realized by the estate of the decedent in an amount equal to the fair market value of the option. The estate will, however, receive an estate tax charitable deduction based on the fair market value of the option. For this reason, it may be preferable to transfer the option on an inter vivos basis with a retained power of exercise as outlined in Ltr. Rul. 9737016, discussed above.

Statutory Employee Stock Options

There are two types of statutory employee stock options available under current law: incentive stock options and employee stock purchase plans. 62 Qualified stock options and restricted stock options are also included under the category of statutory options; however, they have not been available since 1976 and 1963, respectively.

Incentive stock options (ISOs) replaced qualified stock options in 1981 and are described in IRC §422. Employee stock purchase plans are described IRC §423. Statutory stock options are commonly referred to "qualified" stock options.

Statutory stock options are distinguishable from nonstatutory stock options in that the employee (optionee) is not taxed upon either the grant or exercise 63 provided the option:

is in writing,

is not transferable by the employee (other than by will or by laws of descent and distribution), and

is exercisable, during the lifetime of the employee, only by the employee 64 or, if the employee is incompetent, by the employee's legal representative. 65

It is important to note that for incentive stock option exercised prior to 1983, the difference between the exercise price and the fair market value of the stock subject to an incentive stock option is an item of tax preference for alternative minimum tax purposes in the year the option is exercised. This rule does not, however, apply to the exercise of shares pursuant to an employee stock purchase plan nor does it apply to the exercise of a nonqualified option for which an election was made under IRC 83(b).

a. Effect of Disqualifying Dispositions

Statutory options are subject to holding period requirements relating to disposition of exercised shares. In the case of incentive stock or employee stock purchase plan, an optionee avoids recognition of compensation provided the stock is disposed of after the latter of --

two years from the date of grant, and

one year from the date of exercise.

IRC 424(c) and the regulations thereunder define the term "disposition" to include a sale, exchange, gift, or transfer of legal title, but does not include --

a transfer from a decedent to an estate or a transfer by bequest or inheritance.

an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036 applies.

a mere pledge or hypothecation (however, a disposition of the stock pursuant to a pledge or hypothecation is a disposition by the individual, even though the making of the pledge or hypothecation is not such a disposition. 66

the acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership (however, a termination of such joint tenancy, except to the extent such employee acquires ownership of such stock, shall be treated as a disposition by the employee occurring at the time such joint tenancy is terminated).

certain transfers of statutory option stock pursuant to the exercise of incentive stock options.

transfers between spouses or incident to divorce.

segundo. Inter Vivos Charitable Transfers of Statutory Employee Stock Options

With respect to charitable transfers, the disposition rules of section 424 provide that an inter vivos transfer of an unexercised statutory option to a charitable organization or charitable trust will trigger phantom compensation income to the optionee.

Accordingly, a lifetime transfer of exercised shares to a charitable organization or charitable trust prior to the expiration of the applicable holding period would be deemed a disqualifying disposition within the meaning of IRC §421(b).

One taxpayer proposed to exercise an incentive stock option that had been held for longer than two years, then transfer the exercised shares into a charitable remainder trust within one year of exercise. The Service ruled that such a transfer causes the taxpayer to recognize compensation in the amount equal to the difference between the exercise price and the fair market value of the stock on the date of exercise. The Service further stated that if the taxpayer transfers the stock after the one-year holding period, no compensation is recognized. 67

Planning Opportunity: Holders of qualified options may exercise their options one of several ways (with borrowed funds, a portion of the optioned stock, or cash), wait the mandatory one year holding period, and transfer the a portion of the exercised shares to a charitable gift vehicle such as a charitable remainder trust, pooled income fund, or charitable gift annuity.

do. Testamentary Charitable Transfers of Statutory Employee Stock Options

As mentioned earlier, a statutory option is not transferable by the employee other than by will or by laws of descent and distribution. The regulations provide further that if the option (or the plan under which the option was granted) contains a provision permitting the individual to whom the option was granted to designate the person who may exercise the option after his death, neither such provision, nor a designation pursuant to such provision, disqualifies the option as a statutory option. 68 The term "person" includes an individual, trust or estate, partnership, association, company, or corporation. 69 Accordingly, a charitable organization or trust can, providing the plan so permits, receive a testamentary transfer of an unexercised statutory option.

Regarding the income tax consequences of testamentary transfers, IRC 421(c) states that if a statutory option is exercised after the death of the employee by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the provisions of 421(a) shall apply to the same extent as if the option had been exercised by the decedent, except that--

the holding period and employment requirements of sections 422(a) and 423(a) shall not apply, and

any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of section 423(c).

IRC 423(c) provides that if the option price of a share of stock acquired by an individual pursuant to an employee stock purchase plan was less than 100 percent of the fair market value of such share at the time such option was granted, then, in the event of any disposition of such share by him which meets the holding period requirements, or in the event of his death (whenever occurring) while owning such share, there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, whichever applies, an amount equal to the lesser of--

the excess of the fair market value of the share at the time of such disposition or death over the amount paid for the share under the option, or

the excess of the fair market value of the share at the time the option was granted over the option price.

Further, if the option price is not fixed or determinable at the time the option is granted, the option price is determined as if the option were exercised at such time.

Note: IRC 423(c) applies only to employee stock purchase plans and not to ISOs because the exercise price of ISOs must be at least 100 percent of the fair market value of the stock on the date of grant.

If an amount is required to be included under section 423(c) in gross income of the estate of the deceased employee, or of a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, there shall be allowed to the estate or such person a deduction with respect to the estate tax attributable to the inclusion in the taxable estate of the deceased employee of the net value for estate tax purposes of the option. The deduction is determined under section 691(c) as if the option acquired from the deceased employee were an item of gross income in respect of the decedent under section 691 and as if the amount includible in gross income under section 423(c) were an amount included in gross income under section 691 in respect of such item of gross income.

Planning Tip: In order to avoid income in respect to a decedent in connection with charitable transfers of stock acquired via an employee stock purchase plan, the decedent's estate can transfer exercised shares rather than selling such shares and transferring cash.

Purchase Options

Purchase options are frequently created to facilitate the transfer of real property, business interests, or other tangible and intangible assets. Can the maker or holder of such an option transfer it to a charitable organization or split-interest charitable gift vehicle? Are such transfers deductible for income, gift, and estate tax purposes?

Assignable Option Transferred to Charitable Remainder Trust

There are several types of assets that, if transferred to a charitable remainder trust, will either terminate the trust's tax-exempt status or that will adversely affect the qualification of the transferred asset itself. Examples of incompatible assets include, but are not limited to, stock in an S-corporation or professional corporation, and real property that is debt-encumbered, generates unrelated business income, or that may be subject to environmental hazards.

In 1992, the IRS published a letter ruling that offered a unique but short-lived solution to this problem. The solution called for the creation of and transfer to the trust of an assignable call option in place of the incompatible asset. The following case study illustrates how such a strategy operates.

Mr. Smith owns unencumbered real property that he wants to sell to Mr. Jones for $2,000,000. Smith would like to sell the property via a charitable remainder unitrust and, in the process, avoid immediate realization of a $1,500,000 capital gain. The property is unencumbered; however, Smith has been advised that the property produces unrelated business income that will jeopardize the tax-exempt status of the trust.

An Exotic Solution: Creating a Charitable Option

Step 1. Smith creates an assignable three-year option that allows the holder to purchase the property for $100,000.

Step 2. Smith transfers the option to a charitable remainder trust.

Step 3. Trustee sells option to Jones for $1,900,000 (the difference between the fair market value and exercise price).

Step 4. Jones exercises the option to buy by paying Smith $100,000.

Because the trust never owns the property or any income rights therein, the unrelated business income produced by the property should not taint the trust. Smith will recognize capital gain allocable to the $100,000 received upon exercise of the option. Gain attributable to the remaining $1,900,000 will be recognized by the trust. 70

a. IRS Rules on Option with Unencumbered Property

In Ltr. Rul. 9240017, the IRS concluded that, under facts similar to those presented above, the trustee's contractual right to acquire a fee interest in the property for an amount below the fair market value of the property is an asset of the trust for purposes of meeting the requirements of IRC §664(d)(2). In addition, the trustee's contractual right to acquire a fee interest in real property with substantial value ($2,000,000) for an amount substantially lower ($100,000) has substantial fair market value. This substantial fair market value must be included each year in determining the net fair market value of the trust's assets and the resulting unitrust amount payable to the income recipient.

Regarding the availability and sequencing of the trustor's income tax charitable deduction, the IRS's opinion was disappointing, but logical. Rev. Rul. 82-197 71 holds that an individual who grants an option on real property to a charitable organization is allowed a charitable deduction in the year in which the charitable organization exercises the option. The amount of the deduction is equal to the excess of the fair market value of the property on the date the option is exercised over the exercise price. 72 The IRS concluded the trustor is not entitled to a deduction for the remainder interest, either when the purported option is granted [to the trust] or when the trustee sells it. The trustor will, however, be entitled to a deduction for the remainder interest if the trustee or another charitable organization (including the charitable remainderman) exercises the option. The deduction is based on the spread between the fair market value and the exercise price ($1,900,000).

segundo. IRS Rescinds Ltr. Rul. 9240017

One month after receiving a favorable ruling regarding the use of an option with unencumbered real property, the same taxpayer requested a new ruling on the use of the same technique with debt-encumbered real property. This triggered an unanticipated result: the Service responded by immediately by issuing Ltr. Rul. 9417005 in which it rescinded Ltr. Rul. 9240017 stating only that it was reconsidering the issues raised in that ruling.

do. IRS Rules on Use of Options for Unencumbered and Encumbered Assets

In September of 1994, the Service responded to the second ruling request by issuing Ltr. Rul. 9501004 in which it answered two questions: Is a charitable remainder trust that receives as its sole funding asset an assignable call option a qualified charitable remainder trust? And will the trustor or such a trust be treated as the owner of the trust, thereby causing the gain realized on the sale of the option to be realized by the taxpayer?

With respect to the first issue, the Service first stated,

"To qualify as a charitable remainder trust within the meaning of section 664 of the Code and the regulations thereunder, a trust must be one with respect to which a deduction is allowable under one of the specified sections-section 170, 2055, 2106, or 2522. Further, the trust must be a charitable remainder trust in every respect and must meet the definition of and function exclusively as a charitable remainder trust from its creation. The requirements of being a charitable remainder trust in every respect and functioning exclusively as a charitable remainder trust from its creation cannot be met unless each transfer to the trust during its life qualifies for a charitable deduction under one of the applicable sections (IRC §§170, 2055, 2106, or 2522)."

This being an inter vivos trust, the Service then focused its attention on the qualification for income tax deduction under section 170 and qualification for gift tax deduction under section 2522.

With respect to qualification for an income tax deduction, the IRS concluded,

"The transfer to a charitable organization of an option by the option writer is similar to the transfer of a note or pledge by the maker. In the noted situation there is a promise to pay money at a future date. In the pledge situation there is a promise to pay money or transfer other property, or to do both, at a future date. And in the option situation there is a promise to sell property at a future date. Although the promise may be enforceable, a promise to pay money or to sell property in the future is not itself a 'payment' for purposes of deducting a contribution under section 170 of the Code. Thus, the grant of the option to [the charitable organization] in this case is not a contribution for which a deduction is allowable under section 170."

With respect to the availability of the gift tax charitable deduction under section 2522, the IRS cited Rev. Rul. 80-186. The ruling concludes that a transfer of an option to purchase real property for a specified period is a completed gift under section 2511 of the Code on the date the option is transferred, if, under state law, the option is binding and enforceable on the date of the transfer. 73 In the instant case, under local law, the purported option was not binding on the taxpayer when it was granted. Accordingly, the proposed transfer of the purported option to the trust was not a completed gift on the date of transfer under section 25.2511-2(b) of the regulations because the taxpayer would not have made a binding offer on that date.

In absence of income and gift tax charitable deductions, the Service ruled the trust is not a qualified charitable remainder trust. With respect to the second issue (i. e. whether the grantor would be treated as the owner of the trust and, accordingly, be taxable on the gain from the sale of the option), the IRS's conclusion was obvious. If the trust is not a qualified charitable remainder trust, it must be a grantor trust the income from which, including gain from the sale of trust assets, is taxable to the grantor. 74

Property Subject to Right of First Refusal

Can a donor transfer property in which a first right is retained by the donor or another person to purchase the property in the event the charitable donee decides to sell it? Are transfers of property subject to rights of first refusal deductible for income, gift, and estate tax purposes?

In Ltr. Rul. 8641017, an individual proposed to contribute real property to a charitable organization on the condition that, if the organization ever intends to sell the property to other than a charitable organization during the twenty year period following the gift, the donor can purchase the property at the price offered by a bona fide third-party. In addition, the donor placed other restrictions on the property related to its use.

Citing Rev. Rul. 76-151, in which a corporate donor reserved the right to purchase the land and building at its fair market value if the charitable organization ceased to use the property and decided to dispose of it, the Service ruled that the taxpayer was entitled to a charitable contribution deduction, subject to the limitations of section 170(b)(2) of the Code for the land and building transferred to the charitable organization. 75 In addition, the Service cited Rev. Rul. 85-99 in which it ruled the amount of the donor's charitable contribution deduction is the fair market value of the property at the time of the contribution determined in the light of the restriction placed by the donor on the use of the property. 76

Caution: Ltr. Rul. 8641017 and the other rulings referenced therein contemplate an outright gift to charity. Planners should note that if assets are transferred to a private non-operating foundation or a split-interest gift vehicle to which the private foundation excise tax rules apply (i. e. a charitable remainder trust or charitable lead trust), a repurchase by the donor or other disqualified person of a contributed asset would constitute a prohibited act of self-dealing.

The previous rulings deal with transfers of real property. Do the same rules apply to transfers of securities? In Rev. Rul. 80-83, a transfer of stock of a publicly held corporation subject to a first right of refusal by the corporation to a charitable remainder trust which named the trustor as trustee qualified for a gift tax charitable deduction under IRC 2522. The right required any shareholder desiring to sell stock to first offer the shares to the corporation at the same price and terms as offered to any other buyer. 77

The ruling holds, "The value of the charitable beneficial interest is presently ascertainable as that term is used in section 25.2522(c)-3 of the regulations. Accordingly, the charitable deduction is allowable for gift tax purposes, with respect to the remainder interest."

Query: What if the corporation is a disqualified person? Normally, a transfer of stock to a charitable remainder trust or charitable lead trust of more than 35 percent of the voting stock of the corporation followed by a corporate redemption is a prohibited act of self-dealing. However, IRC 4941(d)(2)(F) provides that such a transaction will be exempt from the self-dealing rules "if all of the securities of the same class as that held by the foundation are subject to the same terms and such terms provide receipt by the foundation of no less than fair market value."

73 C. J.S. Property 5 (1951) back

Texas Instruments, Inc. v. U. S. (CA-5, 1977), 551 F.2d 559, 39 AFTR 2d 77-1383 back

U. S.C. Title 17, Sec. 106 back

The Investor and Capital Markets Fee Relief Act requires that the Commission make annual adjustments to the rates for fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e), 14(g), and 31 of the Securities Exchange Act of 1934.

The Section 31 fee rate applicable to securities transactions on the exchanges and Nasdaq are as follows:

0.0000333 is the rate in effect prior to December 28, 2001 0.0000150 is the rate effective December 28, 2001 (annual adjustment was announced on December 21, 2001 & January 16, 2002 ) 0.0000301 is the rate effective April 1, 2002 (mid-year adjustment was announced on March 1, 2002) 0.0000252 is the rate effective March 22, 2003 (annual adjustment was announced on April 29, 2002 & September 17, 2002 & September 30, 2002 & October 4, 2002 & October 11, 2002 & October 18, 2002 & November 22, 2002 & January 10, 2003 & January 31, 2003 & February 7, 2003 & February 21, 2003 ) 0.0000468 is the rate effective April 1, 2003 (mid-year adjustment was announced on February 28, 2003 - Fee Rate Advisory #12 for Fiscal Year 2003) 0.0000390 is the rate effective February 22, 2004 (annual adjustment was announced on April 30, 2003 & September 15, 2003 & September 30, 2003 & October 31, 2003 & November 7, 2003 & November 24, 2003 & January 26, 2004 ) 0.0000234 is the rate effective April 1, 2004 (mid-year adjustment was announced on February 27, 2004 - Fee Rate Advisory #8 for Fiscal Year 2004) 0.0000329 is the rate effective January 7, 2005 (annual adjustment was announced on October 1, 2004 & September 27, 2004 & September 30, 2004 & November 22, 2004 & November 29, 2004 & December 9, 2004 ) 0.0000418 is the rate effective April 1, 2005 (mid-year adjustment was announced on March 1, 2005 - FEE RATE ADVISORY #7 FOR FISCAL YEAR 2005) 0.0000307 is the rate effective December 22, 2005 (annual adjustment was announced on April 29, 2005 & September 27, 2005 & September 30, 2005 & November 18, 2005 & November 23, 2005 ) 0.0000307 is the rate effective April 1, 2006 (mid-year adjustment not required as announced on March 1, 2006 - Fee Rate Advisory #6 for Fiscal Year 2006) 0.0000307 is the rate still effective as of October 1, 2006 (annual adjustment was announced on September 26, 2006 & September 29, 2006 & November 17, 2006 & December 8, 2006 & February 15, 2007. also see 5/4/06 & 2/16/2007 news stories below) 0.0000153 is the rate effective March 17, 2007 (as announced on March 1, 2007, also see 2/16/2007 news release below) 0.0000153 is the rate effective April 1, 2007 (mid-year adjustment not required as announced on March 1, 2007 - Fee Rate Advisory #8 for Fiscal Year 2007) 0.0000110 is the rate effective January 25, 2008 (annual adjustment was announced on May 7, 2007 & September 28, 2007 & November 15, 2007 & December 14, 2007 & December 21, 2007 & December 27, 2007 ) 0.0000056 is the rate effective April 1, 2008 (optional mid-year adjustment was announced on February 29, 2008 - Fee Rate Advisory #7 for Fiscal Year 2008) 0.0000930 was the potential rate effective October 1, 2008 (or later ) (proposed annual adjustment was announced on April 30, 2008) & September 29, 2008 /and then canceled 0.0000056 is the rate still effective as of October 1, 2008 (annual adjustment must be announced no later than April 30, 2008) 0.0000257 is the rate effective April 10, 2009 (mid-year adjustment was announced too late on March 4, 2009 was due March 1, 2009) & March 6, 2009 & March 11, 2009 ) 0.0000127 is the rate effective January 15, 2010 (annual adjustment was announced on April 30, 2009 & September 28, 2009 & October 30, 2009 & December 17, 2009 ) 0.0000169 is the rate effective April 1, 2010 (optional mid-year adjustment was announced on March 1, 2010 - Fee Rate Advisory #5 for Fiscal Year 2010) 0.0000192 is the rate effective January 21, 2011 (annual adjustment was announced on April 30, 2010 & September 29, 2010 & December 3, 2010 & December 18, 2010 & December 22, 2010 ) 0.0000192 is the rate effective April 1, 2011 (mid-year adjustment not required as announced on March 2, 2011 - Fee Rate Advisory #6 for Fiscal Year 2011) 0.0000151 was the potential rate effective October 1, 2011 (or later ) (proposed annual adjustment was announced on May 2, 2011) /and then canceled 0.0000180 is the rate effective February 21, 2012 (annual adjustment was announced on January 20, 2012 - Fee Rate Advisory #5 for Fiscal Year 2012) 0.0000224 is the rate effective April 1, 2012 (optional mid-year adjustment was announced on March 1, 2012 - Fee Rate Advisory #6 for Fiscal Year 2012) 0.0000224 is the rate still effective as of October 1, 2012 (annual adjustment was not made, as announced on November 15, 2012 - Fee Rate Advisory #2 for Fiscal Year 2013) 0.0000224 is the rate still effective as of April 1, 2013 (mid-year adjustment not required but no announcement regarding this was issued) 0.0000174 is the rate effective May 25, 2013 (annual adjustment was announced on April 25, 2013 - Fee Rate Advisory #3 for Fiscal Year 2013) 0.0000174 is the rate still effective as of October 1, 2013 (annual adjustment was not yet made, as announced on October 31, 2013 - Fee Rate Advisory #2 For Fiscal Year 2014) 0.0000221 is the rate effective March 18, 2014 (annual adjustment was announced on February 12, 2014 - Fee Rate Advisory #3 for Fiscal Year 2014) 0.0000221 is the rate effective April 1, 2014 (mid-year adjustment not required as announced on February 28, 2014 - Fee Rate Advisory #4 for Fiscal Year 2014) 0.0000221 is the rate still effective as of October 1, 2014 (annual adjustment was not yet made, as announced on September 30, 2014 - Fee Rate Advisory #2 For Fiscal Year 2015) 0.0000184 is the rate effective February 14, 2015 (annual adjustment was announced on January 15, 2015 - Fee Rate Advisory #3 for Fiscal Year 2015) 0.0000184 is the rate effective April 1, 2015 (mid-year adjustment not required as announced on February 27, 2015 - Fee Rate Advisory #4 for Fiscal Year 2015)

0.0000xxx is the rate effective April 1, 201X (optional mid-year adjustment must be announced no later than March 1, 201X)

0.0000xxx is the rate effective January X, 201X (annual adjustment was announced on xxx 1, 201X)

In calculating the new fee for a transaction, one should multiply the sale or principal amount of the transaction by the fee rate, which will be truncated at the seventh place after the decimal point. The resulting figure should then be truncated at the fifth place after the decimal point and rounded up to the next cent (if there is any remainder you should round up).

As a reminder. the new law (Investor and Capital Markets Relief Act, with an effective date of December 28, 2001) provides for an annual adjustment of the fee rate and, in some circumstances, a mid-year adjustment. The SEC will publish the revised rates well in advance of an adjustment.

THE FOLLOWING IS A WORK IN PROGRESS - links to supporting information would be appreciated: email link

Options Regulatory Fee (ORF): In 2011 a new transaction-based fee generally was being passed on to all retail customers (some brokerages were passing the ORF to customers as early as 2009). The fee was proposed by the Chicago Board Options Exchange (CBOE) in October 2008. The fee was initiated by the CBOE in mid-2009, by each of the BOX, ISE and PHLX in January 2010, by AMEX and ARCA in May 2011, by Nasdaq in January 2012, by C2 in August 2012 and by Miami in January 2013. The combined fees is charged to retail customer orders at a rate of $0.0377 per U. S. exchange listed option contract.

0.0060 is the fee per contract in effect March 1, 2009 (there was a 0.01 minimum fee per trade) 0.0147 is the fee per contract in effect. 0.0377 is the fee per contract in effect.

Important Clarification fro m our gummint : We have been asked to "clarify" to our readers that that the Securities Exchange Commission (SEC) does not impose a fee (a/k/a the Section 31 fee) on any of our tax planning trader or investor clients. In typical gov't bureaucracy-speak the SEC wants you to be informed that: "The SEC does not impose or set any of the brokerage fees that investors must pay. Instead, under Section 31 of the Securities Exchange Act of 1934, self-regulatory organizations. and all of the national securities exchanges. must pay transaction fees to the SEC. & Quot;

It is the greedy self-regulatory organizations and exchanges who "have adopted rules that require their broker-dealer members to pay their fair share of these fees." And it is the greedy broker-dealers, who "in turn, pass the responsibility of paying the fees to their customers."

So with this helpful SEC clarification effectively saying "don't blame us" - we should understand that the "SEC Section 31" fee is actually a "retail broker fee" rather than a fee charged against investors, or so says the SEC.

US regulator reducing fees on securities transactions by $1 billion

Associated Press WorldStream via NewsEdge Corporation.

WASHINGTON_The Securities and Exchange Commission will reduce by $1 billion (Ђ790 million) the fees it levies on securities transactions, a move that will be a boon to ordinary investors, the head of the agency told Congress on Wednesday.

SEC Chairman Christopher Cox announced the move as he testified at a hearing of the House Financial Services Committee, outlining a number of initiatives taken during his nine-month tenure meant to enhance the disclosure of financial information, reduce the complexity of regulations and protect older people from investment scams.

A portion of the fees go to fund the SEC's operations. Starting in the fiscal year that begins Oct. 1 . the fees that the SEC charges companies to register and issue stocks and other securities will be reduced by 71.3 percent, while most fees levied on securities transactions will be cut in half.

"That money will stay in investors' pockets," Cox said. Money that ultimately would have come from investors could now go instead for retirement savings and other investments, he said.

The reduction in fees, made in line with federal law, will not affect the amount of money available to fund the agency, the SEC said.

<<Associated Press WorldStream -- 05/04/06 >>

SEC Chairman Cox Announces $700 Million Fee Cut to Benefit Investors Washington, D. C. Feb. 16, 2007 - Securities and Exchange Commission Chairman Christopher Cox announced today that, starting next week, the agency will sharply cut the fees charged to public companies and other issuers for securities transactions and registrations.

"The investors who bear the burden of these SEC fees deserve this relief," said SEC Chairman Christopher Cox. "It will mean that more of their hard earned savings will be available for important needs such as education, health care, and retirement — and less will be diverted to Washington."

The SEC sets registration and transaction fees according to the Investor and Capital Markets Fee Relief Act. The fee cuts that will go into effect next week are significant: fees to register securities with the Commission will be reduced by 71.3 percent, and fees on securities transactions will be reduced by 50.2 percent.

Fondo

Under the Investor and Capital Markets Fee Relief Act, the SEC makes annual adjustments to the rates paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e), 14(g), and 31 of the Securities Act of 1934. The fee cuts the SEC intended to put into effect for 2007 were thrown into question, however, because the law makes fee rate changes effective only upon enactment of the Commission's "regular appropriations" — and for fiscal 2007, Congress passed a continuing resolution for the entire government, instead of the regular appropriations bill that includes the SEC. As a result, the agency requested special legislative relief to permit the fee cuts to go forward. Congress agreed to the request, and on Feb. 15, 2007, President Bush signed House Joint Resolution 20, the continuing resolution for the remainder of FY 2007, which stated that it shall be deemed the Commission's "regular appropriation" for FY 2007. That, in turn, triggered the fees cuts.

Accordingly, effective Feb. 20, 2007, the Section 6(b) fee rate applicable to the registration of securities, the 13(e) fee rate fee rate applicable to the repurchase of securities, and the Section 14(g) fee rate applicable to proxy solicitations and statements in corporate control transactions will decrease to $30.70 per million dollars. The Section 6(b) rate also is the rate used to calculate the fees payable with the Annual Notice of Securities Sold pursuant to Rule 24f-2 under the Investment Company Act of 1940.

All filings submitted to the SEC before 5:30 p. m. EST, and filings pursuant to Rule 462(b) (17 C. F.R. 230.462(b)) submitted to the SEC before 10:00 p. m. EST, on Feb. 19, 2007, will be subject to the current fee rate of $107.00 per million dollars. Rule 462(b) filings submitted after 10:00 p. m. EST, and all other filings submitted after 5:30 p. m. EST, on Feb. 19, 2007, under Section 232.13 of Regulation S-T (17 C. F.R. 232.13), will be subject to the new fee rate of $30.70 per million dollars.

Questions about the new Section 6(b), Section 13(e), or Section 14(g) fee rates should be directed to the Filer Support Unit in the SEC's Office of Filings and Information Services at (202) 551-8900.

In addition, effective March 17, 2007, the Section 31 fee rate applicable to securities transactions on the exchanges and over-the-counter markets will decrease to $ 15.30 per million dollars . Further, pursuant to Section 31, the Commission will determine no later than March 1, 2007 whether a mid-year adjustment to the Section 31 fee rate will be necessary. The Section 31 assessment on security futures transactions also will decrease to $0.0042 per round turn transaction, effective March 17, 2007.

The adjusted fee rates will not affect the amount of funding available to the Commission.

The Commission will announce the new fee rates for FY 2008 no later than April 30, 2007. These fee rates will become effective October 1, 2007, or after the Commission's FY 2008 appropriation is enacted.

Additional information on the Section 31 fee rate will be available on the Internet websites of the New York Stock Exchange and the NASD at http://www. nyse. com and http://www. nasd. com. respectivamente. The Division of Market Regulation's Office of Interpretation and Guidance also is available to answer questions relating to Section 31. That office may be reached by phone at 202-551-5777 or by email at marketreg@sec. gov .

The Commission will issue further notices as appropriate to keep the public informed of developments relating to the fee rates. These notices will be posted at the SEC's Internet web site at http://www. sec. gov .

The Office of Interpretation and Guidance in the Commission's Division of Trading and Markets is available for questions on Section 31 fees at (202) 551-5777, or by e-mail at tradingandmarkets@sec. gov

The Commission is required to adjust the filing and securities transaction fee rates on an annual basis, after consultation with the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB). A copy of the Commission's April 30, 2007, order regarding fee rates for fiscal year 2008 is available at http://www. sec. gov/rules/other/2007/33-8794.pdf

The adjusted fee rates will not affect the amount of funding available to the Commission.

The Commission will announce the new fee rates for fiscal year 2009 no later than April 30, 2008. These fee rates will become effective Oct. 1, 2008, or after the Commission's fiscal year 2009 appropriation is enacted, whichever is later. In addition, the Commission may be required to make a "mid-year" adjustment to the Section 31 fee rate for fiscal year 2008, after consultation with CBO and OMB, which would be announced no later than March 1, 2008, effective April 1, 2008.

The Commission will issue further notices as appropriate to keep the public informed of developments relating to enactment of the Commission's regular appropriation and the effective dates for the above fee rate changes. These notices will be posted at the SEC's Internet web site at http://www. sec. gov

Sec 1256 item (trick): How to potentially identify §1256 transactions: Section 31 fees no longer apply to sales of options on securities indexes (other than narrow-based security indexes). Therefore, if your sales proceeds are being reduced by the fee rates listed above, the trade is not a Sec 1256 transaction . (see update below)

Note: The charges on the gross sales of most securities transactions are known as Section 31 "fees." But there can be different per transaction charges imposed by Section 31 on transactions in security futures which are termed "assessments." The assessment on security futures transactions under Section 31(d) has been $0.0042 for each round turn transaction .

Exemption of Transactions in Certain Options and Futures on Security Indexes from Section 31 of the Exchange Act

SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-45371]

Exemption of Transactions in Certain Options and Futures on Security Indexes from Section 31 of the Exchange Act

On January 16, 2002, President Bush signed into law the Investor and Capital Markets Fee Relief Act ("Fee Relief Act" Pub. L. No. 107-123, 115 Stat. 2390 (2002) ) which, among other things, amends Section 31 to provide that "options on securities indexes (excluding a narrow-based security index)" are exempt from the fee requirements of Section 31 . Thus, as provided by statute, national securities exchanges and national securities associations are not required to pay to the Commission fees on sales of options on security indexes that are not narrow-based security indexes ( The term "narrow-based security index" is defined in Section 3(a)(55)(B) of the Exchange Act, 15 U. S.C. 78c(a)(55)(B) - i. e. are "broad-based security indexes"). The exclusion of sales of options on broad-based indexes from Section 31 fees is consistent with the treatment of futures on broad-based indexes, which compete with options on broad-based indexes and are not subject to assessments under Section 31 .

The Commission today is amending Rule 31-1 under the Exchange Act( 17 CFR 240.31-1.) by adding new paragraphs (f) and (g) to exempt options and futures, respectively, on narrow-based security indexes from Section 31. The Commission also is adopting conforming amendments to the preliminary note in Rule 31-1.

Colin M. Cody, CPA, CMA TraderStatus. com LLC 6004 Main Street Trumbull, Connecticut 06611-2400

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Tax Deduction Reminder Your payments for income tax services, advice and business related books and services may be tax deductible as an investment expense under IRS Sections 67 and 212 as an Investor to the extent that miscellaneous itemized deductions exceed 2% of your adjusted gross income. Alternatively they are fully tax deductible under Trader Status as a business expense by most corporations and trade or businesses under Section 162 of the IRS Code.

Tax Saving Options in India

About Tax Saving

An income tax is imposed on an individual or a company by the Government of India only if his or her income is included in the slab of taxable income. The Indian Income Tax Act of the year 1961 governs the levy whereas C. B. D. T. (Central Board for Direct Taxes) governs the Department of Income Tax in India. However, as per some of the sections of this Act like Section 80 C, 80 CCF, 80 D etc. exemptions are given on certain incomes. There are many tax saving options, investing on which, one can get a deduction on his or her total income tax.

Tax Saving Options

India has got several government as well as private sector organizations offering numerous tax saving options to the residents of this country. Some of them are as follows:

Public Provident Fund

Commonly known as P. P. F. this tax saving option falls within the Section 80 C of the Income Tax Act in India. Public Provident Fund allows a maximum contribution of INR. 1,50, 000 per year. The return in this scheme is compounded annually at the rate of 8.7%. It is one of the long term ventures that does not allow complete withdrawal before 15 years. Post 7 years of investment, withdrawal is possible though. No tax is levied on the earned interest. Besides these, it even forms a retirement-planning tool. One can have such an account in either the State Bank of India or some of the nationalized banks or at some of the designated post office branches.

Benefits under Public Provident Fund (PPF)

The investor enjoys the rebate on his investment under section 80C of I. T. Act 1961

Interest income on PPF and the final amount is considered as tax free

Investment in small amounts can be made every year for a longer duration

Investments are fixed deposited for 15 years Balance amount held in Public Provident Fund is tax exempted from wealth tax

If one starts his/her PPF account in the year 2015, then the turn of events is shown as under. Starting from the seventh year one can reap the benefits of his/her PPF scheme.

House Rent Allowance

House Rent Allowance is applicable if a fraction of your income is allocated as HRA or if you are paying your house rent. The maximum deduction is done on the basis of the lesser amount which is selected from either the total amount of rent paid or the amount allocated as HRA in your income slip, provided your HRA does not exceed 50% of your income (if you are residing in metro cities) and 40% of your income (if you are residing in other cities)

Unit Linked Insurance Plans

Covered by the Income Tax Act's Section 80 C, U. L. I. P. is a unique blend of investment and insurance that gives a tax exemption of INR. 100, 000 per year. Here, the premium, which is being paid by a customer, gets deducted with initial charges while the rest of the amount is invested. Such a plan can be of the following three kinds:

Aggressive ULIPs where one can invest 80 % to 100 % in equities. The rest can be invested in debt instruments though.

Balanced ULIPs where an individual can invest 40 % to 60 % in equities

Conservative ULIPs, which allows one to invest up to 20 % in equities

Benefits under Unit Linked Insurance Plans

Investments under ULIPs are eligible under Section 80C of the Income Tax Act.

Maturity earnings from ULIPs are tax exempted

Equity Linked Saving Scheme

Popularly called E. L. S. S. this is a kind of mutual fund that comes within the Income Tax Act Section 80 C. With a minimum investment period of 3 years, this investment option helps one get exempted from income tax payment and offers an exemption of maximum INR. 100, 000 in a financial year as well. The interest rate depends on the performance of this scheme in a given year. However, if it does well, then it is more likely to increase even the interest rate of P. P. F.

Benefits under Equity Linked Savings Scheme (ELSS)

The entire investments done under Equity Linked Savings Scheme qualify for tax deduction under 80C of Income tax Act, 1961.

Fixed Deposits

Fixed Deposits (FDs) are another popular tax saving option covered by the Section 80 C of the Income Tax Act. With a maximum exemption of INR. 100, 000 annually, the rate of interest varies from one bank or post office to another. However, the tax saving can only be done of FDs once you have invested for a minimum duration of 5 years. This scheme neither allows the encashment of the money prior to completion of the 5 years term nor can this be used as the security against any loan.

Salient Features of Tax Saving Fixed Deposits Following are the salient features of tax saver fixed deposits in India:

The fixed deposit is locked for 5 years. You cannot withdraw your investment prematurely.

The minimum amount of purchase is 100 and then in multiples of that.

The maximum amount of purchase is 1,00,000.

The maximum amount of claim is 1 lac.

The rate of interest varies, which can further change in future.

It doesn't have sweep-in facility. It can't be linked to a savings account. Surplus fund of savings account can't be automatically invested in tax saver fixed deposits either.

Relationship benefits are not offered on the India tax saver fixed deposits.

Employee Provident Fund

Famously called E. P. F. this scheme offers a total yearly exemption of INR. 100, 000 as mentioned in the Income Tax Act Section 80 C. In this fund, 10 % to 12 % of a person's basic salary gets deducted and the other 12 % is contributed by the employer. One can withdraw the entire amount in instances of leaving job, retirement after 58 years of age or taking V. R. S. Partial withdrawal can be done for home, medical or marriage related expenses though.

National Saving Certificate

This tax saving scheme known as N. S. C. helps one get exempted from tax by an investment of up to INR. 100, 000 per year under the Section 80 C of the I. T. Act of India. The interest rate is compounded half-yearly at the rate of 8 % and reinvested every year from the last year's N. S. C. The minimum period for this investment scheme is 6 years post which, one is provided with the entire interest along with the initial capital. The major benefit of this is that one can earn a maximum tax saving interest of INR. 100, 000.

Benefits under National Savings Certificate (NSC):

The investor enjoys tax rebate on initial 5 years under section 80C of Income Tax Act

Documentation can be guaranteed as safety against a mortgage to banks or Government Institutions Provision of encashment of documentations via banks.

However, the investment in NSC is locked in for 6 years and is taxable under 'income from other sources'.

Infrastructure Bonds

Over and above the deduction allowed by the Section 80 C, one can save income tax on a maximum amount of INR. 20, 000, by investing in different infrastructure bonds. Covered by the Section 80 CCF of the Indian I. T. Act, this bond has got a lock-in period of 5 to 10 years. The rate of interest even varies from 8 % to 8.3 %.

Benefits under Infrastructure Bonds: 1. Investments in infrastructure bonds from different banks are eligible for a rebate under Section 88 of the Income Tax Act. However, the interest will be chargeable; the investor can assert tax exemptions against Rs.15,000 under Section 80L.

Seguro

Life insurance is among the best and authentic tax saving options covered within the Section 80 C of India's Income Tax Act. Though the policy allows a maximum deduction of INR. 100, 000 in a given financial year, but in case anyone surrenders the plan before paying two year's premium, then it will have reverse effect of tax benefit. However, the tax benefit for the premium is restricted to 20 % of the initial amount of the capital invested. Apart from that, this helps one plan for the unforeseen events in his or her life.

Benefits under Life Insurance Schemes 1. The investor can enjoy rebate on his investments under section 80

Health Premiums

Popular as Mediclaim Policies, which are a form of health insurance, comes within the Section 80 D of the country's Income Tax Act. Applicable even on the proprietor firm's cheques, these policies offers a maximum deduction of INR. 35, 000. This deduction is calculated in addition to any other tax saving done as per the Section 80 C. The total amount of INR. 35, 000 can be divided as follows:

INR. 15, 000: Premium for policies on spouse, children or self

INR. 15, 000: Premium towards policies for dependent parents, who are non-senior citizens

INR. 15, 000: Premium for dependent senior citizens

Besides saving your income tax, these policies even help you deal with your or your family's health related problems with ease during any emergency situation.

Tuition Fee

Covered under the Indian I. T. Act Section 80 C, payment made towards the education of children is even exempted from one's yearly income tax. Being a part of Section 80 C, one can get a maximum exemption of up to INR. 100, 000 per financial year. Tuition fee for school, college and university as well as coaching fee for varied competitive exams are considered under this policy. However, just 2 children are considered for such a kind of tax exemption.

Post Office Saving Options

Under the Section 80 C of the I. T. Act of the nation, one can invest in any of the different tax saving options provided by the post offices. Though, along with the terms and conditions, the interest rate as well as the tenure of the investment varies from one scheme to another, they provide a maximum deduction of INR. 100, 000. To name a few of such schemes offered by India Post are:

Recurring Deposit Account (5 Year)

Time Deposit Account

Public Provident Fund Account (15 year)

National Savings Certificate (VIII issue)

Senior Citizen Savings Scheme

Mutual Fund

Being covered under the Section 80 C of the I. T. Act of India, this type of investment plan helps in a total exemption of INR. 100, 000. The entire tenure of such a scheme varies from 3 years to 5 years. Equity Linked Saving Scheme is considered to be one of the best tax saving mutual funds. More on Mutual Funds

Tax Saving Options in Public Sectors Banks

Fixed deposits are among the most popular tax saving options in most of the public sector banks. Besides that, some of the public sector banks like the State Bank of India, Allahabad Bank, Punjab National Bank and many more offers some other tax saving options like P. P. F. mutual funds and infrastructure bonds etc. Another unique bond, which helps to save tax payments, is 6.5 % Savings Bonds, 2003 by R. B. I. (Reserve Bank of India). This bond's tenure is for 5 years with an annual interest rate of 6.5 %.

Tax Saving Options in Private Sectors Banks

The private sector banks in India like ICICI Bank, HDFC Bank, City Union Bank etc. offer varied tax saving options to the country's citizens. To name a few of them are fixed deposits, mutual funds, life insurances, infrastructure bonds, recurring deposits and many more.

chap 16 - BE16-1 Your answer is correct. Archer Inc. issued.

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BE16-1 Your answer is correct. Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance of the bonds. (List multiple debit/credit entries from largest to smallest amount, e. g. 10, 5, 2.) Description/Account Cash Discount on Bonds Payable Bonds Payable BE16-2 Your answer is correct. Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2012, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book value approach. (List multiple debit/credit entries from largest to smallest amount, e. g. 10, 5, 2.) Description/Account Debit Credit Bonds Payable 2000000 Common Stock 1000000 Paid-in Capital in Excess of Par 970000 Discount on Bonds Payable 30000 BE16-3 Your answer is correct. Pechstein Corporation issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion. Record the conversion of the preferred stock. (List multiple debit/credit entries from largest to smallest amount, e. g. 10, 5, 2.) Description/Account Debit Credit Preferred Stock 50000 Paid-in Capital in Excess of Par-Preferred 10000 Paid-in Cap. in Excess of Par-Comm. Stock 40000 Common Stock 20000 BE16-4 Your answer is correct.

Eisler Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market price of $40. Use the proportional method to record the issuance of the bonds and warrants. (List multiple debit/credit entries from largest to smallest amount, e. g. 10, 5, 2. Round computations and final answers to 0 decimal places, e. g. 12,510.) Description/Account Cash Discount on Bonds Payable Bonds Payable Paid-in Capital-Stock Warrants BE16-5 Your answer is correct. McIntyre Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling separately at 98. The market price of the warrants without the bonds cannot be determined. Use the incremental method to record the issuance of the bonds and warrants. (List multiple debit/credit entries from largest to smallest amount, e. g. 10, 5, 2.) Description/Account Debit Credit Cash 2020000 Discount on Bonds Payable 40000 Bonds Payable 2000000 Paid-in Capital - Stock Warrants 60000 BE16-6 Your answer is correct.

On January 1, 2012, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share of Barwood's $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $65 per share on the

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CUERPO

Hand-crafted fiberglass laminate featuring: hand laid layers of fiberglass, durable gelcoat surface and an inner core, providing high strength and superior surface quality. All high stress areas are reinforced with heavy woven roving (woven strands fiberglass at 90 degrees, used in most boat manufacturing) providing the strongest most durable body in the industry.

No fiberglassing required. All inner components, floor, firewall and door liners are pre-glassed and bonded in place. Doors are bonded together in the molds with custom fixtures for precise and accurate placement.

Door frames and dash are supported with hardwood and plywood inner structure for stability and solid mounting of hinges and latches.

Doors come hinged to the body using taped sandwich plates behind inner liners for strength and adjustability.

Doors are latched with bear claw rotary safety latches.

Door window track are installed in doors.

We mold our own bodies, to exact outer dimensions using original specifications, utilizing our 30 years experience in the fiberglass industry.

Our vast experience allows us to offer bodies in Kevlar and Kevlar-carbon fiber, bodies are so well aligned that we remove all flash lines (lines formed from seams in multiple piece molds) from the gelcoat surface. All fiberglass components go through our 12 point total cure process, insuring no post cure, and are inspected at each step of production. Every component is machine buffed to insure that the surface is even, flat and shiny.

These features combine to give our customers with the highest quality body and ease of assembly.

Cuerpo

Stock Frame

Frame rails are reproduced from original design and mig and tig welded for superior strength and durability.

102" wheel base

Main rails fabricated from 10 gauge cold finished mild steel

Cross section of main rails are plasma cut to eliminate warpage and to assure uniformity from rail to rail

All frame rails are precisely located and predrilled with a custom fixture.

Frame is cross-braced with K member formed from 10 gauge mild steel

K member has access for ease of routing exhaust, brake lines and fuel lines.

Frame rails in front and rear of K member are boxed for added strength and appearance.

All blind holes in frame rails for attaching body components have nuts welded in place for ease of assembly.

Front cross member is setup for stock or tubular Mustang II front suspension and is formed from 3/16" cold finished mild steel with all mounting point for upper and lower control arms and rack and pinion steering precisely located with custom fixtures. Front strut mounting brackets are made from 5/16" cold finished mild steel with a 1/4" gusset for added strength (not used with tubular front control arms).

Rear cross member is constructed from 2" x 2" square tubing with 1 1/4" diameter threaded bar stock for mounting of coilover shocks.

Pro-Street Frame

Tube Frame Stock & Pro-Street

Heavy wall rectangular tubing stock or narrowed rear frame ready to accept rear suspension and body.

Triangulated Rear Suspension

used on Stock Frames

Triangulated four link arms setup for coilover shocks.

Each four link arm has a single adjuster for fine tuning rear end location and adjusting of pinion angle.

Link arms are made from 1" diameter .156" heavy wall D. O.M. tubing with urethane bushings and a inner sleeve to accept 9/16" bolts.

All mounting brackets for attachment to frame and rear end housing are provided.

Pro-Street Rear Suspension

Parallel four link with the addition of a panhard bar

OPTIONS

Rear Coil-Over Shocks Fully adjustable shocks with matching spring rates. $395.00

Motor Mounts Steel mounts that weld in place and are matched to your motor style and type. $125.00

Brake Pedal and Master Cylinder Bracket Attaches to frame member and uses a 3/4" oil impregnated bronze bushing as a pivot for the pedal arm. A 3/8" self aligning rod end is used to actuate the master cylinder. $225.00

Hood Hinge Stainless steel piano style bent to proper angle. $39.00

Power Window Regulators Complete system for electronically raising and lowering door glass includes wiring and switches. $425.00

Installed with glass purchase add $200.00

Heater / Defroster Small unit that easily fits up behind dashboard. $375.00

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SUMMARY OF IMPORTANT US GAAP

US GAAP (Generally Accepted Accounting Principle) is the new mantra for Accounting and Corporate Finance Professionals world over. Globalisation and access to Global Capital and securities market has enhanced the need to assimilate the principles of US GAAP into national Accounting Standards. To get listed on NYSE or NASDAQ and float GDR. an Indian company either needs to publish accounts under US GAAP or expressly publish the reconciliation of its Financial Results with US GAAP. Further many foreign companies whose shares are listed on US Stock Exchanges, require that their Indian Subsidiaries or Associates, should prepare separate sets of Accounts under US GAAP for ease of consolidation. Some of Indian Companies who have launched GDR/ ADR are Bajaj Auto, Dr Reddy’s Lab, HDFC Bank, Hindalco, ICICI Bank, Infosys, ITC, L&T, MTNL, Ranbaxy Labs, Reliance, Satyam Computers, SBI, VSNL and WIRPO and required to follow US GAAP Accounting/reconciliation.

1. Financial statements : Under US GAAP. the Financial statements include the following.

v Consolidated Balance Sheet (showing comparatives for 2 years)

v Consolidate statement of Income (showing comparatives for 3 years)

v Consolidated statement of Stock holders’ Equity and comprehensive Incomes (showing comparatives for 3 years)

v Consolidated statement of Cash flow (showing comparatives for 3 years)

v Summary of Significant Accounting Policies as required by APB 22

v Forward looking statement as per section 27A of the Securities Act. 1933 and Section 21E of Securities Act. 1934

v Certification by CEO as well as CFO as required u/s 302 of Sarbanes Oxley Act. 2002 in Annual Report ( 20-F) and also in quarterly report ( 6 K)

v Certification by CEO as well as CFO as required u/s 906 of Sarbanes Oxley Act. 2002 in Annual Report ( 20-F). and also in quarterly report ( 6 K)

The Presentation of items in Balance sheet moves from current to Non Current for Assets as well as Liabilities. The Consolidated statement of Income has to show comparatives for 3 years and also has to contain EPS data ( Basic and/or Diluted EPS) as applicable on the face of said statement. The consolidated statement of Stock holders’ Equity and comprehensive Incomes contains aggregation of Par Value of Common stock along with Additional paid in capital Comprehensive Income, Accumulated Comprehensive Income, deferred Stock compensation and retained earnings. The consolidated statement of cash flow prepared in accordance with SFAS 95 contains break up of cash from Operating, Financing and Investing Activities

2. Compliance for Indian Companies . Indian Companies which issue ADR ( American Depository Receipt) or GDR (Global Depository Receipt) and listed on NASDAQ or NYSE, have to submit Quarterly (6-K) and Annual Report ( 20-F) with Securities Exchange Commission. Washington EC in accordance with Rule 13a –16 or rule 15d-16 of Securities Exchange Act, 1934.

There is no organization like Registrar of Companies (ROC) in US. hence unlisted companies do not have any file their financial statements with any bodies except Auditing from CPA and filing the statements with IRS as per Internal revenue Code for taxation purposes.

The Sarbanes Oxley Act 2002 requires that in the Annual Report in form 20-F. the issuing company has to include a statement of Compliance signed by its CEO and its CFO under Section 302 of the Act. Similarly section 906 of the Said Act requires that CEO and CFO should file similar compliance for quarterly statement in form 6-K

3. Disclosure of Accounting Policies . APB Opinion Number 22 provides guidelines for disclosure of accounting policies. Accounting policies include accounting principles and its application in the preparation of financial statements, A company’s major accounting policies should be disclosed in the first footnote or in a section called “Summary of Significant Accounting Policies,” before the footnotes.

Examples of accounting policies to be disclosed includes revenue recognition, Investments, Fixed Assets, Goodwill & intangible Assets, Foreign currency translation, Derivative Instruments, Stock Based Compensation, Retiral benefits etc.

4. Revenue Recognition: The GAAP for revenue recognition applies to Sales of Good as well as services. Revenue Recognition: According to SFAC Number 5, revenue is generally recognized when

ь it is realized or realizable, and

ь It has been earned.

There are four points of revenue recognition:

ь Realization (at time of sale of merchandise or rendering of service)

ь At the completion of production

ь During production

ь On a cash basis

Revenue from service transactions is recognized based upon performance. Performance may either be based upon the passing of time or may involve a single action or a series of actions. The following four methods should be used to recognize revenue from service transactions:

ь The specific performance method should be used when performance involves a single action and revenue is recognized when that action is completed. For example, a CPA is retained to prepare a tax return. Revenue is recognized when the single action of preparing the tax return is completed.

ь The proportional performance method is used when performance involves a series of actions. If the transaction involves an unspecified number of actions over a given period of time, an equal amount of revenue should be recognized at fixed intervals. The use of the straight-line method is recommended unless another method is deemed to be more

Apropiado. If the transaction involves a specified number of similar or essentially similar actions, an equal amount of revenue should be recognized when each action is performed. If the transaction involves a specified number of dissimilar or unique actions,

ь The completed performance method should be used to recognize revenue when completing the final action is so critical that the entire transaction would be considered incomplete without it.

ь The collection method is used to recognize revenue when there is significant uncertainty regarding the collection of revenue.

ь Revenue should not be recognized until cash is collected. The matching principle requires that expenses be matched to revenues. In other words, revenues should be recognized in the same period as their associated expenses. If expenses are expected to be recovered from future revenues, then those expenses should be deferred.

Three major categories of costs result from service transactions: Initial direct costs are incurred to negotiate and obtain a service agreement. They include costs such as commissions, credit investigation, processing fees, legal fees, etc. They do not include indirect costs such as rent and other administrative costs.

In case of Sale of Goods, revenue is recognized, when delivery has happened, property in good has passed from Seller to Buyer and there is no chance of Return of good sold or any claim

v Sales with buy Back agreements . No sale is recognized when a company sells a product in one accounting period and agrees to buy it back in the next accounting period at a set price which includes not only the cost of inventory but also related holding costs. While the legal title may transfer in such a transaction, the economic substance of the transaction is to leave the risk with the seller, and hence no sale is recognized

v Sales where right of return exists . When a company experiences a high rate of return, it may be necessary to delay reporting sales until the right of return has substantially expired. The right of return may either be specified in a contract or it may be a customary business practice involving “guaranteed sales” or consignments. Three methods are generally used to record sales when the right of return exists. First, the company may decide not to record any sale until the right of return has substantially expired. Second, the company may record the sale and estimated future returns. Finally, the company may record the sale and account for returns as they occur. According to FASB Statement No. 48, Revenue Recognition When Right of Return Exists, the company may recognize revenue at the time of sale only if all of the following six conditions are satisfied: 1. The price is fixed or determinable at the date of sale. 2. The obligation of the buyer to pay the seller is not contingent on resale of the product, or the buyer has paid the seller. 3. Theft or other damage to the product would not affect the buyer’s obligation to the seller. 4. The product being acquired by the buyer for resale has economic substance apart from that provided by the seller. 5. Seller does not have significant future obligations to assist directly in the resale of the product by the buyer. 6. Future returns can be reasonably estimated.

Software Revenue recognition . The contract with Customers can either be on fixed price, fixed timeframe or time and material basis.

v Revenue from fixed price and fixed time frame contract should be recognized on percentage of completion method. (SOP 81-1) The input method may be used to measure progress towards completion as there is a direct correlation between input and output

v Revenue from time and material contracts should be recognized as the related services are performed and revenue from end of last billing till balance sheet date is recognized an unearned revenue

v Maintenance revenue should be recognized over the period of maintenance contract. In case fixed warranty on telephone support is provided then the cost associated with such warranties shall be accrued at the time such revenue are recognized and included as cost of revenue .

v License fee revenue (SOP 97-2) should be recognized when persuasive evidence of an agreement exists, delivery has occurred, license fee is fixed and determinable and collection of fee is probable. Arrangement to deliver SW products have 3 elements license, implementation and Annual Technical Services ( ATS)

v Advances and deposits received should be recorded as client deposit until all conditions for revenue recognition as stated above are met .

5. Current Assets: Promulgated GAAP for current assets is provided in the American Institute of CPAs’ Accounting Principles Board’s Accounting Research Bulletin Number 43, chapter 3A. Current assets have a life of one year or the normal operating cycle of the business, whichever is greater. The accounting policies and any restrictions on current assets must be disclosed.

Inventory. The accounting, reporting, and disclosures associated with inventory are provided by various authoritative pronouncements, including Accounting Research Bulletin Number 43, chapter 4 (Inventory Pricin g), FASB Interpretation Number 1 (Accounting Changes Related to the Cost of Inventor y), and Emerging Issues Task Force Consensus Summary Number 86–46 (Uniform Capitalization Rules for Inventory under The Tax Reform Act of 198 6). Inventories consist of merchandise to be sold for a retailer. Inventories for a manufacturing company include raw materials, work-in-process (partially completed goods), finished goods, operating supplies, and ordinary maintenance parts. Inventories are presented under current assets. However, if inventory consists of slow-moving items or excessive amounts that will not be sold within the normal operating cycle of the business, such excess amounts should be classified as non current assets. Inventory includes direct and indirect costs associated with preparing inventory for sale or use. Therefore, the cost of inventory to a retail store includes the purchase price, taxes paid, delivery charges, storage, and insurance. A manufacturer includes in its cost of inventory the direct materials (including the purchase price and freight-in), direct labor, and factory overhead (including factory utilities, rent, and insurance). Inventory may be valued at the lower of cost or market value. The value of inventory may decrease because of being out-of-date, deteriorated, or

damaged or because of price-level changes.

Specialized inventory methods also exist including retail, retail lower of cost or market, retail LIFO, and dollar value LIFO.

Footnote disclosure for inventory includes the valuation basis method, inventory categorization by major type, unusual losses, and inventory pledged or collateralized.

FASB Statement Number 49 (Accounting for Product Financing Arrangement s) states that a financing arrangement may be entered into for the sale and repurchase of inventory. Such an arrangement is reported as a borrowing, not a sale. In many situations, the product is kept on the company’s (sponsor’s) premises. In addition, a sponsor may guarantee the debt of the other company. Typically, most of the financed product is ultimately used or sold by the sponsor. However, in some instances, minimal amounts of the product may be sold by the financing entity to other parties. The company that provides financing to the sponsor is typically a creditor, non business entity, or trust. In a few cases, the financing entity may have been set up solely to furnish financing to the sponsor. The sponsor should footnote the terms of the product financing arrangement.

6. Fixed assets . GAAP for the accounting, reporting, and disclosures associated with fixed assets are included in the American Institute of CPAs’ Accounting Principles Board Opinion Number 6 dealing with depreciation, Accounting Principles Board Opinion Number 12, paragraphs 4 and 5 (Disclosure of Depreciable Assets and Depreciation), American Institute of CPAs’ Accounting Research Bulletin Number 43, chapter 9A (Depreciation and High Costs), and Emerging Issues Task Force Consensus Summary Number 89–11 (Allocation of Purchase

Price to Assets to be sold).

Fixed Assets are to be stated at cost of acquisition less accumulated depreciation. Depreciation is provided based on estimated useful lives of the assets and no depreciation rate are provided in US GAAP. Cost of improvements that substantially extend the useful lives of assets can be capitalized. Repairs and maintenance expenses are to be charged to revenue when incurred. In case of sale or disposal of an asset, the cost and related accumulated depreciation are removed from consolidated financial statement.

Revaluation . US GAAP prohibits upward revaluations except for a discovery on a natural resource, in a business combination accounted for under the purchase method, or in a quasi reorganization. If a natural resource is discovered on land, such as oil or coal, the appraised value is charged to the land account and then depleted using the units of production method.

Self-constructed assets are recorded at the incremental or direct costs to build (material, labor, and variable overhead) assuming idle capacity. Fixed overhead is excluded unless it increases because of the construction effort. However, self-constructed assets should not be recorded at an amount in excess of the outside cost.

A donated fixed asset should be recorded at its fair market value by debiting fixed assets and crediting contribution revenue4A FASB Statement Number 116 (Accounting for Contributions Received and Contributions Mad e). The Donor should recognize an expense for the fair market value of the donated asset. The difference between the book value and fair market value

of the donated asset represents a gain or loss.

If fair market value is not determinable and the present value (discounted) of expected future cash flows is used, then the assets should be grouped at the lowest level at which the cash flows are separately identifiable. Reasonable and supportable assumptions and projections should be used to make the best estimate. All evidence pertinent to impairment of assets should be considered. Evidence which is objectively verifiable should be given more weight.

6 A Capitalization of Interest cost Interest on Funds borrowed for Asset Purchased (SFAS 34) : SFAS 34 provides that interest on borrowed funds should be is expensed. However, where borrowing is made for purchase of assets. the interest on borrowings is deferred to the asset account and amortized if a) it pertains to self-made assets for the company’s own use b) Assets for sale or lease built as discrete, individual projects. An example is real estate development. If land is being prepared for a specific use in the company, the cost of buying the land meets the test for capitalized interest. c) Asset is bought for the entity’s own use by agreements requiring a down payment and/or process payments d) Assets is received due to gift or grant in which donor restrictions exist.

Interest should not be capitalized in case a) Assets in use or ready for use b) Assets are manufactured in large quantity or on a continual basis c) Asset is not in use and not being prepared for use.

Interest capitalization is based on the average accumulated expenditures for that asset. The interest rate used is generally based on the Interest rate on the specific borrowing. Interest capitalization begins when the asset is being made ready for use in terms of construction or when administrative and technical activities before construction are taking place. The capitalization period ends when the asset is substantially finished and ready for use.

7. ACCOUNTING FOR INVESTMENTS ( SFAS 115 - Accounting for Certain Investments in Debt and Equity Securitie s): SFAS 115 sets forth the accounting and financial reporting Requirements for investments in equity securities with determinable fair Market value and for all investments in debt securities. FASB 115 applies to preferred stock and common stock (if ownership is below 20% or if ownership exceeds 20% but effective control [significant influence] is lacking). The statement is not applicable to investments under the equity method, consolidated subsidiaries, specialized industries such as brokers and dealers, or not-for-profits. Nonprofit entities are governed by FASB 124, which requires fair value reporting for all investment categories, including held to maturity.

Equity and debt securities are broken down into 3 classes i. e. Trading securities Available-for-sale securities and Held-to-maturity securities based on factors such as management intent considering past history of investments, subsequent events after the balance sheet date, and the nature and objective of the investment.

Trading securities –This includes equity, debt securities, Mortgage-backed securities held mainly to sell in short term (usually 3months or less) and there in active trading to earn short-term profits Trading securities are recorded in the balance sheet under current assets at fair market valu e. Realised gains and losses are treated as Income in income statement. Unrealized (holding) gains and losses on trading securities are presented separately in the income statement. Fair market value is based on stock or bond quotation un listed exchanges or in the over-the-counter market or if price is unavailable, other valuation methods may be used, including present value of future cash flows, fundamental analysis, matrix pricing, and Option-adjusted spread models. Market value is compared to cost on a total portfolio basis.

Available-for-sale securities may include equity and debt securities which are not held for short-term profits, nor are they to be held to maturity. Therefore, they are in between trading and held-to-maturity classifications. Available-for-sale securities are presented in the balance sheet as either current assets or non current assets at fair market valu e . They are often listed as non current asset s. However, if the intent is to hold for less than one year, they are current assets.

Market value is compared to cost on a total portfolio basis. The Unrealized (holding) gains and losses during the period is presented in the Statement of Comprehensive Income as Other comprehensive Income. Cumulative effects is included as a separate item in the stockholders’ equity section as “accumulated other comprehensive loss or gain.”

Held-to-maturity securities can only be debt securities (principally bonds) because they have maturity dates and the intent is to hold to maturity. Held-to-maturity are presented under noncurrent assets securities in the balance sheet at amortized cos t. However, those held-to-maturity securities maturing within one year are presented under current assets.

The classification of these investment must be reviewed annually and transfers should be accounted for at fair market value. The fair value becomes the new basis

Dividend and interest earned on investments are realized income and should be included in Income statement as other Income

The following information should be disclosed about investments

v Valuation basis used

v Total portfolio market value.

v Method used to determine cost (e. g. FIFO, average cost, specific identification) in computing the realized gain or loss on sale of securities

v Unrealized (holding) gains and losses for trading and available-for-sale securities

v Reasons for selling or transferring securities

v Gains and losses from transferring available-for-sale securities to trading included in the income statement

v Market value and cost by major equity security

8. Investment in Associate Companies . Where an Individual or a Company 20% of more of voting common stock of another entity. the accounting. reporting, and disclosures shall be done as per equity method as per GAAP enunciated in APB Opinion Number 18

Under this method, the investor treats the investment as if it were a consolidated subsidiary and includes its proportionate share in the profit or loss profit as part of carrying value of investments. For example, say ABC limited holds 30% in XYZ Limited at an initial cost of US$ 1,000,000 and has significant control, over XYZ Limited. If XYZ’s annual Profit is US$ 200,000 and dividend declared is US$ 50,000. The carrying value of investment shall be 1,000,000+30% of 200,000- 30% of 50,000 ( 1,000,000+60,000-15,000=US$ 1,045,000)

APB Opinion no 18 also provides that a) cost of Investments to include brokerage charges b) No adjustment for temporary declines, but in case of permanent decline, loss is debited and the value of investment is reduced c) Share in profit is determined afar subtracting Cumulative preferred dividend, whether declared or not d)

The equity method is to be used if.

v An investor owns between 20 and 50% of the investee’s voting common stock.

v The investor owns less than 20% of the investee’s voting common stock but has effective control (significant influence).

v The investor owns in excess of 50% of the investee’s voting common stock, but a negating factor exists, preventing consolidation.

v There is a joint venture. A joint venture is an entity that is owned, operated, and jointly managed by a common group of investors. Other accounting aspects exist.

Significant influence may be indicated by a number of factors, including substantial inter company transactions, exchanges of executives between investor and investee, investor’s significant input in the investee’s decision-making process, investor’s representation on the investee’s Board of directors, investee’s dependence on investor (e. g. operational, technological, or financial support), and substantial ownership of the investee by investor relative to other widely disbursed shareholder interests. Under FASB Interpretation Number 35, if there is a standstill agreement stipulating that either the investor has relinquished major rights as a stockholder or that significant influence does not exist, it may indicate that the equity method is not appropriate. Interpretation Number 35 also may preclude the equity method if the investor attempts unsuccessfully to obtaining representation on the investee’s board of directors.

The equity method basically uses the consolidation approach to results of investee’s accounts by eliminating inter company profits and losses. Such profits and losses are eliminated by reducing the investment balance and the equity earnings in investee for the investor’s share of the unrealized inter company profits and losses. Investee capital transactions affecting the investor are treated as in consolidation. The investee is treated as if it were a consolidated subsidiary.

If the investor’s share of the investee’s losses exceeds the carrying value of the investment account, the equity method should be discontinued at the zero amount. Thereafter, the investor should not record additional losses unless it has guaranteed the investee’s debts or is otherwise committed to provide additional financial support to the investee, or immediate profitability is forthcoming. If the investee later shows net income, the investor can reinstate using the equity method only after its share of profit equals the share of unrecorded losses when the equity method was suspended.

If ownership falls below 20%, or if the investor loses effective control over the investee, the investor should stop recording the investee’s earnings. The equity method is discontinued, but the balance in the investment account is retained. The investors will then follow SFAS for regular investment. If the investor increases its ownership in the investee to 20% or more (e. g. 30%), the equity method should be used for current and future years. The effect of using the equity method instead of the market value method on previous years at the old percentage (e. g. 10%) should be recognized as a retroactive adjustment to retained earnings and other affected accounts (e. g. investment in investee).The retroactive adjustment on the investment, earnings, and retained earnings should be applied in a similar way as a step-by - step acquisition of a subsidiary.

If the investor sells the investee’s stock, a realized gain or loss is recognized for the difference between the selling price and carrying value of the investment in investee account at the time of sale. The realized gain or loss appears in the investor’s income statement.

The investor must disclose the following information in the footnotes, in separate schedules, or parenthetically:

v Statement that the equity method is being used

v Identification of investee along with percent owned

v Quoted market price of investee’s stock

v Investor’s accounting policies

v Significant subsequent events between the date and issuance of the financial statements

v Reason for not using the equity method even though the investor owned 20% or more of the investee’s common stock

v Reason why the equity method was used even though the investor owned less than 20% of the investee’s common stock

v Summarized financial information as to assets, liabilities, and earnings of significant investments in unconsolidated subsidiaries

v Significant realized and unrealized gains and losses applying to the subsidiary’s portfolio taking place between the dates of the financial statements of the parent and subsidiary

Thus. we find that there are 3 treatment for Investments:

v Normal investment upto 20% and no control - SFAS 115

v Investment between 20% to 50% with significant control - SFAS. APB 18

Investment > 50% and majority control - SFAS 94

9. Consolidation . SFAS 94 mandates that the Financial statement of all Subsidiary should be Consolidated when the parent owns more than 50% of the voting common stock of the subsidiary. to report as one economic unit the financial position and operating performance of a parent and its majority-owned subsidiaries.

A consolidation is negated, even if more than 50% of voting common stock is owned by the parent, in the following cases: Parent is not in actual control of subsidiary, such as when the subsidiary is in receivership (arising from bankruptcy or receivership) or in a politically unstable foreign region. When control is temporary, consolidation is negated. Significant foreign exchange restrictions may be a negating factor. Parent has sold or agreed to sell the subsidiary shortly after year-end. In this case, the subsidiary is a temporary investment. The results of acquired business in which company owns more than 50% of voting rights should be included in consolidated financial statements Inter-company balances and transactions should be eliminated

10. Business Combination/Mergers and Amalgamation (SFAS 141) . (Other Ref APB Opinion No 16 (Business Combination s), Accounting Interpretations of APB Opinion Number 16, FASB Interpretation Number 4 (Applicability of FASB Statement Number 2 to Business Combinations Accounted for by the Purchase Method), FASB Statement Number 38 (Accounting for Pre acquisition Contingencies of Purchased Enterprise s), and FASB Technical Bulletin 85–5 (Issues Relating to Accounting for Business Combination s).

A business combination takes place when two or more entities combine to form a single company. A business combination occurs before the consolidation process. Business combinations are accounted for under either the pooling-of-interests method or the purchase method.

Pooling of interest Method . Applied used when the acquirer issues its voting common stock for 90% or more of the voting common stock of the Acquiree, and all of the 12 criteria as stated in are met. Hence, business combinations are accounted for under purchase method. A pooling of interests presumes that for accounting purposes both Companies were always combined. No purchase or sale is assumed to have occurred. In other words, stockholders of the combining companies become stockholders in the combined company. In this method, Net assets of the acquired business are carried forward at book value. No assets or liabilities are added or withdrawn by the acquirer or acquired. Retained earnings and paid-in-capital of the acquired business are brought forth at book value. While total stockholders’ equity does not change, the equity components do change. Any necessary adjustments are made to paid-in-capital. If paid-in-capital is inadequate to absorb the difference; retained earnings would be reduced for the balance. A deficit in retained earnings for a combining company is retained in the combined entity. Net income of the acquired company is carried forth for the entire year regardless of the acquisition date. Expenses of the pooling are charged against earnings immediately. A gain or loss from disposing of a major part of the assets of the acquired business (e. g. duplicate warehouse) within two years after combination is treated as an extraordinary item (net of tax).

Purchase Method . an application of the cost principle in that assets acquired are recorded at the price paid (which is their fair market value), fair values of other assets distributed, or fair values of the liabilities incurred. This gives rise to a new basis for the net assets acquired. Under the purchase method, none of the equity accounts of the acquired business appears on the acquirer’s records or on the consolidated financial statements. In effect, ownership interests of the acquired company’s stockholders are not continued after the combination.

11. Goodwill & Intangible Assets ( SFAS 142 ) : Goodwill represents cost of acquired business in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill should be tested for impairment on an annual basis relying on a number of factors including operational results, business plans and future cash flow. Goodwill should also be tested between annual tests, if there is an extraordinary event that is more likely than not to reduce to fair value of Goodwill.

Recoverability of goodwill should be tested using a two-step process. The first step involves comparison of fair value of the entity with the carrying value and the excess of book value over the fair value is recorded as impairment loss. If the carrying value is excess then the second step is followed. Under the second step the fair value and book value (carrying value) of goodwill itself is tested. The excess of book value over the fair value is recorded as impairment loss

12. REPORTING COMPREHENSIVE INCOM E ( SFAS 130) : SFAS No 130 r equires companies to report comprehensive income and its components in a complete set of financial statements (including investment companies, but not non profit entities). Comprehensive income refers to the change in equity (net asset) arising from either transactions or other occurrences with non owners. Investments and withdrawals by owners are excluded Comprehensive income consists of two components: net income and other comprehensive income which includes: Foreign currency items, including translation gains and losses, gains and losses on foreign currency transactions designated as hedges of net investment in a foreign entity Holding losses or gains on available-for-sale securities. excess of additional pension liability over unamortized (unrecognized) prior service cost. Changes in market value of a futures contract that is a hedge of an asset reported as fair values

There are 3 options of reporting other comprehensive income and its components as follows:1. Below the net income figure in the income statement, or 2. In a separate statement of comprehensive income starting with net income. FASB Statement Number 130 encourages reporting under options 1 and 2.The 3 rd option is in a statement of changes in equity as long as such statement is presented as a primary financial statement. Options 1 and 2 are termed income-statement-type formats, while option 3 is termed a statement-of-changes-in-equity format.

In the stockholder’s equity section in Balance Sheet, accumulated other comprehensive income is presented as one amount for all items or listed for each component separately. The elements of other comprehensive income for the year may be presented on either a net of tax basis or on a before tax basis, with one amount for the tax effect of all the items of other comprehensive income.

A reclassification adjustment may be needed so as not to double count items reported in net income for the current year which have also been taken into account as part of other comprehensive income in a prior year. An example is the realized gain on an available-for-sale security sold in the current year when an unrealized (holding) gain was also included in other

comprehensive income in a prior year. Besides an available-for-sale security, reclassification adjustments may apply to foreign currency translation. However, reclassification adjustments do not apply to the account “excess of additional pension liability over unamortized prior service cost” (minimum pension liability adjustment).The reclassification adjustment associated with

foreign exchange translation only applies to translation gains and losses realized from the sale or liquidation of an investment in a foreign entity. The presentation of reclassification adjustments may be shown with other comprehensive income or in a footnote. The reclassification adjustment

may be presented on a gross or net basis (except the minimum pension liability adjustment must be shown on a net basis).

13. Research and Development Costs ( SFAS 2) . Research is defined as testing to search for a new product, service, technique, or process. Research may also be undertaken to improve already existing products or services. Development is defined as translating the research into a design for a new product or process and also encompass improvements made to existing products or processes.

SFAS 2 (Accounting for Research and Development Costs) requires the expensing of research and development costs as incurred. Equipment, facilities, materials, and intangibles (e. g. patents) bought that have alternative future benefit in R&D activities are capitalized. Any resulting depreciation or amortization expense on such assets is presented as an R&D expense. R. &D costs are presented separately within income from continuing operations. When research is performed under contract for a fee from a third party, a receivable is charged. When there is no future alternative use, the costs must be immediately expensed. R&D costs include employee salaries directly tied to R&D efforts, and directly allocable indirect costs for R&D efforts. If a group of assets is bought, proper allocation should be made to those applicable to R&D activities. As per FASB Interpretation Number 4 (Applicability of FASB Statement Number 2 to Business Combinations Accounted for by the Purchase Metho d), in a business combination accounted for under the purchase method, acquired R&D assets should be based on their fair market value. If payments are made to others to undertake R&D efforts on the company’s behalf, R&D expense is charged. FASB Statement Number 2 is not applicable to the extractive (e. g. mining) or regulated industries.

14. Impairment of Long Lived Assets ( FASB Statement Number 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) - A long-lived asset is deemed impaired if the total (undiscounted) estimated cash flows from using it are less than the book value of the asset. Future cash flows applicable to environmental exist costs that have been accrued for the asset should not be included in determining the undiscounted anticipated future cash flows in applying the asset impairment test.

In determining if asset impairment exists, the asset’s book value should include any associated goodwill. An impairment may be due to such reasons as

ь A major change in how the asset is used

ь A decline in the market value of the fixed asset

ь Excess construction costs relative to estimated amounts

If this recoverability test for asset impairment is met, an impairment loss must be calculated as the excess of the asset’s book value over its fair market value. Fair value is the amount at which the asset could be bought or sold between willing parties; fair value is not determined by the value of an asset in a forced or liquidation sale. SFAS 121. para 7 identifies three methods for determining fair value:

v Market price quoted in an active market

v Estimate based on prices of similar assets

v Estimate based on valuation techniques, including discounted cash flows and other asset-specific models, such as options pricing model, fundamental analysis, etc.

If fair market value is not determinable and the present value (discounted) of expected future cash flows is used, then the assets should be grouped at the lowest level at which the cash flows are separately identifiable. Reasonable and supportable assumptions and projections should be used to make the best estimate. All evidence pertinent to impairment of assets should be considered. Evidence which is objectively verifiable should be given more weight.

An impairment loss is charged against earnings with a similar reduction in the recorded value of the impaired fixed asset. If there is any related goodwill, it should be eliminated before reducing the carrying value of the fixed asset. After impairment, the reduced carrying value becomes the new cost basis for the fixed asset. Thus, the fixed asset once impaired cannot be written up for a later recovery in market value. In other words, the impairment loss cannot be restored. Depreciation is based on the new cost basis. If an impaired asset is intended to be disposed of rather than kept in service, the impaired asset should be recorded at the lower of cost or net realizable value.

Loss due to impairment of assets held for use is recognized as a component of income from continuing operations before taxes (1) in the income statement of for-profit entities, and (2) in the statement of activities for nonprofit entities.

The disclosure requirements for impaired assets held for use are as follows :Complete description of the impaired assets, including the events that resulted in the impairment ; The amount of loss due to impairment and how the fair value of impaired asset was determined ; The location in the income statement or statement of activities where the impairment loss is situated (e. g. an individual caption, parenthetical disclosure, or caption where the loss is aggregated ; The business segments, if any, that were affected by loss impairment an impaired asset is to be disposed rather than held for use; the impaired asset is reported at the lower of cost or net realizable value (fair value less cost to sell).The costs to sell an impaired asset include such costs as broker’s commission and transfer fees. Insurance, security services, utility expenses, and other costs to protect or maintain the asset are generally not considered costs to sell for determining the net realizable value. The present value of costs to sell may used when the fair value of the asset is determined using discounted cash flows and the sale is expected to occur after one year. When the asset will be disposed shortly, the net realizable value is a better indicator of the cash flows that one can expected to receive from the impaired asset. Assets held for disposal are not depreciated. Conceptually, these assets are more like inventory, since they are expected to be sold shortly. Assets held for disposal are revalued at the lower of cost or net realizable value during each period that they are reported. These assets maybe written up or down in future periods as long as the write-up is not greater than the carrying amount of the asset before the impairment. Such losses or gains are reported as a component of income from continuing operations.

15. Loan Impairment FASB Statement Number 114, Accounting by Creditors for Impairment of a Loa n, is the primary authoritative guideline for recognizing impaired loans. A loan is a contractual right to receive cash either on demand or at a fixed or determinable date. Loans include accounts receivable and notes only if their term is longer than one year. If it is probable (likely to occur) that some or all of the principal or interest will not be collected, then the loan is considered impaired. Any loss on an impaired loan should be recognized immediately by debiting bad debt expense and crediting the valuation allowance. Creditors may exercise their judgment and use their normal review procedures in determining the probability of collection. If a loan is considered impaired, the loss is the difference between the investment in loan and the present value of the future cash flows discounted at the loan’s effective interest rate. The investment in loan will generally be the principal and the accrued interest. Future cash flows should be determined using reasonable and supportable assumptions and projections. The discount rate will generally be the effective interest used at the time the loan was originally made. As a practical matter, the loan’s value may be determined using the market price of the loan, if available. The loan’s value may also be determined using the fair value of the collateral, less estimated costs to sell, if the loan is collateralized and the collateral is expected to be the sole source of repayment.

16. Stock Options/ ESOP ( SFAS 123,148) : Under US GAAP stock option plans may be accounted for by either the “intrinsic value” method or the “fair value” Método. SFAS 123 encourages adoption of the fair value method and will become mandatory from 1.4.2006

Intrinsic Method. I n this method, compensation expense is recorded on the date of grant only if current market price ( CMP ) of underlying stock exceeds option exercise price. The difference between CMP and Exercise price (total compensation expense) is allocated over the vesting ( the time between the date of grant and the vesting date or compensatory or service period). The intrinsic method is so termed because the computation is not based on data derived from external circumstances. If an employee chooses not to exercise a stock option, previously recognized compensation expense is not negated or adjusted.

Fair Value method: Under this method, Compensation expense is taken as equivalent to fair value of options at the grant date which is computed by using an option-pricing model that considers several factors. Compensation expense is recognized over the period between the date of grant and the vesting date, in a manner similar to the intrinsic value method.

A popular option pricing model is Black - Scholes Model which computes the present value of hypothetical instruments. Assumptions include freely trading of Options, and the total return rate (considering the change in price plus dividends) may be determined based on a continuous compounding over the life of the option. Under SFAS 123, the life of the option is the anticipated time period until the option is exercised rather than the contractual term The Black-Scholes model was formulated based on European-style options exercisable only at expiration. However, most employee stock options are American-style and are exercisable at any time during the life of the option once vesting has occurred. The Black-Scholes model uses the volatility anticipated for the option’s life.

Example 1. On January 1, 2005, ABC Limited granted stock options to its senior executives to

purchase 100,000 shares of U$ 5 par value common stock at an exercise price of $20 per share exercisable any time after December 31, 2009. The current market price of the stock is $30.

Under the Black-Scholes option price model, fair value of the option plan is estimated as $800,000. hence the fair value i. e. US$ 800,000 will be deemed as compensation expense and will be recognized evenly over this period (20005-2009).

If an employee forfeits a stock option because he or she leaves the employer and fails to satisfy the service requirement, then the recorded compensation expense and paid-in-capital stock option should be adjusted (as a change in accounting estimate) to account for the forfeiture.

SFAS 148 require that Provisions of SFAS 123 shall be transitory in nature and companies may continue to use intrinsic value method for Stock Options. However, SFAS 148 requires that companies should disclose the effect on net income and earning per share. if Fair value method was used . In case of Infosys Limited ( FY ended March, 2005) which deploys Intrinsic method of Accounting, disclosure as per SFAS 148 led to a further loss of US$ 57 Million

17. EARNINGS PER SHAR E ( SFAS 128) : All public companies ( excluding Non public entities ) are required to state earnings per share (EPS) on the face of the income statement, either basic or basic and diluted EPS depending on simple or complex capital structure, if the capital structure is complex (it includes potentially dilutive securities), then presentation of both basic and diluted earnings per share is mandated.

Basic EPS is derived by dividing the net income (less declared preferred dividends on non cumulative preferred stock) available to common stockholders by the weighted average number of common shares outstanding. On the other hand, if the preferred stock is cumulative, then the dividends are subtracted even if they are not declared in the current year. The weighted-average number of common shares outstanding is determined by multiplying the number of shares issued and outstanding for any time period by a fraction, the numerator being the Basic earnings per share and diluted earnings per share (if required) for income from continuing operations and net income must be disclosed on the face of the income statement. In addition, the earnings per share effects associated with the disposal of a business segment, extraordinary gains or losses, and the cumulative effect of a change in accounting principle must be presented either on the face of the income statement or notes thereto.

Diluted EPS: In case of convertible securities, if converted method is used whereby it is assumed that the dilutive convertible security is converted into common stock at the beginning of the period or date of issue, if later. Interest expense(net of tax). Any dividend on convertible preferred stock on must be added back to net income to result in an adjusted net income Correspondingly, the number of common shares the convertible securities are convertible into (or their weighted-average effect if conversion to common stock actually took place during the year) must also be added to the weighted-average outstanding common shares in the denominator.

In the case of dilutive stock options, stock warrants, or their equivalent, the treasury stock method is used. Under this approach, there is a presumption that the option or warrant was exercised at the beginning of the period, or date of grant, if later. The assumed proceeds received from the

exercise of the option or warrant are assumed to be used to buy treasury stock at the average market price for the period. However, exercise is presumed to occur only if the average market price of the underlying shares during the period is greater than the exercise price of the option or warrant.

A reconciliation is required of the numerators and denominators for basic and diluted earnings per share. Disclosure is also mandated for the impact of preferred dividends in arriving at income available to common stockholders. In addition, the earnings per share effects associated with the disposal of a business segment, extraordinary gains or losses, and the cumulative effect of a change in accounting principle must be presented either on the face of the income statement or notes thereto.

18. FAIR VALUE DISCLOSURES FOR ALL FINANCIAL INSTRUMENTS (SFAS 107): This GAAP requires disclosures of fair value of Financial Instruments in the body of the financial statements or in the footnotes.

Financial instrument is defined as cash (including currencies of other countries), evidence of an ownership interest in another company (e. g. common or preferred stock), or a contract that both. Thus conventional assets and liabilities (e. g. accounts and notes receivable, accounts and notes payable, investment inequity and debt securities, and bonds payable) are deemed to be financial instruments. The definition also encompasses many derivative contracts, e. g. options, swaps, caps, and futures

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a liquidation sale. Quoted market prices are best to use, if available. Financial instruments can be transacted in following types of markets:

v Exchange market s, for listed stocks, bonds, options, and certain futures contracts.

v Dealer market s, e. g. the NASDAQ or other over-the-counter markets, are the major exchanges for more thinly traded securities. Dealer markets also exist for commercial loans, asset-backed securities, mortgage-backed securities, and municipal securities. In most cases, quotations on this market properly reflect fair value. However, if evidence exists to the contrary, then the company may opt for another indicator of fair value, such as an internally developed model. Market quotations for dealer markets are usually in the form of bid and ask prices. Fair value determination should take into account the size of an issue and its possible dilutive effect on price of the financial instrument. Note: The basis used for a price quote should be disclosed.

v Principal-to-principal markets in principal-to-principal transactions, transactions occur independently, with no intermediary and basically no public information available to approximate market price, e. g. an interest rate swap.

v Brokered market s, in which intermediaries match buyers and sellers but do not trade for their own accounts, usually provide less reliable information as to price. The broker is aware of the prices bid and asked by the parties, but each participant is usually unaware of the other party’s price requests. Prices of completed transactions may be available in some cases. If more than one quoted price for a financial instrument is available, then use the one in the most active market. When possible, get more than one quotation when quoted prices vary widely in the market. The company may want to disclose additional information about the fair value of a financial instrument, e. g. if the fair value of long-term debt is below its carrying value. In this case, the company may want to provide the reasons and whether the debt could be settled at the lower amount.

For financial institutions, loans receivable may be a major financial instrument. If market prices are available (e. g. securities backed by residential mortgages may be a proxy for valuing residential mortgages), then they should be used to arrive at fair value. If no quoted market price exists for a category of loans, particularly fixed rate loans, then an approximation may be based on:1. market prices of similar traded loans (similarity may be in the forms of terms, interest rates, maturity dates, and credit scoring),2. current prices for similar loans that the company has originated and sold, or3. Valuations derived from loan pricing services. Fair value of a loan may be determined by using the present value of future cash flows, using a risk-adjusted discount rate.

Disclosure includes the methods and assumptions used to estimate fair value. The fair value amounts disclosed should be cross-referenced to carrying value amounts presented in the balance sheet. The disclosures should distinguish between financial instruments held or issued for trading purposes and other than trading. Fair values of non-derivative instruments should not be adjusted against derivative instruments unless netting is permitted as per FASB Interpretation Number 39 (Offsetting of Amounts Related to Certain Contracts). If it is not practical to estimate the fair value of a financial instrument, then information relevant to estimating fair value should be disclosed, including the financial instrument’s carrying value, maturity, and interest rate. The reasons why it is not determinable should also be provided.

19. Hedge Accounting (SFAS 133) . SFAS 133 mandates that All qualifying financial derivatives have to stated on the balance sheet at their fair value ( marked to market ) and Changes in the fair value of derivatives must be recognized in the financial statements as part of comprehensive income (not as part of the income statement).

Changes in value of all other derivatives are marked to market recognized as income. Currently the instruments covered by Hedge Accounting are Interest rate Cap floor Collars, Interest ate and currency Swaps, financial Future contracts, Options to Purchase securities, Swaptions and Commodities and excluded are financial Guarantees, Forward Contracts with no net settlements, Mortgage Based Security, Adjustable Rate Loan, and Variable Annuity Contracts.

There are three types of qualified hedges discussed in FASB Statement Number 133: fair value hedges, cash flow hedges, and foreign currency hedges. Simply stated, a fair value hedge is protection against adverse changes in the value of an existing asset, liability or unrecognized firm commitment. A cash flow hedge protects against changes in the value of future cash flows—for instance interest payments on fixed rate debt, if the company is concerned about falling interest rates and the fact that would not be able to renegotiate the terms of the debt to capitalize on lower rates. A foreign currency hedge protects against adverse movement of exchange rates impacting any foreign currency exposure—which, for instance, can involve either fair value or cash flow hedges in foreign currency or a net investment in a foreign business activity, e. g. concern over the impact that a devaluation of a foreign currency would have on the company’s investment in an overseas subsidiary. In all of these three hedges, a hedge effectiveness test must be met in order to achieve hedge accounting.

Foreign Exchange forward contract taken from Bank, to mitigate the risk of changes in foreign exchange rates do not qualify for Hedge Accounting under SFA 133.

20 Cash Flow statement ( SFAS 95) . A statement of cash flows. prepared in conformity with GAAP is required to be annexed as part of a full set of financial statements. The statement should present cash flows from operating, investing, and financing activities. The statement must be included in both annual ( for 3 financial years) and interim financial statements ( for 2 periods - current and previous year). It should include a reconciliation of beginning and ending cash and cash equivalents and should match with the totals presented in the balance sheet. Separate disclosure must be made of non cash investing and financing transactions.

Cash flow statement may be prepared by direct method or indirect method, but it must include a reconciliation of net income to cash flow from operations whichever method is deployed.

Under the direct method . the operating section presents gross cash receipts and gross cash payments from operating activities, with a reconciliation of net income to cash flow from operations in a separate schedule accompanying the statement of cash flows. The cash flow from operations derived in this separate schedule must agree with the cash flow from operations in the

Operating section of the statement of cash flows.

Under the indirect method . gross cash receipts and gross cash payments from operating activities are not presented. Instead, only the reconciliation of net income to cash flow from operations may be presented. The reconciliation is done by adding back non cash expenses to and deducting non cash revenues from net income. Examples of these adjustments include adding back depreciation and depletion expense, amortization expense on intangibles, pension expense arising from a deferred pension liability, bad debts, accrued warranty expense, tax expense arising from a deferred tax liability, loss on a fixed asset, compensation expense arising from an employee stock option plan; and deducting the amortization of deferred revenue, amortization of bond premium, tax expense arising from a deferred tax asset, the gain on a fixed asset, pension expense associated with a deferred pension asset, unrealized gains on trading securities, and income from investments under the equity method.

Irrespective of whether the direct method or the indirect method is used, there must be separate disclosure of income taxes and interest paid during the year as supplementary information. The effect of exchange rate change on cash should also be shown separately as a separate line item to derive the total cash and cash equivalent. While SFAS 95 prefers Direct Method, most of the Companies prefer Indirect method due to its simplicity.

21. Segmental reporting ( SFAS 131) : SFAS 131 mandates information about operating segments and related disclosures about products and services, geographical areas and major customers. Segmental reporting aids in evaluating a company’s financial statements by revealing growth prospects, including earning potential, areas of risk, and financial problems. It facilitates the appraisal of both historical performance and expected future performance.

The amount reported for each segment should be based on what is used by the “Chief operating decision maker” in formulating a determination as to how much resources to assign to a segment and how to appraise the performance of that segment. The term chief operating decision maker may apply to the chief executive officer or chief operating officer or to a group of executives. The term of chief operating decision maker may apply to a function and not necessarily to a specific person(s).This is a management approach rather than an industry approach in identifying segments. The segments are based on the company’s organizational structure, revenue sources, nature of activities, existence of responsible managers, and information presented to the Board

of Directors. Revenues, gains, expenses, losses, and assets should only be allocated to a segment if the chief operating decision maker considers doing so in measuring a segment’s earnings for purposes of making a financial or operating decision.

The same is true with regard to allocating to segments eliminations and adjustments applying to the company’s general-purpose financial statements. Any allocation of financial items to a segment should be rationally based. In measuring a segment’s earnings or assets, the following should be disclosed for explanatory purposes:

v Measurement or valuation basis used

v Differences in measurements used for the general-purpose financial statements relative to the financial information of the segment

v A change in measurement method relative to prior years

v A symmetrical allocation, meaning an allocation of depreciation or amortization to a segment without a related allocation to the associated assets

Segmental information is required in annual financial statements. Some segmental disclosures are required in interim financial statements. Segmental information is not required for non-consolidated subsidiaries or investees accounted for under the equity method. An operating segment is a distinct revenue-producing component of the business for which internal financial data are produced. Expenses are Disclosures should be in both dollars and percentages.

A reportable segment is determined by.

v Grouping by industry line

v Identifiable products or services

v Significant segments to the company in the entirety

v If any one of the following exist, a segment must be reported upon:

o Revenue, including unaffiliated and inter segment sales or transfers, is 10% or more of total revenue of all operating segments.

o Operating profit or loss is 10% or more of the greater, in absolute amount, of the combined operating profit (or loss) of all industry segments with operating profits (or losses).

o Identifiable assets are 10% or more of total assets of all operating segments.

Segments shall represent a significant portion (75% or more) of the entity’s total revenue of all operating segments. The 75% test is applied separately each year. In deriving 75%, no more than 10 segments should be presented because to do otherwise would result in too cumbersome and detailed reporting. If more than 10 are identified, similar segments may be combined. For example, if the reportable segments identified by the materiality tests account for only70% of all industry segment revenue from unaffiliated customers, one or more additional industry segments must be included among reportable segments so that at least 75% of all industry segment revenue is accounted for by the reported segments. Disclosures are not mandated for 90% enterprises (a company obtaining 90% or more of its revenues, operating earnings, and total assets from one segment). In essence, the segment is the business. Dominant industry

segments should be identified. PRINT

The source of segmental revenue should be disclosed with the percent so derived when 10% percent or more of -

v revenue is generated from either a foreign government contract or domestic contract (as required by FASB Statement Number 30).

v sales is made to one customer. A group of customers under common control (e. g. subsidiaries of a parent, federal or local government) is deemed as one customer (as required by FASB Statement Number 30). The identity of the customer need not be disclosed.

v of revenue or assets are in a particular foreign country or similar group of countries. Similarity might be indicated by proximity, business environment, interrelationships, and economic and/ or political ties. If foreign activities are in more than one geographic area, required disclosures should be made for both—each significant individual foreign area and in total for other insignificant areas. For revenues from foreign operations, the amount of sales to unaffiliated customers and the amount of intra company sales between geographic areas should be disclosed. The geographic areas that have been disaggregated should be identified along with the percentages derived.

The accounting principles used in preparing segmental information should be the same as those used in preparing the financial statements. However, inter company transactions (which are eliminated in consolidation) are included for segmental reporting purposes, including in applying the 10% and 75% rules discussed later. Segmental information may be provided in the body

of the financial statements, in separate schedules, or in footnotes. Most companies report segmental data in separate schedules.

Disclosures should be made of how reporting segments were determined (e. g. customer class, products, services, geographical areas). And also identifying those operating segments that have been aggregated

22. Inflation Accounting (SFAS 89) . FASB Statement no 89 titled as Financial Reporting and Changing Price s permits a company to disclose voluntarily, in its annual report, inflation data to enable investors and shareholders to assess inflationary pressure and impact on the company. The GAAP recommends businesses to present selected summarized financial data based on current costs and adjusted for inflation (inconstant purchasing power) for a 5 - year period. The Consumer Price Index for All Urban Consumers may be used.

Inflation information to be disclosed includes sales and operating revenue expressed in constant purchasing power, income from continuing operations (including per share amounts) on a current cost basis, cash dividends per share in constant purchasing power, market price per share restated in constant purchasing power, purchasing power gain or loss on net monetary items, inflation-adjusted inventory, restated fixed assets, foreign currency translation based on current cost, net assets based on current cost, and the Consumer Price Index used. ELP

23. Interim financial reporting ( APB Opinion 28) . Interim reporting are required to be done by Corporate in between annual Financial statements for a period less than one year. Each interim period is viewed as an integral part of the annual period. Interim financial reports may be issued semiannually, quarterly, or monthly. Typically, interim reports include the operating results of the current interim period and the cumulative year-to-date figures, or last 12 months to date. Comparisons are usually made to results of comparable interim periods for the previous year.

Interim statements do not have to be audited. Each page should be labeled “Unaudited.” Interim results should be based on those accounting principles used in the last year’s annual report unless a change in accounting has been made subsequently. Further, accounting policies do not have to be disclosed in interim reports unless there has been a change in an accounting policy (principle or estimate).

Income statement information is required in interim reports. However, it is recommended but not required to present a balance sheet and cash flow statement at interim dates. If these statements are not reported, the company must disclose significant changes in liquid assets, working capital, non current liabilities, and stockholders’ equity. Extraordinary items, nonrecurring items, and gain or loss on the disposal of a business segment are recognized in the interim period in which they occur. Earnings per share determination for interim purposes is handled in a fashion similar to annual reporting. Materiality should be related to the full fiscal year. However, an item not disclosed in the annual financial statement due to immateriality would still be presented in the interim report if it is material to that interim period.

Minimum disclosure in interim reports is as follows:

v Revenue, tax expense, extraordinary items, cumulative effect of a change in accounting principle, and net income

v Earnings per share

v Seasonal revenue and costs

v Material changes in tax expense, including reasons for significant differences between tax expense and income subject to tax

v Information on disposal of a business segment

v Commitments, contingencies, and uncertainties

v Significant changes in financial position and cash flows

Other disclosures peculiar to interim reporting are as follows:

v Seasonal factors bearing upon interim results. Seasonal companies should

v present supplementary information for the current and preceding 12-month periods ending at the interim date so that proper evaluation of the seasonal impact on interim results may be revealed

24. Development stage enterprises ( SFAS 7. FASBI 7 ) : A development stage enterprise is one whose operations have not begun or have begun but does not contribute significant revenue. The expenses incurred during this stage are called pre operative expenses. A development stage enterprise must use the same GAAP as any other established company and prepare the financial statements using GAAP and criteria applicable to an established company.

Following reporting is required for development stage enterprises:

v In the balance sheet, retained earnings will typically show a deficit. A descriptive caption would be “deficit accumulated in the development stage.” For each equity security, the number of shares issued, dates of issue and dollar figures per share must be shown from inception. Besides common or preferred stock, information must be provided for stock warrants, stock rights, or other equities. If non cash consideration is received, such consideration must be specified along with the basis of deriving its value.

v In the income statement, the total revenue and expenses since inception must be disclosed separately.

v In the statement of cash flows, cumulative cash flows from operating, investing, and financing activities from inception, in addition to current year amounts, must be shown.

The financial statements must be headed “Development Stage Enterprise.” Footnote disclosure is required of the development stage activities and the proposed lines of business. In the first year when regular operation starts. the company must disclose that in prior years it was in development stage. If comparative financial statements are issued, the company must disclose in Form 10-K that in previous years it was in the development stage

Newly issued SOP 98-5 requires that start-up costs must be expensed as incurred. Start-up costs are commonly referred to as pre - operating expenditures. In some industries, it was common to defer some of those costs if it could be shown that the future net operating results would be sufficient to recover these costs. They would then be expensed when the business opened or over a period not to exceed one year. Under the new guidance, all such start-up costs, including organization costs, are to be expensed as incurred .

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Stock Gumshoe es apoyado por los suscriptores y por los patrocinadores y anunciantes. Stock Gumshoe's employee authors will disclose holdings in any stock covered at time of publication and will not trade in any stocks written about for at least three days after publication. Consulte a continuación para obtener información completa sobre la divulgación, la renuncia y la política.

Rules and regulations

The attractiveness of the Exchange's markets is maintained by providing an efficient and well regulated market place. As a Recognised Investment Exchange (RIE), the Exchange also has to satisfy the requirements detailed in the Financial Conduct Authority's RIE and RCH Sourcebook. Los mercados ordenados se mantienen a través de reglas, orientación y mediante el monitoreo de la actividad comercial y de mercado. Los avisos de bolsa difunden enmiendas a las normas y directrices del mercado.

The Exchange's primary aim is to provide issuers, intermediaries and investors with attractive, efficient and well-regulated markets in which to raise capital and fulfil investment and trading requirements.

All London Stock Exchange member firms are bound by the Rules of the London Stock Exchange (“the rules”) and must ensure compliance with these rules. The rules were fully updated in 2007 in readiness for the introduction of the Markets in Financial Instruments Directive (“MiFID”or “the Directive”). El Rulebook revisado también alineaba las reglas más estrechamente con la estructura del sistema de comercio y las simplificaba cuando era posible para hacerlas más fáciles de usar.

The Rules are therefore closely linked to the operation of the trading system and should be read in conjunction with the Guide to the trading system and the parameters.

Microsoft Corp. MSFT (U. S. Nasdaq)

P/E Ratio (TTM) The Price to Earnings (P/E) ratio, a key valuation measure, is calculated by dividing the stock's most recent closing price by the sum of the diluted earnings per share from continuing operations for the trailing 12 month period. Earnings Per Share (TTM) A company's net income for the trailing twelve month period expressed as a dollar amount per fully diluted shares outstanding. Capitalización de Mercado Refleja el valor de mercado total de una empresa. Market Cap is calculated by multiplying the number of shares outstanding by the stock's price. Para las empresas con múltiples clases de acciones comunes, la capitalización de mercado incluye ambas clases. Shares Outstanding Number of shares that are currently held by investors, including restricted shares owned by the company's officers and insiders as well as those held by the public. Público Float El número de acciones en manos de los inversores públicos y disponibles para el comercio. Para calcular, comience con el total de acciones en circulación y reste el número de acciones restringidas. El stock restringido es típicamente el emitido a los iniciados de la compañía con límites en cuándo puede ser negociado. Dividend Yield A company's dividend expressed as a percentage of its current stock price.

Key Stock Data

P/E Ratio (TTM)

EPS (TTM)

Market Cap

Shares Outstanding

Public Float

rendimiento

Latest Dividend

Ex-Dividend Date

Shares Sold Short The total number of shares of a security that have been sold short and not yet repurchased. Cambiar de último cambio de porcentaje de interés corto del informe anterior al informe más reciente. Los intercambios reportan intereses cortos dos veces al mes. Porcentaje de flota Posiciones cortas totales en relación con el número de acciones disponibles para el comercio.

Short Interest (02/29/16)

Shares Sold Short

Change from Last

Percent of Float

Money Flow Uptick/Downtick Ratio Money flow measures the relative buying and selling pressure on a stock, based on the value of trades made on an "uptick" in price and the value of trades made on a "downtick" in price. La relación up / down se calcula dividiendo el valor de los oficios uptick por el valor de los oficios downtick. Flujo neto de dinero es el valor de las operaciones de uptick menos el valor de las operaciones downtick. Nuestros cálculos se basan en cotizaciones exhaustivas y diferidas.

Stock Money Flow

Las cotizaciones bursátiles en tiempo real de Estados Unidos reflejan las operaciones reportadas a través del Nasdaq solamente.

Las cotizaciones bursátiles internacionales se retrasan según los requerimientos del mercado. Los índices pueden estar en tiempo real o retrasados; Consulte las marcas de tiempo en las páginas de cotización de índice para obtener información sobre los tiempos de retardo.

Datos de cotización, excepto las acciones estadounidenses, proporcionados por SIX Financial Information.

Los datos se proporcionan "tal cual" con fines únicamente informativos y no se destinan a fines comerciales. SIX Información Financiera (a) no hace ninguna garantía expresa o implícita de ningún tipo con respecto a los datos, incluyendo, sin limitación, cualquier garantía de comerciabilidad o idoneidad para un propósito o uso particular; Y (b) no será responsable de ningún error, incompleto, interrupción o demora, acciones tomadas en base a cualquier dato, o por cualquier daño resultante de ello. Los datos pueden ser retrasados ​​intencionalmente de acuerdo con los requisitos del proveedor.

Toda la información de fondos mutuos y ETF contenida en esta exhibición fue suministrada por Lipper, una compañía de Thomson Reuters, sujeto a lo siguiente: Copyright © Thomson Reuters. Todos los derechos reservados. Queda prohibida expresamente cualquier copia, reedición o redistribución del contenido de Lipper, incluyendo almacenamiento en caché, enmarcado o medios similares sin el consentimiento previo por escrito de Lipper. Lipper no será responsable de ningún error o retraso en el contenido, ni de las acciones tomadas en dependencia de los mismos.

Las cotizaciones de bonos se actualizan en tiempo real. Fuente: Tullett Prebon.

Las cotizaciones de divisas se actualizan en tiempo real. Fuente: Tullet Prebon.

Datos fundamentales de la empresa y estimaciones de los analistas proporcionados por FactSet. Copyright FactSet Research Systems Inc. Todos los derechos reservados.

Capital Gains & Losses

Words you may need to know (see Glossary):

Llamada

Commodity future

Conversion transaction

Forward contract

Limited partner

Listed option

Nonequity option

Options dealer

Put

Regulated futures contract

Section 1256 contract

Montar a horcajadas

Wash sale

This section discusses the tax treatment of gains and losses from different types of investment transactions.

Character of gain or loss. You need to classify your gains and losses as either ordinary or capital gains or losses. You then need to classify your capital gains and losses as either short term or long term. If you have long-term gains and losses, you must identify your 28% rate gains and losses. If you have a net capital gain, you must also identify your qualified 5-year gain and any unrecaptured section 1250 gain.

The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. For information about determining whether your capital gain or loss is short term or long term, see Holding Period, later. For information about 28% rate gain or loss, qualified 5-year gain, and unrecaptured section 1250 gain, see Reporting Capital Gains and Losses and Capital Gains Tax Rates, later.

Capital or Ordinary Gain or Loss

If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. In some situations, part of your gain or loss may be a capital gain or loss, and part may be an ordinary gain or loss.

Capital Assets and Noncapital Assets

For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Some examples are:

Stocks or bonds held in your personal account,

A house owned and used by you and your family,

Household furnishings,

A car used for pleasure or commuting,

Coin or stamp collections,

Gems and jewelry, and

Gold, silver, or any other metal.

Any property you own is a capital asset, except the following noncapital assets.

Property held mainly for sale to customers or property that will physically become a part of the merchandise that is for sale to customers.

Depreciable property used in your trade or business, even if fully depreciated.

Real property used in your trade or business.

A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property --

Created by your personal efforts,

Prepared or produced for you (in the case of a letter, memorandum, or similar property), or

Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1).

U. S. Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price.

Certain commodities derivative financial instruments held by commodities derivatives dealers. For more information, see section 1221 of the Internal Revenue Code.

Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. For more information, see the definition of "hedging transaction" earlier, and the discussion of hedging transactions under Commodity Futures, later.

Supplies of a type you regularly use or consume in the ordinary course of your trade or business.

Investment property. Investment property is a capital asset. Any gain or loss from its sale or trade generally is a capital gain or loss.

Gold, silver, stamps, coins, gems, etc. These are capital assets except when they are held for sale by a dealer. Any gain or loss from their sale or trade generally is a capital gain or loss.

Stocks, stock rights, and bonds. All of these, including stock received as a dividend, are capital assets except when they are held for sale by a securities dealer. However, see Losses on Section 1244 (Small Business) Stock and Losses on Small Business Investment Company Stock, later.

Personal use property. Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. However, you cannot deduct a loss from selling personal use property.

Discounted Debt Instruments

Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions.

Short-term government obligations. Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. This treatment applies to obligations that have a fixed maturity date not more than 1 year from the date of issue. Acquisition discount is the stated redemption price at maturity minus your basis in the obligation.

However, do not treat these gains as income to the extent you previously included the discount in income. See Discount on Short-Term Obligations in chapter 1 for more information.

Short-term nongovernment obligations. Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of OID. This treatment applies to obligations that have a fixed maturity date of not more than 1 year from the date of issue.

However, to the extent you previously included the discount in income, you do not have to include it in income again. See Discount on Short-Term Obligations, in chapter 1, for more information.

Tax-exempt state and local government bonds. If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of the OID as tax-exempt interest. To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of the OID.

If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of the OID to figure gain or loss. For more information on the basis of these bonds, see Discounted tax-exempt obligations under Stocks and Bonds, earlier in this chapter.

Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain from market discount is ordinary income.

You figure market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. For more information, see Market Discount Bonds in chapter 1.

A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.

Redeemed before maturity. If a state or local bond that was issued before June 9, 1980 . is redeemed before it matures, the OID is not taxable to you.

If a state or local bond issued after June 8, 1980 . is redeemed before it matures, the part of the OID that is earned while you hold the bond is not taxable to you. However, you must report the unearned part of the OID as a capital gain.

Ejemplo. On July 1, 1990, the date of issue, you bought a 20-year, 6% municipal bond for $800. The face amount of the bond was $1,000. The $200 discount was OID. At the time the bond was issued, the issuer had no intention of redeeming it before it matured. The bond was callable at its face amount beginning 10 years after the issue date.

The issuer redeemed the bond at the end of 11 years (July 1, 2001) for its face amount of $1,000 plus accrued annual interest of $60. The OID earned during the time you held the bond, $73, is not taxable. The $60 accrued annual interest also is not taxable. However, you must report the unearned part of the OID ($127) as a capital gain.

Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of sale or redemption is ordinary income. The rest of the gain is capital gain. If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter.

Ejemplo. You bought a 30-year, 6% government bond for $700 at original issue on April 1, 1982, and sold it for $900 on April 20, 2001, for a $200 gain. The redemption price is $1,000. At the time of original issue, there was no intention to call the bond before maturity. You have held the bond for 228 full months. Do not count the additional days that are less than a full month. The number of complete months from date of issue to date of maturity is 360 (30 years). The fraction 228/360 multiplied by the discount of $300 ($1,000 - $700) is equal to $190. This is your ratable share of OID for the period you owned the bond. You must treat any part of the gain up to $190 as ordinary income. As a result, $190 is treated as ordinary income and $10 is capital gain.

Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). If you hold one of these debt instruments, you must include a part of the OID in your gross income each year that you own the instrument. Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. See Original Issue Discount (OID) in chapter 1.

If you sell or trade the debt instrument before maturity, your gain is a capital gain. However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. In this case, the rest of the gain is a capital gain.

An intention to call a debt instrument before maturity means there is a written or oral agreement or understanding not provided for in the debt instrument between the issuer and original holder that the issuer will redeem the debt instrument before maturity. In the case of debt instruments that are part of an issue, the agreement or understanding must be between the issuer and the original holders of a substantial amount of the debt instruments in the issue.

Example 1. On February 4, 1999, you bought at original issue for $7,600, Jones Corporation's 10-year, 5% bond which has a stated redemption price at maturity of $10,000. On February 3, 2001, you sold the bond for $9,040. Assume you have included $334 of the OID in your gross income and increased your basis in the bond by that amount. This includes the amount accrued for 2001. Your basis is now $7,934. If at the time of the original issue there was no intention to call the bond before maturity, your gain of $1,106 ($9,040 amount realized minus $7,934 adjusted basis) is capital gain.

Example 2. If, in Example 1, at the time of original issue there was an intention to call the bond before maturity, your entire gain is ordinary income. You figure this as follows:

Entire OID ($10,000 stated redemption price at maturity minus $7,600 issue price)

Because the amount in (3) is more than your gain of $1,106, your entire gain is ordinary income.

Market discount bonds. If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. See Market Discount Bonds in chapter 1. The rest of the gain is capital gain.

However, a different rule applies if you dispose of a market discount bond that was:

Issued before July 19, 1984, and

Purchased by you before May 1, 1993.

In that case, any gain is treated as interest income up to the amount of your deferred interest deduction for the year you dispose of the bond. The rest of the gain is capital gain. (Deferred interest deduction for market discount bonds is discussed in chapter 3 under When To Deduct Investment Interest .)

Report the sale or trade of a market discount bond on Schedule D (Form 1040), line 1 or line 8. If the sale or trade results in a gain and you did not choose to include market discount in income currently, enter "Accrued Market Discount" on the next line in column (a) and the amount of the accrued market discount as a loss in column (f). Also report the amount of accrued market discount in column (f) as interest income on Schedule B (Form 1040), line 1, and identify it as "Accrued Market Discount."

Retirement of debt instrument. Any amount that you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument.

Notes of individuals. If you hold an obligation of an individual that was issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. An exception to this treatment applies if the obligation is a loan between individuals and all of the following requirements are met.

The lender is not in the business of lending money.

The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less.

Avoiding federal tax is not one of the principal purposes of the loan.

If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of the OID at that time is ordinary income. The rest of the gain, if any, is capital gain. Any loss on the sale or redemption is capital loss.

You cannot deduct any loss on an obligation required to be in registered form that is instead held in bearer form. In addition, any gain on the sale or other disposition of the obligation is ordinary income. However, if the issuer was subject to a tax when the obligation was issued, then you can deduct any loss, and any gain may qualify for capital gain treatment.

Obligations required to be in registered form. Any obligation must be in registered form unless:

It is issued by a natural person,

It is not of a type offered to the public,

It has a maturity at the date of issue of not more than 1 year, or

It was issued before 1983.

Deposit in Insolvent or Bankrupt Financial Institution

If you lose money you have on deposit in a qualified financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways.

Ordinary loss,

Casualty loss, or

Nonbusiness bad debt (short-term capital loss).

Ordinary loss or casualty loss. If you can reasonably estimate your loss, you can choose to treat the estimated loss as either an ordinary loss or a casualty loss in the current year. Either way, you claim the loss as an itemized deduction.

If you claim an ordinary loss, report it as a miscellaneous itemized deduction on line 22 of Schedule A (Form 1040). The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Your loss is subject to the 2%-of-adjusted-gross-income limit. You cannot choose to claim an ordinary loss if any part of the deposit is federally insured.

If you claim a casualty loss, attach Form 4684, Casualties and Thefts, to your return. Each loss must be reduced by $100. Your total casualty losses for the year are reduced by 10% of your adjusted gross income.

You cannot choose either of these methods if:

You own at least 1% of the financial institution,

You are an officer of the institution, or

You are related to such an owner or officer. You are related if you and the owner or officer are "related parties," as defined earlier under Related Party Transactions, or if you are the aunt, uncle, nephew, or niece of the owner or officer.

If the actual loss that is finally determined is more than the amount you deducted as an estimated loss, you can claim the excess loss as a bad debt. If the actual loss is less than the amount deducted as an estimated loss, you must include in income (in the final determination year) the excess loss claimed. See Recoveries in Publication 525. Taxable and Nontaxable Income.

Nonbusiness bad debt. If you do not choose to deduct your estimated loss as a casualty loss or an ordinary loss, you wait until the year the amount of the actual loss is determined and deduct it as a nonbusiness bad debt in that year. Report it as a short-term capital loss on Schedule D (Form 1040), as explained under Nonbusiness Bad Debts, later.

Sale of Annuity

The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income.

Generally, all or part of a gain on a conversion transaction is treated as ordinary income. This applies to gain on the disposition or other termination of any position you held as part of a conversion transaction that you entered into after April 30, 1993.

A conversion transaction is any transaction that meets both of these tests.

Substantially all of your expected return from the transaction is due to the time value of your net investment. In other words, the return on your investment is, in substance, like interest on a loan.

The transaction is one of the following.

A straddle as defined under Straddles, later, but including any set of offsetting positions on stock.

Any transaction in which you acquire property (whether or not actively traded) at substantially the same time that you contract to sell the same property, or substantially identical property, at a price set in the contract.

Any other transaction that is marketed or sold as producing capital gains from a transaction described in (1).

Amount treated as ordinary income. The amount of gain treated as ordinary income is the smaller of:

The gain recognized on the disposition or other termination of the position, or

The "applicable imputed income amount."

Applicable imputed income amount. Figure this amount as follows.

Figure the amount of interest that would have accrued on your net investment in the conversion transaction for the period ending on the earlier of:

The date when you dispose of the position, or

The date when the transaction stops being a conversion transaction.

To figure this amount, use an interest rate equal to 120% of the "applicable rate," defined later.

Subtract from (1) the amount treated as ordinary income from any earlier disposition or other termination of a position held as part of the same conversion transaction.

Applicable rate. If the term of the conversion transaction is indefinite, the applicable rate is the federal short-term rate in effect under section 6621(b) of the Internal Revenue Code during the period of the conversion transaction, compounded daily.

In all other cases, the applicable rate is the "applicable federal rate" determined as if the conversion transaction were a debt instrument and compounded semi-annually.

The rates discussed above are published by the IRS in the Internal Revenue Bulletin. Or, you can contact the IRS to get these rates. See chapter 5 for information on contacting IRS.

Net investment. To determine your net investment in a conversion transaction, include the fair market value of any position at the time it becomes part of the transaction. This means that your net investment generally will be the total amount you invested, less any amount you received for entering into the position (for example, a premium you received for writing a call).

Position with built-in loss. A special rule applies when a position with a built-in loss becomes part of a conversion transaction. A built-in loss is any loss that you would have realized if you had disposed of or otherwise terminated the position at its fair market value at the time it became part of the conversion transaction.

When applying the conversion transaction rules to a position with a built-in loss, use the position's fair market value at the time it became part of the transaction. But, when you dispose of or otherwise terminate the position in a transaction in which you recognize gain or loss, you must recognize the built-in loss. The conversion transaction rules do not affect whether the built-in loss is treated as an ordinary or capital loss.

Netting rule for certain conversion transactions. Before determining the amount of gain treated as ordinary income, you can net certain gains and losses from positions of the same conversion transaction. To do this, you have to dispose of all the positions within a 14-day period that is within a single tax year. You cannot net the built-in loss against the gain.

You can net gains and losses only if you identify the conversion transaction as an identified netting transaction on your books and records. Each position of the conversion transaction must be identified before the end of the day on which the position becomes part of the conversion transaction. For conversion transactions entered into before February 20, 1996, this requirement is met if the identification was made by that date.

Options dealers and commodities traders. These rules do not apply to options dealers and commodities traders.

How to report. Use Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, to report conversion transactions. See the instructions for lines 11 and 13 of Form 6781.

A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price.

If the contract is a regulated futures contract, the rules described earlier under Section 1256 Contracts Marked To Market apply to it.

The termination of a commodity futures contract generally results in capital gain or loss unless the contract is a hedging transaction.

Hedging transaction. A futures contract that is a hedging transaction generally produces ordinary gain or loss. A futures contract is a hedging transaction if you enter into the contract in the ordinary course of your business primarily to manage the risk of interest rate or price changes or currency fluctuations on borrowings, ordinary property, or ordinary obligations. (Generally, ordinary property or obligations are those that cannot produce capital gain or loss under any circumstances.) For example, the offset or exercise of a futures contract that protects against price changes in your business inventory results in an ordinary gain or loss.

For more information about hedging transactions, see section 1.1221-2 of the regulations. Also, see Hedging Transactions under Section 1256 Contracts Marked to Market . earlier.

If you have numerous transactions in the commodity futures market during the year, the burden of proof is on you to show which transactions are hedging transactions. Clearly identify any hedging transactions on your books and records before the end of the day you entered into the transaction. It may be helpful to have separate brokerage accounts for your hedging and nonhedging transactions. For specific requirements concerning identification of hedging transactions and the underlying item, items, or aggregate risk that is being hedged, see section 1.1221-2(e) of the regulations.

Gains From Certain Constructive Ownership Transactions

If you have a gain from a constructive ownership transaction entered into after July 11, 1999, involving a financial asset (discussed later) and the gain normally would be treated as long-term capital gain, all or part of the gain may be treated instead as ordinary income. In addition, if any gain is treated as ordinary income, your tax is increased by an interest charge.

Constructive ownership transactions. The following are constructive ownership transactions.

A notional principal contract in which you have the right to receive substantially all of the investment yield on a financial asset and you are obligated to reimburse substantially all of any decline in value of the financial asset.

A forward or futures contract to acquire a financial asset.

The holding of a call option and writing of a put option on a financial asset at substantially the same strike price and maturity date.

This provision does not apply if all the positions are marked to market. Marked to market rules for section 1256 contracts are discussed in detail under Section 1256 Contracts Marked to Market, earlier.

Financial asset. A financial asset, for this purpose, is any equity interest in a pass-through entity. Pass-through entities include partnerships, S corporations, trusts, regulated investment companies, and real estate investment trusts.

Amount of ordinary income. Long-term capital gain is treated as ordinary income to the extent it is more than the net underlying long-term capital gain. The net underlying long-term capital gain is the amount of net capital gain you would have realized if you acquired the asset for its fair market value on the date the constructive ownership transaction was opened, and sold the asset for its fair market value on the date the transaction was closed. If you do not establish the amount of net underlying long-term capital gain by clear and convincing evidence, it is treated as zero.

Más información. For more information, see section 1260 of the Internal Revenue Code.

Losses on Section 1244 (Small Business) Stock

You can deduct as an ordinary loss, rather than as a capital loss, a loss on the sale, trade, or worthlessness of section 1244 stock. Report the loss on Form 4797, Sales of Business Property, line 10.

Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Do not offset gains against losses that are within the ordinary loss limit, explained later in this discussion, even if the transactions are in stock of the same company. Report the gain on Schedule D of Form 1040.

If you must figure a net operating loss, any ordinary loss from the sale of section 1244 stock is a business loss.

Ordinary loss limit. The amount that you can deduct as an ordinary loss is limited to $50,000 each year. On a joint return the limit is $100,000, even if only one spouse has this type of loss. If your loss is $110,000 and your spouse has no loss, you can deduct $100,000 as an ordinary loss on a joint return. The remaining $10,000 is a capital loss.

Section 1244 (small business) stock. This is stock that was issued for money or property (other than stock and securities) in a domestic small business corporation. During its 5 most recent tax years before the loss, this corporation must have derived more than 50% of its gross receipts from other than royalties, rents, dividends, interest, annuities, and gains from sales and trades of stocks or securities. If the corporation was in existence for at least 1 year, but less than 5 years, the 50% test applies to the tax years ending before the loss. If the corporation was in existence less than 1 year, the 50% test applies to the entire period the corporation was in existence before the day of the loss. However, if the corporation's deductions (other than the net operating loss and dividends received deductions) were more than its gross income during this period, this 50% test does not apply.

The corporation must have been largely an operating company for ordinary loss treatment to apply.

If the stock was issued before July 19, 1984, the stock must be common stock. If issued after July 18, 1984, the stock may be either common or preferred. For more information about the requirements of a small business corporation or the qualifications of section 1244 stock, see section 1244 of the Internal Revenue Code and its regulations.

The stock must be issued to the person taking the loss. You must be the original owner of the stock to be allowed ordinary loss treatment. To claim a deductible loss on stock issued to your partnership, you must have been a partner when the stock was issued and have remained so until the time of the loss. You add your distributive share of the partnership loss to any individual section 1244 stock loss you may have before applying the ordinary loss limit.

Stock distributed by partnership. If your partnership distributes the stock to you, you cannot treat any later loss on that stock as an ordinary loss.

Stock sold through underwriter. Stock sold through an underwriter is not section 1244 stock unless the underwriter only acted as a selling agent for the corporation.

Stock dividends and reorganizations. Stock you receive as a stock dividend qualifies as section 1244 stock if:

You receive it from a small business corporation in which you own stock, and

The stock you own meets the requirements when the stock dividend is distributed.

If you trade your section 1244 stock for new stock in the same corporation in a reorganization that qualifies as a recapitalization or that is only a change in identity, form, or place of organization, the new stock is section 1244 stock if the stock you trade meets the requirements when the trade occurs.

If you hold section 1244 stock and other stock in the same corporation, not all of the stock you receive as a stock dividend or in a reorganization will qualify as section 1244 stock. Only that part based on the section 1244 stock you hold will qualify.

Ejemplo. Your basis for 100 shares of X common stock is $1,000. These shares qualify as section 1244 stock. If, as a nontaxable stock dividend, you receive 50 more shares of common stock, the basis of which is determined from the 100 shares you own, the 50 shares are also section 1244 stock.

If you also own stock in the corporation that is not section 1244 stock when you receive the stock dividend, you must divide the shares you receive as a dividend between the section 1244 stock and the other stock. Only the shares from the former can be section 1244 stock.

Contributed property. To determine ordinary loss on section 1244 stock you receive in a trade for property, you have to reduce the basis of the stock if:

The adjusted basis (for figuring loss) of the property, immediately before the trade, was more than its fair market value, and

The basis of the stock is determined by the basis of the property.

Reduce the basis of the stock by the difference between the adjusted basis of the property and its fair market value at the time of the trade. You reduce the basis only to figure the ordinary loss. Do not reduce the basis of the stock for any other purpose.

Ejemplo. You transfer property with an adjusted basis of $1,000 and a fair market value of $250 to a corporation for its section 1244 stock. The basis of your stock is $1,000, but to figure the ordinary loss under these rules, the basis of your stock is $250 ($1,000 minus $750). If you later sell the section 1244 stock for $200, your $800 loss is an ordinary loss of $50 and a capital loss of $750.

Contributions to capital. If the basis of your section 1244 stock has increased, through contributions to capital or otherwise, you must treat this increase as applying to stock that is not section 1244 stock when you figure an ordinary loss on its sale.

Ejemplo. You buy 100 shares of section 1244 stock for $10,000. You are the original owner. You later make a $2,000 contribution to capital that increases the total basis of the 100 shares to $12,000. You then sell the 100 shares for $9,000 and have a loss of $3,000. You can deduct only $2,500 ($3,000 × $10,000/$12,000) as an ordinary loss under these rules. The remaining $500 is a capital loss.

Recordkeeping. You must keep records sufficient to show your stock qualifies as section 1244 stock. Your records must also distinguish your section 1244 stock from any other stock you own in the corporation.

Losses on Small Business Investment Company Stock

A small business investment company (SBIC) is one that is licensed and operated under the Small Business Investment Act of 1958.

If you are an investor in SBIC stock, you can deduct as an ordinary loss, rather than a capital loss, a loss from the sale, trade, or worthlessness of that stock. A gain from the sale or trade of that stock is a capital gain. Do not offset your gains and losses, even if they are on stock of the same company.

How to report. You report this type of ordinary loss on line 10, Part II, of Form 4797. In addition to the information required by the form, you must include the name and address of the company that issued the stock. Report a capital gain from the sale of SBIC stock on Schedule D of Form 1040.

Short sale. If you close a short sale of SBIC stock with other SBIC stock that you bought only for that purpose, any loss you have on the sale is a capital loss. See Short Sales, later in this chapter, for more information.

Holding Period

If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss.

Long-term or short-term. If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.

To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.

Ejemplo. If you bought investment property on February 5, 2000, and sold it on February 5, 2001, your holding period is not more than 1 year and you have a short-term capital gain or loss. If you sold it on February 6, 2001, your holding period is more than 1 year and you have a long-term capital gain or loss.

Securities traded on an established market. For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them.

Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made.

Ejemplo. You are a cash method, calendar year taxpayer. You sold stock at a gain on December 28, 2001. According to the rules of the stock exchange, the sale was closed by delivery of the stock 3 trading days after the sale, on January 3, 2002. You received payment of the sale price on that same day. Report your gain on your 2001 return, even though you received the payment in 2002. The gain is long term or short term depending on whether you held the stock more than 1 year. Your holding period ended on December 28. If you had sold the stock at a loss, you would also report it on your 2001 return.

U. S. Treasury notes and bonds. The holding period of U. S. Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. The holding period of U. S. Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted.

Automatic investment service. In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. Your holding period starts on the day after the bank's purchase date. If a share was bought over more than one purchase date, your holding period for that share is a split holding period. A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds.

Nontaxable trades. If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property.

Property received as a gift. If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started.

If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift.

Inherited property. If you inherit investment property, your capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss. This is true regardless of how long you actually held the property.

Real property bought. To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. El período de tenencia no puede comenzar hasta que exista un contrato de venta real. The holding period of the seller cannot end before that time.

Real property repossessed. If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Your holding period does not include the time between the original sale and the repossession. That is, it does not include the period during which the first buyer held the property.

Stock dividends. The holding period for stock you received as a taxable stock dividend begins on the date of distribution.

The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. This rule also applies to stock acquired in a spin-off, which is a distribution of stock or securities in a controlled corporation.

Nontaxable stock rights. Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised.

Section 1256 contracts. Gains or losses on section 1256 contracts open at the end of the year, or terminated during the year, are treated as 60% long term and 40% short term, regardless of how long the contracts were held. See Section 1256 Contracts Marked to Market, earlier.

Option exercised. Your holding period for property you acquire when you exercise an option begins the day after you exercise the option.

Wash sales. Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.

Qualified small business stock. Your holding period for stock you acquired in a tax-free rollover of gain from a sale of qualified small business stock, described later, includes the period you held the old stock.

Commodity or securities futures. Futures transactions in any commodity subject to the rules of a board of trade or commodity exchange are long term if the contract was held for more than 6 months.

Your holding period for a commodity received in satisfaction of a commodity futures contract or securities futures contract, other than a regulated futures contract subject to Internal Revenue Code section 1256, includes your holding period for the futures contract if you held the contract as a capital asset.

Securities futures contract. Your holding period for a security received in satisfaction of a securities futures contract, other than one that is a section 1256 contract, includes your holding period for the futures contract if you held the contract as a capital asset.

Loss on mutual fund or REIT stock held 6 months or less. If you hold stock in a regulated investment company (commonly called a mutual fund ) or real estate investment trust (REIT) for 6 months or less and then sell it at a loss (other than under a periodic liquidation plan), special rules may apply.

Capital gain distributions received. The loss (after reduction for any exempt-interest dividends you received, as explained next) is treated as a long-term capital loss up to the total of any capital gain distributions you received and your share of any undistributed capital gains. Any remaining loss is short-term capital loss.

Exempt-interest dividends on mutual fund stock. If you received exempt-interest dividends on the stock, at least part of your loss is disallowed. You can deduct only the amount of loss that is more than the exempt-interest dividends.

Nonbusiness Bad Debts

If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.

There are two kinds of bad debts -- business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business and is deductible as a business loss. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses.

Ejemplo. An architect made personal loans to several friends who were not clients. She could not collect on some of these loans. They are deductible only as nonbusiness bad debts because the architect was not in the business of lending money and the loans do not have any relationship to her business.

Business bad debts. For information on business bad debts of an employee, see Publication 529. For information on other business bad debts, see chapter 11 of Publication 535 .

Deductible nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.

Genuine debt required. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

Loan or gift. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan. You cannot take a bad debt deduction for a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money.

When minor children borrow from their parents to pay for their basic needs, there is no genuine debt. A bad debt cannot be deducted for such a loan.

Basis in bad debt required. To deduct a bad debt, you must have a basis in it -- that is, you must have already included the amount in your income or loaned out your cash. For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash method taxpayer (most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items.

When deductible. You can take a bad debt deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid.

It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.

If your bad debt is the loss of a deposit in a financial institution, see Deposit in Insolvent or Bankrupt Financial Institution, earlier.

Filing a claim for refund. If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. To do this, use Form 1040X to amend your return for the year the debt became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. (Claims not due to bad debts or worthless securities generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid.) For more information about filing a claim, see Publication 556. Examination of Returns, Appeal Rights, and Claims for Refund .

Loan guarantees. If you guarantee a debt that becomes worthless, you cannot take a bad debt deduction for your payments on the debt unless you can show either that your reason for making the guarantee was to protect your investment or that you entered the guarantee transaction with a profit motive. If you make the guarantee as a favor to friends and do not receive any consideration in return, your payments are considered a gift and you cannot take a deduction.

Example 1. Henry Lloyd, an officer and principal shareholder of the Spruce Corporation, guaranteed payment of a bank loan the corporation received. The corporation defaulted on the loan and Henry made full payment. Because he guaranteed the loan to protect his investment in the corporation, Henry can take a nonbusiness bad debt deduction.

Example 2. Milt and John are co-workers. Milt, as a favor to John, guarantees a note at their local credit union. John does not pay the note and declares bankruptcy. Milt pays off the note. However, since he did not enter into the guarantee agreement to protect an investment or to make a profit, Milt cannot take a bad debt deduction.

Deductible in year paid. Unless you have rights against the borrower, discussed next, a payment you make on a loan you guaranteed is deductible in the year you make the payment.

Rights against the borrower. When you make payment on a loan that you guaranteed, you may have the right to take the place of the lender (the right of subrogation). The debt is then owed to you. If you have this right, or some other right to demand payment from the borrower, you cannot take a bad debt deduction until these rights become totally worthless.

Debts owed by political parties. You cannot take a nonbusiness bad debt deduction for any worthless debt owed to you by:

A political party,

A national, state, or local committee of a political party, or

A committee, association, or organization that either accepts contributions or spends money to influence elections.

Mechanics' and suppliers' liens. Workers and material suppliers may file liens against property because of debts owed by a builder or contractor. If you pay off the lien to avoid foreclosure and loss of your property, you are entitled to repayment from the builder or contractor. If the debt is uncollectible, you can take a bad debt deduction.

Insolvency of contractor. You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction.

Secondary liability on home mortgage. If the buyer of your home assumes your mortgage, you may remain secondarily liable for repayment of the mortgage loan. If the buyer defaults on the loan and the house is then sold for less than the amount outstanding on the mortgage, you may have to make up the difference. You can take a bad debt deduction for the amount you pay to satisfy the mortgage, if you cannot collect it from the buyer.

Worthless securities. If you own securities that become totally worthless, you can take a deduction for a loss, but not for a bad debt. See Worthless Securities under What Is a Sale or Trade, earlier in this chapter.

Recovery of a bad debt. If you deducted a bad debt and in a later tax year you recover (collect) all or part of it, you may have to include the amount you recover in your gross income. However, you can exclude from gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year deducted. See Recoveries in Publication 525 .

How to report bad debts. Deduct nonbusiness bad debts as short-term capital losses on Schedule D (Form 1040).

In Part I, line 1 of Schedule D, enter the name of the debtor and "statement attached" in column (a). Enter the amount of the bad debt in parentheses in column (f). Use a separate line for each bad debt.

For each bad debt, attach a statement to your return that contains:

A description of the debt, including the amount, and the date it became due,

The name of the debtor, and any business or family relationship between you and the debtor,

The efforts you made to collect the debt, and

Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.

S corporation shareholder. If you are a shareholder in an S corporation, your share of any nonbusiness bad debt will be shown on a schedule attached to your Schedule K-1 (Form 1120S) that you receive from the corporation.

Short Sales

A short sale occurs when you agree to sell property you do not own (or own but do not wish to sell). You make this type of sale in two steps.

You sell short. You borrow property and deliver it to a buyer.

You close the sale. At a later date, you either buy substantially identical property and deliver it to the lender or make delivery out of property that you held at the time of the sale.

You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset.

Exception if property becomes worthless. A different rule applies if the property sold short becomes substantially worthless. In that case, you must recognize gain as if the short sale were closed when the property became substantially worthless.

Exception for constructive sales. Entering into a short sale may cause you to be treated as having made a constructive sale of property. In that case, you will have to recognize gain on the date of the constructive sale. For details, see Constructive Sales of Appreciated Financial Positions, earlier.

Ejemplo. On May 1, 2001, you bought 100 shares of Baker Corporation stock for $1,000. On September 3, 2001, you sold short 100 shares of similar Baker stock for $1,600. You made no other transactions involving Baker stock for the rest of 2001 and the first 30 days of 2002. Your short sale is treated as a constructive sale of an appreciated financial position because a sale of your Baker stock on the date of the short sale would have resulted in a gain. You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 3.

Short-Term or Long-Term Capital Gain or Loss

As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.

Ejemplo. Even though you do not own any stock of the Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than one day.

Special rules. Special rules may apply to gains and losses from short sales of stocks, securities, and commodity futures (other than certain straddles) if you held or acquired property substantially identical property to that sold short. But if the amount of property you sold short is more than the amount of that substantially identical property, the special rules do not apply to the gain or loss on the excess.

Gains and holding period. If you held the substantially identical property for 1 year or less on the date of the short sale, or if you acquired the substantially identical property after the short sale and by the date of closing the short sale, then:

Rule 1. Your gain, if any, when you close the short sale is a short-term capital gain, and

Rule 2. The holding period of the substantially identical property begins on the date of the closing of the short sale or on the date of the sale of this property, whichever comes first.

Pérdidas. If, on the date of the short sale, you held substantially identical property for more than 1 year, any loss you realize on the short sale is a long-term capital loss, even if you held the property used to close the sale for 1 year or less. Certain losses on short sales of stock or securities are also subject to wash sale treatment. For information, see Wash Sales, later.

Mixed straddles. Under certain elections, you can avoid the treatment of loss from a short sale as long term under the special rule. These elections are for positions that are part of a mixed straddle. See Other elections under Mixed Straddles, later, for more information about these elections.

Reporting Substitute Payments

If any broker transferred your securities for use in a short sale, or similar transaction, and received certain substitute dividend payments on your behalf while the short sale was open, that broker must give you a Form 1099-MISC or a similar statement, reporting the amount of these payments. Form 1099-MISC must be used for those substitute payments totaling $10 or more that are known on the payment's record date to be in lieu of an exempt-interest dividend, a capital gain dividend, a return of capital distribution, or a dividend subject to a foreign tax credit, or that are in lieu of tax-exempt interest. Do not treat these substitute payments as dividends or interest. Instead, report the substitute payments shown on Form 1099-MISC as "Other income" on line 21 of Form 1040.

Substitute payment. A substitute payment means a payment in lieu of:

Tax-exempt interest (including OID) that has accrued while the short sale was open, and

A dividend, if the ex-dividend date is after the transfer of stock for use in a short sale and before the closing of the short sale.

Short Sale Expenses

If you borrow stock to make a short sale, you may have to remit to the lender payments in lieu of the dividends distributed while you maintain your short position. You can deduct these payments only if you hold the short sale open at least 46 days (more than 1 year in the case of an extraordinary dividend as defined below) and you itemize your deductions.

You deduct these expenses as investment interest on Schedule A (Form 1040). See Interest Expenses in chapter 3 for more information.

If you close the short sale by the 45th day after the date of the short sale (1 year or less in the case of an extraordinary dividend), you cannot deduct the payment in lieu of the dividend that you make to the lender. Instead, you must increase the basis of the stock used to close the short sale by that amount.

To determine how long a short sale is kept open, do not include any period during which you hold, have an option to buy, or are under a contractual obligation to buy substantially identical stock or securities.

If your payment is made for a liquidating distribution or nontaxable stock distribution, or if you buy more shares equal to a stock distribution issued on the borrowed stock during your short position, you have a capital expense. You must add the payment to the cost of the stock sold short.

Exception. If you close the short sale within 45 days, the deduction for amounts you pay in lieu of dividends will be disallowed only to the extent the payments are more than the amount that you receive as ordinary income from the lender of the stock for the use of collateral with the short sale. This exception does not apply to payments in place of extraordinary dividends.

Extraordinary dividends. If the amount of any dividend you receive on a share of preferred stock equals or exceeds 5% (10% in the case of other stock) of the amount realized on the short sale, the dividend you receive is an extraordinary dividend.

Wash Sales

You cannot deduct losses from sales or trades of stock or securities in a wash sale.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,

Acquire substantially identical stock or securities in a fully taxable trade, or

Acquire a contract or option to buy substantially identical stock or securities.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold.

Example 1. You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050.

Example 2. You are an employee of a corporation that has an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.

Options and futures contracts. The wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities. They do not apply to losses from sales or trades of commodity futures contracts and foreign currencies. See Coordination of Loss Deferral Rules and Wash Sale Rules under Straddles, later, for information about the tax treatment of losses on the disposition of positions in a straddle.

Warrants. The wash sale rules apply if you sell common stock at a loss and, at the same time, buy warrants for common stock of the same corporation. But if you sell warrants at a loss and, at the same time, buy common stock in the same corporation, the wash sale rules apply only if the warrants and stock are considered substantially identical, as discussed next.

Substantially identical. In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.

Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:

Is convertible into common stock,

Has the same voting rights as the common stock,

Is subject to the same dividend restrictions,

Trades at prices that do not vary significantly from the conversion ratio, and

Is unrestricted as to convertibility.

More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

Example 1. You bought 100 shares of M stock on September 24, 2000, for $5,000. On December 21, 2000, you bought 50 shares of substantially identical stock for $2,750. On December 28, 2000, you bought 25 shares of substantially identical stock for $1,125. On January 4, 2001, you sold for $4,000 the 100 shares you bought in September. You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days of the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 21, 2000, is increased by two-thirds (50 × 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 28, 2000, is increased by the rest of the loss to $1,375 ($1,125 + $250).

Example 2. You bought 100 shares of M stock on September 24, 2000. On February 1, 2001, you sold those shares at a $1,000 loss. On each of the 4 days from February 13, 2001, to February 16, 2001, you bought 50 shares of substantially identical stock. You cannot deduct your $1,000 loss. You must add half the disallowed loss ($500) to the basis of the 50 shares bought on February 13. Add the other half ($500) to the basis of the shares bought on February 14.

Loss and gain on same day. Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.

Ejemplo. During 1996, you bought 100 shares of X stock on each of three occasions. You paid $158 a share for the first block of 100 shares, $100 a share for the second block, and $95 a share for the third block. On December 23, 2001, you sold 300 shares of X stock for $125 a share. On January 6, 2002, you bought 250 shares of identical X stock. You cannot deduct the loss of $33 a share on the first block because within 30 days after the date of sale you bought 250 identical shares of X stock. In addition, you cannot reduce the gain realized on the sale of the second and third blocks of stock by this loss.

Distribuidores. The wash sale rules do not apply to a dealer in stock or securities if the loss is from a transaction made in the ordinary course of business.

Short sales. The wash sale rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities within a period beginning 30 days before the date the short sale is complete and ending 30 days after that date.

For purposes of the wash sale rules, a short sale is considered complete on the date the short sale is entered into, if:

On that date, you own stock or securities identical to those sold short (or by that date you enter into a contract or option to acquire that stock or those securities), and

You later deliver the stock or securities to close the short sale.

Otherwise, a short sale is not considered complete until the property is delivered to close the sale.

Ejemplo. On June 2, you buy 100 shares of stock for $1,000. You sell short 100 shares of the stock for $750 on October 6. On October 7, you buy 100 shares of the same stock for $750. You close the short sale on November 17 by delivering the shares bought on June 2. You cannot deduct the $250 loss ($1,000 - $750) because the date of entering into the short sale (October 6) is considered the date the sale is complete for wash sale purposes and you bought substantially identical stock within 30 days from that date.

Residual Interests in a REMIC. The wash sale rules generally will apply to the sale of your residual interest in a real estate mortgage investment conduit (REMIC) if, during the period beginning 6 months before the sale of the interest and ending 6 months after that sale, you acquire any residual interest in any REMIC or any interest in a taxable mortgage pool that is comparable to a residual interest. REMICs are discussed in chapter 1.

How to report. Report a wash sale or trade on line 1 or line 8 of Schedule D (Form 1040), whichever is appropriate. Show the full amount of the loss in parentheses in column (f). On the next line, enter "Wash Sale" in column (a) and the amount of the loss not allowed as a positive amount in column (f).

Securities Futures Contracts

A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index.

Gain or loss from the contract generally will be treated in a manner similar to gain or loss from transactions in the underlying security. This means gain or loss from the sale or exchange of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale or exchange of a contract to sell property will be considered short-term, regardless of how long you hold the contract. These contracts are not section 1256 contracts (unless they are dealer securities futures contracts).

Opciones

Options are generally subject to the rules described in this section. If the option is part of a straddle, the loss deferral rules covered later under Straddles may also apply. For special rules that apply to nonequity options and dealer equity options, see Section 1256 Contracts Marked to Market, earlier.

Gain or loss from the sale or trade of an option to buy or sell property that is a capital asset in your hands, or would be if you acquired it, is capital gain or loss. If the property is not, or would not be, a capital asset, the gain or loss is ordinary gain or loss.

Example 1. You purchased an option to buy 100 shares of XYZ Company stock. The stock increases in value and you sell the option for more than you paid for it. Your gain is capital gain because the stock underlying the option would have been a capital asset in your hands.

Example 2. The facts are the same as in Example 1, except that the stock decreases in value and you sell the option for less than you paid for it. Your loss is a capital loss.

Option not exercised. If you have a loss because you did not exercise an option to buy or sell, you are considered to have sold or traded the option on the date that it expired.

Writer of option. If you write (grant) an option, how you report your gain or loss depends on whether it was exercised.

If you are not in the business of writing options and an option you write on stocks, securities, commodities, or commodity futures is not exercised, the amount you receive is a short-term capital gain.

If an option requiring you to buy or sell property is exercised, see Writers of calls and puts, later.

Section 1256 contract options. Gain or loss is recognized on the exercise of an option on a section 1256 contract. Section 1256 contracts are defined under Section 1256 Contracts Marked to Market, earlier.

Cash settlement option. A cash settlement option is treated as an option to buy or sell property. A cash settlement option is any option that on exercise is settled in, or could be settled in, cash or property other than the underlying property.

How to report. Gain or loss from the closing or expiration of an option that is not a section 1256 contract, but that is a capital asset in your hands, is reported on Schedule D (Form 1040).

If an option you purchased expired, enter the expiration date in column (c) and write "Expired" in column (d).

If an option that you wrote expired, enter the expiration date in column (b) and write "Expired" in column (e).

Calls and puts are options on securities and are covered by the rules just discussed for options. The following are specific applications of these rules to holders and writers of options that are bought, sold, or "closed out" in transactions on a national securities exchange, such as the Chicago Board Options Exchange. (But see Section 1256 Contracts Marked to Market, earlier, for special rules that may apply to nonequity options and dealer equity options.) These rules are also presented in Table 4-1.

Calls and puts are issued by writers (grantors) to holders for cash premiums. They are ended by exercise, closing transaction, or lapse.

A call option is the right to buy from the writer of the option, at any time before a specified future date, a stated number of shares of stock at a specified price. Conversely, a put option is the right to sell to the writer, at any time before a specified future date, a stated number of shares at a specified price.

Holders of calls and puts. If you buy a call or a put, you may not deduct its cost. It is a capital expenditure.

If you sell the call or the put before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.

If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.

If you exercise a call, add its cost to the basis of the stock you bought. If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss. Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.

Put option as short sale. Buying a put option is generally treated as a short sale, and the exercise, sale, or expiration of the put is a closing of the short sale. See Short Sales, earlier. If you have held the underlying stock for 1 year or less at the time you buy the put, any gain on the exercise, sale, or expiration of the put is a short-term capital gain. The same is true if you buy the underlying stock after you buy the put but before its exercise, sale, or expiration. Your holding period for the underlying stock begins on the earliest of:

The date you dispose of the stock,

The date you exercise the put,

The date you sell the put, or

The date the put expires.

Writers of calls and puts. If you write (grant) a call or a put, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:

Your obligation expires,

You sell, in the case of a call, or buy, in the case of a put, the underlying stock when the option is exercised, or

You engage in a closing transaction.

If your obligation expires, the amount you received for writing the call or put is short-term capital gain.

If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.

If you enter into a closing transaction by paying an amount equal to the value of the call or put at the time of the payment, the difference between the amount you pay and the amount you receive for the call or put is a short-term capital gain or loss.

Examples of non-dealer transactions.

Vencimiento. Ten JJJ call options were issued on April 8, 2001, for $4,000. These equity options expired in December 2001, without being exercised. If you were a holder (buyer) of the options, you would recognize a short-term capital loss of $4,000. If you were a writer of the options, you would recognize a short-term capital gain of $4,000.

Closing transaction. The facts are the same as in (1), except that on May 10, 2001, the options were sold for $6,000. If you were the holder of the options who sold them, you would recognize a short-term capital gain of $2,000. If you were the writer of the options and you bought them back, you would recognize a short-term capital loss of $2,000.

Ejercicio. The facts are the same as in (1), except that the options were exercised on May 27, 2001. The buyer adds the cost of the options to the basis of the stock bought through the exercise of the options. The writer adds the amount received from writing the options to the amount realized from selling the stock.

Section 1256 contracts. The facts are the same as in (1), except the options were nonequity options, subject to the rules for section 1256 contracts. If you were a buyer of the options, you would recognize a short-term capital loss of $1,600, and a long-term capital loss of $2,400. If you were a writer of the options, you would recognize a short-term capital gain of $1,600, and a long-term capital gain of $2,400. See Section 1256 Contracts Marked to Market, earlier, for more information.

Straddles

This section discusses the loss deferral rules that apply to the sale or other disposition of positions in a straddle. These rules do not apply to the straddles described under Exceptions, later.

A straddle is any set of offsetting positions on personal property. For example, a straddle may consist of a security and a written option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period.

Personal property. This is any property of a type that is actively traded. It includes stock options and contracts to buy stock, but generally does not include stock.

Straddle rules for stock. Although stock is generally excluded from the definition of personal property when applying the straddle rules, it is included in the following two situations.

The stock is part of a straddle in which at least one of the offsetting positions is either:

An option to buy or sell the stock or substantially identical stock or securities,

A securities futures contract on the stock or substantially identical stock or securities, or

A position on substantially similar or related property (other than stock).

The stock is in a corporation formed or availed of to take positions in personal property that offset positions taken by any shareholder.

Posición. A position is an interest in personal property. A position can be a forward or futures contract, or an option.

An interest in a loan that is denominated in a foreign currency is treated as a position in that currency. For the straddle rules, foreign currency for which there is an active interbank market is considered to be actively-traded personal property. See also Foreign currency contract under Section 1256 Contracts Marked to Market, earlier.

Offsetting position. This is a position that substantially reduces any risk of loss you may have from holding another position. However, if a position is part of a straddle that is not an identified straddle (described later), do not treat it as offsetting to a position that is part of an identified straddle.

Presumed offsetting positions. If you establish two or more positions, an offsetting position will be presumed under any of the following conditions, unless otherwise rebutted.

The positions are established in the same personal property (or in a contract for this property), and the value of one or more positions varies inversely with the value of one or more of the other positions.

The positions are in the same personal property, even if this property is in a substantially changed form, and the positions' values vary inversely as described in the first condition.

The positions are in debt instruments with a similar maturity, and the positions' values vary inversely as described in the first condition.

The positions are sold or marketed as offsetting positions, whether or not the positions are called a straddle, spread, butterfly, or any similar name.

The aggregate margin requirement for the positions is lower than the sum of the margin requirements for each position if held separately.

Related persons. To determine if two or more positions are offsetting, you will be treated as holding any position that your spouse holds during the same period. If you take into account part or all of the gain or loss for a position held by a flowthrough entity, such as a partnership or trust, you are also considered to hold that position.

Loss Deferral Rules

Generally, you can deduct a loss on the disposition of one or more positions only to the extent that the loss is more than any unrecognized gain you have on offsetting positions. Unused losses are treated as sustained in the next tax year.

Unrecognized gain. This is:

The amount of gain you would have had on an open position if you had sold it on the last business day of the tax year at its fair market value, and

The amount of gain realized on a position if, as of the end of the tax year, gain has been realized, but not recognized.

Ejemplo. On July 1, 2001, you entered into a straddle. On December 16, 2001, you closed one position of the straddle at a loss of $15,000. On December 31, 2001, the end of your tax year, you have an unrecognized gain of $12,750 in the offsetting open position. On your 2001 return, your deductible loss on the position you closed is limited to $2,250 ($15,000 - $12,750). You must carry forward to 2002 the unused loss of $12,750.

Exceptions. The loss deferral rules do not apply to:

A straddle that is an identified straddle at the end of the tax year,

Certain straddles consisting of qualified covered call options and the stock to be purchased under the options,

Hedging transactions . described earlier under Section 1256 Contracts Marked to Market . y

Straddles consisting entirely of section 1256 contracts, as described earlier under Section 1256 Contracts Marked to Market (but see Identified straddle, next).

Identified straddle. Losses from positions in an identified straddle are deferred until you dispose of all the positions in the straddle.

Any straddle (other than a straddle described in (2) or (3) above) is an identified straddle if all of the following conditions exist.

You clearly identified the straddle on your records before the close of the day on which you acquired it.

All of the original positions that you identify were acquired on the same day.

All of the positions included in item (2) were disposed of on the same day during the tax year, or none of the positions were disposed of by the end of the tax year.

The straddle is not part of a larger straddle.

Qualified covered call options and optioned stock. A straddle is not subject to the loss deferral rules for straddles if both of the following are true.

All of the offsetting positions consist of one or more qualified covered call options and the stock to be purchased from you under the options.

The straddle is not part of a larger straddle.

But see Special year-end rule, later, for an exception.

A qualified covered call option is any option you grant to purchase stock you hold (or stock you acquire in connection with granting the option), but only if all of the following are true.

The option is traded on a national securities exchange or other market approved by the Secretary of the Treasury.

The option is granted more than 30 days before its expiration date.

The option is not a deep-in-the-money option.

You are not an options dealer who granted the option in connection with your activity of dealing in options.

Gain or loss on the option is capital gain or loss.

A deep-in-the-money option is an option with a strike price lower than the lowest qualified benchmark (LQB). The strike price is the price at which the option is to be exercised. The LQB is the highest available strike price that is less than the applicable stock price. However, the LQB for an option with a term of more than 90 days and a strike price of more than $50 is the second highest available strike price that is less than the applicable stock price. Strike prices are listed in the financial section of many newspapers.

The availability of strike prices for equity options with flexible terms does not affect the determination of the LQB for an option that is not an equity option with flexible terms.

The applicable stock price for any stock for which an option has been granted is:

The closing price of the stock on the most recent day on which that stock was traded before the date on which the option was granted, or

The opening price of the stock on the day on which the option was granted, but only if that price is greater than 110% of the price determined in (1).

If the applicable stock price is $25 or less, the LQB will be treated as not less than 85% of the applicable stock price. If the applicable stock price is $150 or less, the LQB will be treated as not less than an amount that is $10 below the applicable stock price.

Ejemplo. On May 13, 2001, you held XYZ stock and you wrote an XYZ/September call option with a strike price of $120. The closing price of one share of XYZ stock on May 12, 2001, was $130.25. The strike prices of all XYZ/September call options offered on May 13, 2001, were as follows: $110, $115, $120, $125, $130, and $135. Because the option has a term of more than 90 days, the LQB is $125, the second highest strike price that is less than $130.25, the applicable stock price. The call option is a deep-in-the-money option because its strike price is lower than the LQB. Therefore, the option is not a qualified covered call option, and the loss deferral rules apply if you closed out the option or the stock at a loss during the year.

Capital loss on qualified covered call options. If you hold stock and you write a qualified covered call option on that stock with a strike price less than the applicable stock price, treat any loss from the option as long-term capital loss if, at the time the loss was realized, gain on the sale or exchange of the stock would be treated as long-term capital gain. The holding period of the stock does not include any period during which you are the writer of the option.

Special year-end rule. The loss deferral rules for straddles apply if all of the following are true.

The qualified covered call options are closed or the stock is disposed of at a loss during any tax year.

Gain on disposition of the stock or gain on the options is includible in gross income in a later tax year.

The stock or options were held less than 30 days after the closing of the options or the disposition of the stock.

How To Report Gains and Losses (Form 6781)

Report each position (whether or not it is part of a straddle) on which you have unrecognized gain at the end of the tax year and the amount of this unrecognized gain in Part III of Form 6781. Use Part II of Form 6781 to figure your gains and losses on straddles before entering these amounts on Schedule D (Form 1040). Include a copy of Form 6781 with your income tax return.

Coordination of Loss Deferral Rules and Wash Sale Rules

Rules similar to the wash sale rules apply to any disposition of a position or positions of a straddle. First apply Rule 1, explained next, then apply Rule 2. However, Rule 1 applies only if stocks or securities make up a position that is part of the straddle. If a position in the straddle does not include stock or securities, use Rule 2.

Rule 1. You cannot deduct a loss on the disposition of shares of stock or securities that make up the positions of a straddle if, within a period beginning 30 days before the date of that disposition and ending 30 days after that date, you acquired substantially identical stock or securities. Instead, the loss will be carried over to the following tax year, subject to any further application of Rule 1 in that year. This rule will also apply if you entered into a contract or option to acquire the stock or securities within the time period described above. See Loss carryover, later, for more information about how to treat the loss in the following tax year.

Distribuidores. If you are a dealer in stock or securities, this loss treatment will not apply to any losses you sustained in the ordinary course of your business.

Ejemplo. You are not a dealer in stock or securities. On December 2, 2001, you bought stock in XX Corporation (XX stock) and an offsetting put option. On December 13, 2001, there was $20 of unrealized gain in the put option and you sold the XX stock at a $20 loss. By December 16, 2001, the value of the put option had declined, eliminating all unrealized gain in the position. On December 16, 2001, you bought a second XX stock position that is substantially identical to the XX stock you sold on December 13, 2001. At the end of the year there is no unrecognized gain in the put option or in the XX stock. Under these circumstances, the $20 loss will be disallowed for 2001 under Rule 1 because, within a period beginning 30 days before December 13, 2001, and ending 30 days after that date, you bought stock substantially identical to the XX stock you sold.

Rule 2. You cannot deduct a loss on the disposition of less than all of the positions of a straddle (your loss position) to the extent that any unrecognized gain at the close of the tax year in one or more of the following positions is more than the amount of any loss disallowed under Rule 1:

Successor positions,

Offsetting positions to the loss position, or

Offsetting positions to any successor position.

Successor position. A successor position is a position that is or was at any time offsetting to a second position, if both of the following conditions are met.

The second position was offsetting to the loss position that was sold.

The successor position is entered into during a period beginning 30 days before, and ending 30 days after, the sale of the loss position.

Example 1. On November 1, 2001, you entered into offsetting long and short positions in non-section 1256 contracts. On November 12, 2001, you disposed of the long position at a $10 loss. On November 14, 2001, you entered into a new long position (successor position) that is offsetting to the retained short position, but that is not substantially identical to the long position disposed of on November 12, 2001. You held both positions through year end, at which time there was $10 of unrecognized gain in the successor long position and no unrecognized gain in the offsetting short position. Under these circumstances, the entire $10 loss will be disallowed for 2001 because there is $10 of unrecognized gain in the successor long position.

Example 2. The facts are the same as in Example 1, except that at year end you have $4 of unrecognized gain in the successor long position and $6 of unrecognized gain in the offsetting short position. Under these circumstances, the entire $10 loss will be disallowed for 2001 because there is a total of $10 of unrecognized gain in the successor long position and offsetting short position.

Example 3. The facts are the same as in Example 1, except that at year end you have $8 of unrecognized gain in the successor long position and $8 of unrecognized loss in the offsetting short position. Under these circumstances, $8 of the total $10 realized loss will be disallowed for 2001 because there is $8 of unrecognized gain in the successor long position.

Loss carryover. If you have a disallowed loss that resulted from applying Rule 1 and Rule 2, you must carry it over to the next tax year and apply Rule 1 and Rule 2 to that carryover loss. For example, a loss disallowed in 2000 under Rule 1 will not be allowed in 2001, unless the substantially identical stock or securities (which caused the loss to be disallowed in 2000) were disposed of during 2001. In addition, the carryover loss will not be allowed in 2001 if Rule 1 or Rule 2 disallows it.

Ejemplo. The facts are the same as in the example under Rule 1 above, except that on December 31, 2002, you sell the XX stock at a $20 loss and there is $40 of unrecognized gain in the put option. Under these circumstances, you cannot deduct in 2002 either the $20 loss disallowed in 2001 or the $20 loss you incurred for the December 31, 2002, sale of XX stock. Rule 1 does not apply because the substantially identical XX stock was sold during the year and no substantially identical stock or securities were bought within the 61-day period. However, Rule 2 does apply because there is $40 of unrecognized gain in the put option, an offsetting position to the loss positions.

Capital loss carryover. If the sale of a loss position would have resulted in a capital loss, you treat the carryover loss as a capital loss on the date it is allowed, even if you would treat the gain or loss on any successor positions as ordinary income or loss. Likewise, if the sale of a loss position (in the case of section 1256 contracts) would have resulted in a 60% long-term capital loss and a 40% short-term capital loss, you treat the carryover loss under the 60/40 rule, even if you would treat any gain or loss on any successor positions as 100% long-term or short-term capital gain or loss.

Exceptions. The rules for coordinating straddle losses and wash sales do not apply to the following loss situations.

Loss on the sale of one or more positions in a hedging transaction. (Hedging transactions are described under Section 1256 Contracts Marked to Market, earlier.)

Loss on the sale of a loss position in a mixed straddle account. (See the discussion later on the mixed straddle account election.)

Loss on the sale of a position that is part of a straddle consisting only of section 1256 contracts.

Holding Period and Loss Treatment Rules

The holding period of a position in a straddle generally begins no earlier than the date on which the straddle ends (the date you no longer hold an offsetting position). This rule does not apply to any position you held more than 1 year before you established the straddle. But see Exceptions, later.

Ejemplo. On March 6, 2000, you acquired gold. On January 4, 2001, you entered into an offsetting short gold forward contract (nonregulated futures contract). On April 1, 2001, you disposed of the short gold forward contract at no gain or loss. On April 8, 2001, you sold the gold at a gain. Because the gold had been held for 1 year or less before the offsetting short position was entered into, the holding period for the gold begins on April 1, 2001, the date the straddle ended. Gain recognized on the sale of the gold will be treated as short-term capital gain.

Loss treatment. Treat the loss on the sale of one or more positions (the loss position) of a straddle as a long-term capital loss if both of the following are true.

You held (directly or indirectly) one or more offsetting positions to the loss position on the date you entered into the loss position.

You would have treated all gain or loss on one or more of the straddle positions as long-term capital gain or loss if you had sold these positions on the day you entered into the loss position.

Mixed straddles. Special rules apply to a loss position that is part of a mixed straddle and that is a non-section 1256 position. A mixed straddle is a straddle:

That is not part of a larger straddle,

In which all positions are held as capital assets,

In which at least one (but not all) of the positions is a section 1256 contract, and

For which the mixed straddle election (Election A, discussed later) has not been made.

Treat the loss as 60% long-term capital loss and 40% short-term capital loss, if all of the following conditions apply.

Gain or loss from the sale of one or more of the straddle positions that are section 1256 contracts would be considered gain or loss from the sale or exchange of a capital asset.

The sale of no position in the straddle, other than a section 1256 contract, would result in a long-term capital gain or loss.

You have not made a straddle-by-straddle identification election (Election B) or mixed straddle account election (Election C), both discussed later.

Ejemplo. On March 1, 2001, you entered into a long gold forward contract. On July 15, 2001, you entered into an offsetting short gold regulated futures contract. You did not make an election to offset gains and losses from positions in a mixed straddle. On August 9, 2001, you disposed of the long forward contract at a loss. Because the gold forward contract was part of a mixed straddle and the disposition of this non-section 1256 position would not result in long-term capital loss, the loss recognized on the termination of the gold forward contract will be treated as a 60% long-term and 40% short-term capital loss.

Exceptions. The special holding period and loss treatment for straddle positions does not apply to positions that:

Constitute part of a hedging transaction,

Are included in a straddle consisting only of section 1256 contracts, or

Are included in a mixed straddle account (Election C), discussed later.

If you disposed of a position in a mixed straddle and make one of the elections described in the following discussions, report your gain or loss as indicated in those discussions. If you do not make any of the elections, report your gain or loss in Part II of Form 6781. If you disposed of the section 1256 component of the straddle, enter the recognized loss (line 10, column (h)) or your gain (line 12, column (f)) in Part I of Form 6781, on line 1. Do not include it on line 11 or 13 (Part II).

Mixed straddle election (Election A). You can elect out of the marked to market rules, discussed under Section 1256 Contracts Marked to Market, earlier, for all section 1256 contracts that are part of a mixed straddle. Instead, the gain and loss rules for straddles will apply to these contracts. However, if you make this election for an option on a section 1256 contract, the gain or loss treatment discussed earlier under Options will apply, subject to the gain and loss rules for straddles.

You can make this election if:

At least one (but not all) of the positions is a section 1256 contract, and

Each position forming part of the straddle is clearly identified as being part of that straddle on the day the first section 1256 contract forming part of the straddle is acquired.

If you make this election, it will apply for all later years as well. It cannot be revoked without the consent of the IRS. If you made this election, check box A of Form 6781. Do not report the section 1256 component in Part I.

Other elections. You can avoid the 60% long-term capital loss treatment required for a non-section 1256 loss position that is part of a mixed straddle, described earlier, if you choose either of the two following elections to offset gains and losses for these positions.

Election B. Make a separate identification of the positions of each mixed straddle for which you are electing this treatment (the straddle-by-straddle identification method).

Election C. Establish a mixed straddle account for a class of activities for which gains and losses will be recognized and offset on a periodic basis.

These two elections are alternatives to the mixed straddle election. You can choose only one of the three elections. Use Form 6781 to indicate your election choice by checking box A, B, or C, whichever applies.

Straddle-by-straddle identification election (Election B). Under this election, you must clearly identify each position that is part of the identified mixed straddle by the earlier of:

The close of the day the identified mixed straddle is established, or

The time the position is disposed of.

If you dispose of a position in the mixed straddle before the end of the day on which the straddle is established, this identification must be made by the time you dispose of the position. You are presumed to have properly identified a mixed straddle if independent verification is used.

The basic tax treatment of gain or loss under this election depends on which side of the straddle produced the total net gain or loss. If the net gain or loss from the straddle is due to the section 1256 contracts, gain or loss is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Enter the net gain or loss in Part I of Form 6781 and identify the election by checking box B.

If the net gain or loss is due to the non-section 1256 positions, gain or loss is short-term capital gain or loss. Enter the net gain or loss on Part I of Schedule D and identify the election.

For the specific application of the rules of this election, see regulations section 1.1092(b)-3T.

Ejemplo. On April 1, you entered into a non-section 1256 position and an offsetting section 1256 contract. You also made a valid election to treat this straddle as an identified mixed straddle. On April 8, you disposed of the non-section 1256 position at a $600 loss and the section 1256 contract at an $800 gain. Under these circumstances, the $600 loss on the non-section 1256 position will be offset against the $800 gain on the section 1256 contract. The net gain of $200 from the straddle will be treated as 60% long-term capital gain and 40% short-term capital gain because it is due to the section 1256 contract.

Mixed straddle account (Election C). You may elect to establish one or more accounts for determining gains and losses from all positions in a mixed straddle. You must establish a separate mixed straddle account for each separate designated class of activities.

Generally, you must determine gain or loss for each position in a mixed straddle account as of the close of each business day of the tax year. You offset the net section 1256 contracts against the net non-section 1256 positions to determine the "daily account net gain or loss."

If the daily account amount is due to non-section 1256 positions, the amount is treated as short-term capital gain or loss. If the daily account amount is due to section 1256 contracts, the amount is treated as 60% long-term and 40% short-term capital gain or loss.

On the last business day of the tax year, you determine the "annual account net gain or loss" for each account by netting the daily account amounts for that account for the tax year. The "total annual account net gain or loss" is determined by netting the annual account amounts for all mixed straddle accounts that you had established.

The net amounts keep their long-term or short-term classification. However, no more than 50% of the total annual account net gain for the tax year can be treated as long-term capital gain. Any remaining gain is treated as short-term capital gain. Also, no more than 40% of the total annual account net loss can be treated as short-term capital loss. Any remaining loss is treated as long-term capital loss.

The election to establish one or more mixed straddle accounts for each tax year must be made by the due date (without extensions) of your income tax return for the immediately preceding tax year. If you begin trading in a new class of activities during a tax year, you must make the election for the new class of activities by the later of either:

The due date of your return for the immediately preceding tax year (without extensions), or

60 days after you entered into the first mixed straddle in the new class of activities.

You make the election on Form 6781 by checking box C. Attach Form 6781 to your income tax return for the immediately preceding tax year, or file it within 60 days, if that applies. Report the annual account net gain or loss from a mixed straddle account in Part II of Form 6781. In addition, you must attach a statement to Form 6781 specifically designating the class of activities for which a mixed straddle account is established.

For the specific application of the rules of this election, see regulations section 1.1092(b)-4T.

Interest expense and carrying charges relating to mixed straddle account positions. You cannot deduct interest and carrying charges that are allocable to any positions held in a mixed straddle account. Treat these charges as an adjustment to the annual account net gain or loss and allocate them proportionately between the net short-term and the net long-term capital gains or losses.

To find the amount of interest and carrying charges that is not deductible and that must be added to the annual account net gain or loss, apply the rules described in chapter 3 under Interest expense and carrying charges on straddles to the positions held in the mixed straddle account.

Sales of Stock to ESOPs or Certain Cooperatives

If you sold qualified securities held for at least 3 years to an employee stock ownership plan (ESOP) or eligible worker-owned cooperative, you may be able to elect to postpone all or part of the gain on the sale if you bought qualified replacement property (certain securities) within the period that began 3 months before the sale and ended 12 months after the sale. If you make the election, you must recognize gain on the sale only to the extent the proceeds from the sale exceed the cost of the qualified replacement property.

You must reduce the basis of the replacement property by any postponed gain. If you dispose of any replacement property, you may have to recognize all of the postponed gain.

Generally, to qualify for the election the ESOP or cooperative must own at least 30% of the outstanding stock of the corporation that issued the qualified securities. Also, the qualified replacement property must have been issued by a domestic operating corporation.

How to make the election. You must make the election no later than the due date (including extensions) for filing your tax return for the year in which you sold the stock. If your original return was filed on time, you may make the election on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Print "Filed pursuant to section 301.9100-2" at the top of the amended return, and file it at the same address you used for your original return.

How to report and postpone gain. Report the entire gain realized on line 8 of Schedule D. To make the choice to postpone gain, enter "Section 1042 election" in column (a) of the line directly below the line on which you reported the gain. Enter in column (f) the amount of the gain you are postponing or expecting to postpone. Enter it as a loss (in parentheses). If the actual postponed gain is different from the amount you report, file an amended return.

Also attach the following statements.

A "statement of election" that indicates you are making an election under section 1042(a) of the Internal Revenue Code and that includes the following information.

A description of the securities sold, the date of the sale, the amount realized on the sale, and the adjusted basis of the securities.

The name of the ESOP or cooperative to which the qualified securities were sold.

For a sale that was part of a single, interrelated trasaction under a prearranged agreement between taxpayers involving other sales of qualified securities, the names and identifying numbers of the other taxpayers under the agreement and the number of shares sold by the other taxpayers.

A notarized "statement of purchase" describing the qualified replacement property, date of purchase, and the cost of the property and declaring the property to be qualified replacement property for the qualified stock you sold. The statement must have been notarized no later than 30 days after the purchase. If you have not yet purchased the qualified replacement property, you must attach the notarized "statement of purchase" to your income tax return for the year following the election year (or the election will not be valid).

A verified written statement of the domestic corporation whose employees are covered by the ESOP acquiring the securities, or of any authorized officer of the cooperative, consenting to the taxes under sections 4978 and 4979A of the Internal Revenue Code on certain dispositions, and prohibited allocations of the stock purchased by the ESOP or cooperative.

Más información. For details, see section 1042 of the Internal Revenue Code and Temporary Regulations section 1.1042-1T.

Rollover of Gain From Publicly Traded Securities

You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain.

You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property, later. This postpones your gain until the year you dispose of the replacement property.

You qualify to make this choice if you meet all the following tests.

You sell publicly traded securities at a gain. Publicly traded securities are securities traded on an established securities market.

Your gain from the sale is a capital gain.

During the 60-day period beginning on the date of the sale, you buy replacement property. This replacement property must be either common stock or a partnership interest in a specialized small business investment company (SSBIC) . This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993.

Amount of gain recognized If you make the choice described in this section, you must recognize gain only up to the following amount:

The amount realized on the sale, minus

The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities).

If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain.

Limit on gain postponed. The amount of gain you can postpone each year is limited to the smaller of:

$50,000 ($25,000 if you are married and file a separate return), or

$500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years.

Basis of replacement property. You must subtract the amount of postponed gain from the basis of your replacement property.

How to report and postpone gain. Report the entire gain realized from the sale on line 1 or line 8 of Schedule D (Form 1040), whichever is appropriate. To make the choice to postpone gain, enter "SSBIC Rollover" in column (a) of the line directly below the line on which you reported the gain. Enter the amount of gain postponed in column (f). Enter it as a loss (in parentheses).

Also, attach a schedule showing how you figured the postponed gain, the name of the SSBIC in which you purchased common stock or a partnership interest, the date of that purchase, and your new basis in that SSBIC stock or partnership interest.

You must make the choice to postpone gain no later than the due date (including extensions) for filing your tax return for the year in which you sold the securities. If your original return was filed on time, you may make the choice on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Print "Filed pursuant to section 301.9100-2" at the top of the amended return, and file it at the same address you used for your original return.

Your choice is revocable with the consent of the IRS.

Gains on Qualified Small Business Stock

This section discusses two provisions of the law that may apply to gain from the sale or trade of qualified small business stock. You may qualify for a tax-free rollover of all or part of the gain. You may be able to exclude part of the gain from your income.

Qualified small business stock. This is stock that meets all the following tests.

It must be stock in a C corporation.

It must have been originally issued after August 10, 1993.

The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it was issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or less.

When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.

You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as pay for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.

The corporation must have met the active business test . defined next, and must have been a C corporation during substantially all the time you held the stock.

Within the period beginning 2 years before and ending 2 years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.

Within the period beginning 1 year before and ending 1 year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is 5% or less of the total value of all its stock.

For more information about tests 6 and 7, see the regulations under section 1202 of the Internal Revenue Code.

Active business test. A corporation meets this test for any period of time if, during that period, both the following are true.

It was an eligible corporation . defined below.

It used at least 80% (by value) of its assets in the active conduct of at least one qualified trade or business . defined below.

Exception for SSBIC. Any specialized small business investment company (SSBIC) is treated as meeting the active business test. An SSBIC is an eligible corporation that is licensed to operate under section 301(d) of the Small Business Investment Act of 1958 as in effect on May 13, 1993.

Eligible corporation. This is any U. S. corporation other than:

A Domestic International Sales Corporation (DISC) or a former DISC,

A corporation that has made, or whose subsidiary has made, an election under section 936 of the Internal Revenue Code, concerning the Puerto Rico and possession tax credit,

A regulated investment company,

A real estate investment trust (REIT),

A real estate mortgage investment conduit (REMIC),

A financial asset securitization investment trust (FASIT), or

A cooperative.

Qualified trade or business. This is any trade or business other than:

One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services,

One whose principal asset is the reputation or skill of one or more employees,

Any banking, insurance, financing, leasing, investing, or similar business,

Any farming business (including the business of raising or harvesting trees),

Any business involving the production or extraction of products for which percentage depletion can be claimed, or

Any business of operating a hotel, motel, restaurant, or similar business.

Rollover of Gain

You may qualify for a tax-free rollover of capital gain from the sale of qualified small business stock held more than 6 months. This means that, if you buy certain replacement stock and make the choice described in this section, you postpone part or all of your gain.

You postpone the gain by adjusting the basis of the replacement stock as described in Basis of replacement stock, below. This postpones your gain until the year you dispose of the replacement stock.

You can make this choice if you meet all the following tests.

You buy replacement stock during the 60-day period beginning on the date of the sale.

The replacement stock is qualified small business stock.

The replacement stock continues to meet the active business requirement for small business stock for at least the first 6 months after you buy it.

Amount of gain recognized. If you make the choice described in this section, you must recognize the capital gain only up to the following amount:

The amount realized on the sale, minus

The cost of any qualified small business stock you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of qualified small business stock).

If this amount is less than the amount of your capital gain, you can postpone the rest of that gain. If this amount equals or is more than the amount of your capital gain, you must recognize the full amount of your gain.

Basis of replacement stock. You must subtract the amount of postponed gain from the basis of your replacement stock.

Holding period of replacement stock. Your holding period for the replacement stock includes your holding period for the stock sold, except for the purpose of applying the 6-month holding period requirement for choosing to roll over the gain on its sale.

Pass-through entity. A pass-through entity (a partnership, S corporation, or mutual fund or other regulated investment company) also may make the choice to postpone gain. The benefit of the postponed gain applies to your share of the entity's postponed gain if you held an interest in the entity for the entire period the entity held the stock.

If a pass-through entity sold qualified small business stock held for more than 6 months and you held an interest in the entity for the entire period the entity held the stock, you also may choose to postpone gain if you, rather than the pass-through entity, buy the replacement stock within the 60-day period.

How to report gain. Report the entire gain realized from the sale on line 1 or line 8 of Schedule D (Form 1040), whichever is appropriate. To make the choice to postpone the gain, enter "Section 1045 Rollover" in column (a) of the line directly below the line on which you reported the gain. Enter the amount of gain postponed in column (f). Enter it as a loss (in parentheses).

You must make the choice to postpone gain no later than the due date (including extensions) for filing your tax return for the year in which the stock was sold. If your original return was filed on time, you may make the choice on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Print "Filed pursuant to section 301.9100-2" at the top of the amended return, and file it at the same address you used for your original return.

Section 1202 Exclusion

You generally can exclude from your income one-half of your gain from the sale or trade of qualified small business stock held by you for more than 5 years. The taxable part of your gain equal to your section 1202 exclusion is a 28% rate gain. See Capital Gain Tax Rates, later.

SSBIC stock. If the stock is specialized small business investment company (SSBIC) stock that you bought as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock by the amount of any postponed gain on that earlier sale, as explained earlier under Rollover of Gain From Publicly Traded Securities. But do not reduce your basis by that amount when figuring your section 1202 exclusion.

Limit on eligible gain. The amount of your gain from the stock of any one issuer that is eligible for the exclusion in 2001 is limited to the greater of:

Ten times your basis in all qualified stock of the issuer that you sold or exchanged during the year, or

$10 million ($5 million for married individuals filing separately) minus the amount of gain from the stock of the same issuer that you used to figure your exclusion in earlier years.

How to report gain. Report the entire gain realized from the sale in column (f) of line 8 of Schedule D (Form 1040). Report an amount equal to the excluded gain in column (g). Directly below the line on which you report the gain, enter "Section 1202 exclusion" in column (a) and enter the amount of the exclusion in column (f). Enter it as a loss (in parentheses).

Más información. For information about additional requirements that may apply, see section 1202 of the Internal Revenue Code.

Rollover of Gain From Sale of Empowerment Zone Assets

You may qualify for a tax-free rollover of certain gains from the sale of qualified empowerment zone assets. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of the recognition of your gain.

You qualify to make this choice if you meet all the following tests.

You hold a qualified empowerment zone asset for more than 1 year and sell it at a gain.

Your gain from the sale is a capital gain.

During the 60-day period beginning on the date of the sale, you buy a replacement qualified empowerment zone asset in the same zone as the asset sold.

Qualified empowerment zone asset. This means certain stock or partnership interests in an enterprise zone business. It also includes certain tangible property used in an enterprise zone business. You must have acquired the asset after December 21, 2000.

Amount of gain recognized. If you make the choice described in this section, you must recognize gain only up to the following amount:

The amount realized on the sale, minus

The cost of any qualified empowerment zone asset that you bought during the 60-day period beginning on the date of sale (and did not previously take into account in rolling over gain on an earlier sale of qualified empowerment zone assets).

If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. If this amount is less than the amount of your gain, you can postpone the rest of your gain by adjusting the basis of your replacement property as described next.

Basis of replacement property. You must subtract the amount of postponed gain from the basis of the qualified empowerment zone assets you bought as replacement property.

How to report and postpone gain. Report the entire gain realized from the sale on line 8 of Schedule D (Form 1040). To make the choice to postpone gain, enter "Section 1397B Rollover" in column (a) of the line directly below the line on which you reported the gain. Enter the amount of gain postponed in column (f). Enter it as a loss (in parentheses).

Also attach a statement describing:

How you figured the postponed gain,

The name of the empowerment zone(s) in which the property sold and purchased is located,

The qualified empowerment zone asset(s) purchased, including the date of purchase, and

Your adjusted basis in the asset(s).

Más información. For more information about empowerment zones, see Publication 954. Tax Incentives for Empowerment Zones and Other Distressed Communities. For more information about this rollover of gain, see section 1397B of the Internal Revenue Code.

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Statements of Financial Accounting Standards

Statement No. 159 (Superseded) The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (Issue Date 02/07) [As Amended] [As Issued] [Summary] [Status]

Statement No. 158 (Superseded) Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (Issue Date 09/06) [As Amended] [As Issued] [Summary] [Status]

Statement No. 132 (revised 2003) (Superseded) Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106 (Issue Date 12/03) [As Amended] [As Issued] [Summary] [Status]

Statement No. 147 (Superseded) Acquisitions of Certain Financial Institutions—an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 (Issue Date 10/02) [As Amended] [As Issued] [Summary] [Status]

Statement No. 140 (Superseded) Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125 (Issue Date 9/00) [As Amended] [As Issued] [Summary] [Status]

Statement No. 138 (Superseded) Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No. 133 (Issue Date 6/00) [As Amended] [As Issued] [Status]

Statement No. 137 (Superseded) Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133—an amendment of FASB Statement No. 133 (Issue Date 6/99) [As Amended] [As Issued] [Status]

Statement No. 134 (Superseded) Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise—an amendment of FASB Statement No. 65 (Issue Date 10/98) [As Amended] [As Issued] [Status]

Statement No. 132 (revised 2003) (Superseded) Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106 (Issue Date 12/03) [As Amended] [As Issued] [Summary] [Status]

Statement No. 127 (Superseded) Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125—an amendment to FASB Statement No. 125 (Issue Date 12/96) [As Issued] [Summary] [Status]

Statement No. 120 (Superseded) Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts—an amendment of FASB Statements 60, 97, and 113 and Interpretation No. 40 (Issue Date 1/95) [As Amended] [As Issued] [Summary] [Status]

Statement No. 118 (Superseded) Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures—an amendment of FASB Statement No. 114 (Issue Date 10/94) [As Amended] [As Issued] [Summary] [Status]

Statement No. 108 (Superseded) Accounting for Income Taxes-Deferral of the Effective Date of FASB Statement No. 96—an amendment of FASB Statement No. 96 (Issue Date 12/91) [As Issued] [Summary] [Status]

Statement No. 105 (Superseded) Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk (Issue Date 3/90) [As Issued] [Summary] [Status]

Statement No. 104 (Superseded) Statement of Cash Flows-Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions—an amendment of FASB Statement No. 95 (Issue Date 12/89) [As Amended] [As Issued] [Summary] [Status]

Statement No. 103 (Superseded) Accounting for Income Taxes-Deferral of the Effective Date of FASB Statement No. 96—an amendment of FASB Statement No. 96 (Issue Date 12/89) [As Issued] [Summary] [Status]

Statement No. 102 (Superseded) Statement of Cash Flows-Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale—an amendment of FASB Statement No. 95 (Issue Date 2/89) [As Amended] [As Issued] [Summary] [Status]

Statement No. 100 (Superseded) Accounting for Income Taxes-Deferral of the Effective Date of FASB Statement No. 96—an amendment of FASB Statement No. 96 (Issue Date 12/88) [As Issued] [Summary] [Status]

Statement No. 99 (Superseded) Deferral of the Effective Date of Recognition of Depreciation by Not-for-Profit Organizations—an amendment of FASB Statement No. 93 (Issue Date 9/88) [As Amended] [As Issued] [Summary] [Status]

Statement No. 98 (Superseded) Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases—an amendment of FASB Statements No. 13, 66, and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No. 79-11 (Issue Date 5/88) [As Amended] [As Issued] [Summary] [Status]

Statement No. 97 (Superseded) Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (Issue Date 12/87) [As Amended] [As Issued] [Summary] [Status]

Statement No. 94 (Superseded) Consolidation of All Majority-owned Subsidiaries—an amendment of ARB No. 51, with related amendments of APB Opinion No. 18 and ARB No. 43, Chapter 12 (Issue Date 10/87) [As Amended] [As Issued] [Summary] [Status]

Statement No. 91 (Superseded) Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17 (Issue Date 12/86) [As Amended] [As Issued] [Summary] [Status]

Statement No. 90 (Superseded) Regulated Enterprises-Accounting for Abandonments and Disallowances of Plant Costs—an amendment of FASB Statement No. 71 (Issue Date 12/86) [As Amended] [As Issued] [Summary] [Status]

Statement No. 88 (Superseded) Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (Issue Date 12/85) [As Amended] [As Issued] [Summary] [Status]

Statement No. 85 (Superseded) Yield Test for Determining whether a Convertible Security is a Common Stock Equivalent—an amendment of APB Opinion No. 15 (Issue Date 3/85) [As Issued] [Summary] [Status]

Statement No. 83 (Superseded) Designation of AICPA Guides and Statement of Position on Accounting by Brokers and Dealers in Securities, by Employee Benefit Plans, and by Banks as Preferable for Purposes of Applying APB Opinion 20—an amendment FASB Statement No. 32 and APB Opinion No. 30 and a rescission of FASB Interpretation No. 10 (Issue Date 3/85) [As Issued] [Summary] [Status]

Statement No. 82 (Superseded) Financial Reporting and Changing Prices: Elimination of Certain Disclosures—an amendment of FASB Statement No. 33 (Issue Date 11/84) [As Issued] [Summary] [Status]

Statement No. 79 (Superseded) Elimination of Certain Disclosures for Business Combinations by Nonpublic Enterprises—an amendment of APB Opinion No. 16 (Issue Date 2/84) [As Amended] [As Issued] [Summary] [Status]

Statement No. 75 (Superseded) Deferral of the Effective Date of Certain Accounting Requirements for Pension Plans of State and Local Governmental Units—an amendment of FASB Statement No. 35 (Issue Date 11/83) [As Issued] [Summary] [Status]

Statement No. 73 (Superseded) Reporting a Change in Accounting for Railroad Track Structures—an amendment of APB Opinion No. 20 (Issue Date 8/83) [As Issued] [Summary] [Status]

Statement No. 72 (Superseded) Accounting for Certain Acquisitions of Banking or Thrift Institutions—an amendment of APB Opinion No. 17, an interpretation of APB Opinions 16 and 17, and an amendment of FASB Interpretation No. 9 (Issue Date 2/83) [As Amended] [As Issued] [Summary] [Status]

Statement No. 70 (Superseded) Financial Reporting and Changing Prices: Foreign Currency Translation—an amendment of FASB Statement No. 33 (Issue Date 12/82) [As Issued] [Summary] [Status]

Statement No. 64 (Superseded) Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements—an amendment of FASB Statement No. 4 (Issue Date 9/82) [As Issued] [Summary] [Status]

Statement No. 62 (Superseded) Capitalization of Interest Cost in Situations Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants—an amendment of FASB Statement No. 34 (Issue Date 6/82) [As Amended] [As Issued] [Summary] [Status]

Statement No. 59 (Superseded) Deferral of the Effective Date of Certain Accounting Requirements for Pension Plans of State and Local Governmental Units—an amendment of FASB Statement No. 35 (Issue Date 4/82) [As Issued] [Summary] [Status]

Statement No. 58 (Superseded) Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method—an amendment of FASB Statement No. 34 (Issue Date 4/82) [As Amended] [As Issued] [Summary] [Status]

Statement No. 56 (Superseded) Designation of AICPA Guide and Statement of Position (SOP) 81-1 on Contractor Accounting and SOP 81-2 concerning Hospital-Related Organizations as Preferable for Purposes of Applying APB Opinion 20—an amendment of FASB Statement No. 32 (Issue Date 2/82) [As Issued] [Summary] [Status]

Statement No. 55 (Superseded) Determining whether a Convertible Security is a Common Stock Equivalent—an amendment of APB Opinion No. 15 (Issue Date 2/82) [As Issued] [Summary] [Status]

Statement No. 54 (Superseded) Financial Reporting and Changing Prices: Investment Companies—an amendment of FASB Statement No. 33 (Issue Date 1/82) [As Issued] [Summary] [Status]

Statement No. 44 (Superseded) Accounting for Intangible Assets of Motor Carriers—an amendment of Chapter 5 of ARB No. 43 and an interpretation of APB Opinions 17 and 30 (Issue Date 12/80) [As Issued] [Summary] [Status]

Statement No. 41 (Superseded) Financial Reporting and Changing Prices: Specialized Assets-Income-Producing Real Estate—a supplement to FASB Statement No. 33 (Issue Date 11/80) [As Issued] [Summary] [Status]

Statement No. 40 (Superseded) Financial Reporting and Changing Prices: Specialized Assets-Timberlands and Growing Timber—a supplement to FASB Statement No. 33 (Issue Date 11/80) [As Issued] [Summary] [Status]

Statement No. 39 (Superseded) Financial Reporting and Changing Prices: Specialized Assets-Mining and Oil and Gas—a supplement to FASB Statement No. 33 (Issue Date 10/80) [As Issued] [Summary] [Status]

Statement No. 32 (Superseded) Specialized Accounting and Reporting Principles and Practices in AICPA Statements of Position and Guides on Accounting and Auditing Matters—an amendment of APB Opinion No. 20 (Issue Date 9/79) [As Issued] [Summary] [Status]

Statement No. 27 (Superseded) Classification of Renewals or Extensions of Existing Sales-Type or Direct Financing Leases—an amendment of FASB Statement No. 13 (Issue Date 5/79) [As Amended] [As Issued] [Summary] [Status]

Statement No. 25 Suspension of Certain Accounting Requirements for Oil and Gas Producing Companies—an amendment of FASB Statement No. 19 (Issue Date 2/79) [As Amended] [As Issued] [Summary] [Status]

Statement No. 24 (Superseded) Reporting Segment Information in Financial Statements That Are Presented in Another Enterprise's Financial Report—an amendment of FASB Statement No. 14 (Issue Date 12/78) [As Issued] [Summary] [Status]

Statement No. 22 (Superseded) Changes in the Provisions of Lease Agreements Resulting from Refundings of Tax-Exempt Debt—an amendment of FASB Statement No. 13 (Issue Date 6/78) [As Amended] [As Issued] [Summary] [Status]

Statement No. 21 (Superseded) Suspension of the Reporting of Earnings per Share and Segment Information by Nonpublic Enterprises—an amendment of APB Opinion No. 15 and FASB Statement No. 14 (Issue Date 4/78) [As Issued] [Summary] [Status]

Statement No. 18 (Superseded) Financial Reporting for Segments of a Business Enterprise: Interim Financial Statements—an amendment of FASB Statement No. 14 (Issue Date 11/77) [As Issued] [Summary] [Status]

Statement No. 9 (Superseded) Accounting for Income Taxes: Oil and Gas Producing Companies—an amendment of APB Opinions No. 11 and 23 (Issue Date 10/75) [As Issued] [Summary] [Status]

Statement No. 8 (Superseded) Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements (Issue Date 10/75) [As Issued] [Summary] [Status]

Statement No. 3 (Superseded) Reporting Accounting Changes in Interim Financial Statements—an amendment of APB Opinion No. 28 (Issue Date 12/74) [As Issued] [Summary] [Status]

Interpretation 45 (Superseded) Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (Issue Date 11/02) [As Amended] [As Issued] [Summary] [Status]

Interpretation 42 (Superseded) Accounting for Transfers of Assets in Which a Not-for-Profit Organization Is Granted Variance Power—an interpretation of FASB Statement No. 116 (Issue Date 9/96) [As Issued] [Summary] [Status]

Interpretation 41 (Superseded) Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements—an interpretation of APB Opinion No. 10 and a modification of FASB Interpretation No. 39 (Issue Date 12/94) [As Amended] [As Issued] [Summary] [Status]

Interpretation 40 (Superseded) Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises—an interpretation of FASB Statements No. 12, 60, 97, and 113 (Issue Date 4/93) [As Amended] [As Issued] [Summary] [Status]

Interpretation 38 (Superseded) Determining the Measurement Date for Stock Option, Purchase, and Award Plans Involving Junior Stock—an interpretation of APB Opinion No. 25 (Issue Date 8/84) [As Amended] [As Issued] [Summary] [Status]

Interpretation 37 (Superseded) Accounting for Translation Adjustments upon Sale of Part of an Investment in a Foreign Entity—an interpretation of FASB Statement No. 52 (Issue Date 7/83) [As Amended] [As Issued] [Summary] [Status]

Interpretation 36 (Superseded) Accounting for Exploratory Wells in Progress at the End of a Period—an interpretation of FASB Statement No. 19 (Issue Date 10/81) [As Amended] [As Issued] [Summary] [Status]

Interpretation 35 (Superseded) Criteria for Applying the Equity Method of Accounting for Investments in Common Stock—an interpretation of APB Opinion No. 18 (Issue Date 5/81) [As Amended] [As Issued] [Summary] [Status]

Interpretation 34 (Superseded) Disclosure of Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statement No. 5 (Issue Date 3/81) [As Issued] [Summary] [Status]

Interpretation 33 (Superseded) Applying FASB Statement No. 34 to Oil and Gas Producing Operations Accounted for by the Full Cost Method—an interpretation of FASB Statement No. 34 (Issue Date 8/80) [As Amended] [As Issued] [Summary] [Status]

Interpretation 32 (Superseded) Application of Percentage Limitations in Recognizing Investment Tax Credit—an interpretation of APB Opinions 2, 4, and 11 (Issue Date 3/80) [As Issued] [Summary] [Status]

Interpretation 31 (Superseded) Treatment of Stock Compensation Plans in EPS Computations—an interpretation of APB Opinion No. 15 and a modification of FASB Interpretation No. 28 (Issue Date 2/80) [As Issued] [Summary] [Status]

Interpretation 30 (Superseded) Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary Assets—an interpretation of APB Opinion No. 29 (Issue Date 9/79) [As Amended] [As Issued] [Summary] [Status]

Interpretation 29 (Superseded) Reporting Tax Benefits Realized on Disposition of Investments in Certain Subsidiaries and Other lnvestees—an interpretation of APB Opinions No. 23 and 24 (Issue Date 2/79) [As Issued] [Summary] [Status]

Interpretation 28 (Superseded) Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an interpretation of APB Opinions No. 15 and 25 (Issue Date 12/78) [As Amended] [As Issued] [Summary] [Status]

Interpretation 26 (Superseded) Accounting for Purchase of a Leased Asset by the Lessee during the Term of the Lease—an interpretation of FASB Statement No. 13 (Issue Date 9/78) [As Amended] [As Issued] [Summary] [Status] Interpretation 25 (Superseded) Accounting for an Unused Investment Tax Credit—an interpretation of APB Opinions No. 2, 4, 11, and 16 (Issue Date 9/78) [As Issued] [Summary] [Status]

Interpretation 23 (Superseded) Leases of Certain Property Owned by a Governmental Unit or Authority—an interpretation of FASB Statement No. 13 (Issue Date 8/78) [As Amended] [As Issued] [Summary] [Status]

Interpretation 22 (Superseded) Applicability of Indefinite Reversal Criteria to Timing Differences—an interpretation of APB Opinions No. 11 and 23 (Issue Date 4/78) [As Issued] [Status]

Interpretation 20 (Superseded) Reporting Accounting Changes under AICPA Statements of Position—an interpretation of APB Opinion No. 20 (Issue Date 11/77) [As Issued] [Status]

Interpretation 19 (Superseded) Lessee Guarantee of the Residual Value of Leased Property—an interpretation of FASB Statement No. 13 (Issue Date 10/77) [As Amended] [As Issued] [Status]

Interpretation 17 (Superseded) Applying the Lower of Cost or Market Rule in Translated Financial Statements—an interpretation of FASB Statement No. 8 (Issue Date 2/77) [As Issued] [Status]

Interpretation 16 (Superseded) Clarification of Definitions and Accounting for Marketable Equity Securities That Become Nonmarketable—an interpretation of FASB Statement No. 12 (Issue Date 2/77) [As Issued] [Status]

Interpretation 15 (Superseded) Translation of Unamortized Policy Acquisition Costs by a Stock Life Insurance Company—an interpretation of FASB Statement No. 8 (Issue Date 9/76) [As Issued] [Status]

Interpretation 13 (Superseded) Consolidation of a Parent and Its Subsidiaries Having Different Balance Sheet Dates—an interpretation of FASB Statement No. 12 (Issue Date 9/76) [As Issued] [Status]

Interpretation 12 (Superseded) Accounting for Previously Established Allowance Accounts—an interpretation of FASB Statement No. 12 (Issue Date 9/76) [As Issued] [Status]

Interpretation 11 (Superseded) Changes in Market Value after the Balance Sheet Date—an interpretation of FASB Statement No. 12 (Issue Date 9/76) [As Issued] [Status]

Interpretation 10 (Superseded) Application of FASB Statement No. 12 to Personal Financial Statements—an interpretation of FASB Statement No. 12 (Issue Date 9/76) [As Issued] [Status]

Interpretation 9 (Superseded) Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method—an interpretation of APB Opinions No. 16 and 17 (Issue Date 2/76) [As Amended] [As Issued] [Status]

Interpretation 8 (Superseded) Classification of a Short-Term Obligation Repaid Prior to Being Replaced by a Long-Term Security—an interpretation of FASB Statement No. 6 (Issue Date 1/76) [As Amended] [As Issued] [Status]

Interpretation 7 (Superseded) Applying FASB Statement No. 7 in Financial Statements of Established Operating Enterprises—an interpretation of FASB Statement No. 7 (Issue Date 10/75) [As Amended] [As Issued] [Status]

Interpretation 6 (Superseded) Applicability of FASB Statement No. 2 to Computer Software—an interpretation of FASB Statement No. 2 (Issue Date 2/75) [As Amended] [As Issued] [Status]

Interpretation 5 (Superseded) Applicability of FASB Statement No. 2 to Development Stage Enterprises—an interpretation of FASB Statement No. 2 (Issue Date 2/75) [As Issued] [Status]

Interpretation 4 (Superseded) Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method—an interpretation of FASB Statement No. 2 (Issue Date 2/75) [As Amended] [As Issued] [Status]

Interpretation 3 (Superseded) Accounting for the Cost of Pension Plans Subject to the Employee Retirement Income Security Act of 1974—an interpretation of APB Opinion No. 8 (Issue Date 12/74) [As Issued] [Status]

Interpretation 2 (Superseded) Imputing Interest on Debt Arrangements Made under the Federal Bankruptcy Act—an interpretation of APB Opinion No. 21 (Issue Date 6/74) [As Issued] [Status]

FSP APB 14-1—Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (Superseded) (Issue Date May 9, 2008) [Full Text] [Status]

FSP APB 18-1—Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence (Superseded) (Issue Date July 12, 2005) [Full Text] [Status]

FSP FAS 13-1—Accounting for Rental Costs Incurred during a Construction Period (Superseded) (Issue Date October 6, 2005) [Full Text] [Status]

FSP FAS 13-2—Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (Superseded) (Issue Date July 13, 2006) [Full Text] [Status]

FSP FAS 97-1—Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability (Superseded) (Issue Date June 18, 2004) [Full Text] [Status]

FSP FAS 106-2—Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Superseded) (Issue Date May 19, 2004) [Full Text] [Status]

FSP FAS 107-1 and APB 28-1—Interim Disclosures about Fair Value of Financial Instruments (Superseded) (Issue Date April 9, 2009) [Full Text] [Status]

FSP FAS 109-1—Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (Superseded) (Issue Date December 21, 2004) [Full Text] [Status]

FSP FAS 109-2—Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (Superseded) (Issue Date December 21, 2004) [Full Text] [Status]

FSP FAS 115-1 and FAS 124-1—The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (Superseded) (Issue Date November 3, 2005) [Full Text] [Status]

FSP FAS 115-2 and FAS 124-2—Recognition and Presentation of Other-Than-Temporary Impairments (Superseded) (Issue Date April 9, 2009) [Full Text] [Status]

FSP FAS 117-1—Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds (Superseded) (Issue Date August 06, 2008) [Full Text] [Status]

FSP FAS 123(R)-1—Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R) (Superseded) (Issue Date August 31, 2005) [Full Text] [Status]

FSP FAS 123(R)-2—Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R) (Superseded) (Issue Date October 18, 2005) [Full Text] [Status]

FSP FAS 123(R)-3—Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (Superseded) (Issue Date November 10, 2005) [Full Text] [Status]

FSP FAS 123(R)-4—Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event (Superseded) (Issue Date February 3, 2006) [Full Text] [Status]

FSP FAS 123(R)-5—Amendment of FASB Staff Position FAS 123(R)-1 (Superseded) (Issue Date October 10, 2006) [Full Text] [Status]

FSP FAS 123(R)-6—Technical Corrections of FASB Statement No. 123(R) (Superseded) (Issue Date October 20, 2006) [Full Text] [Status]

FSP FAS 126-1—Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities (Superseded) (Issue Date October 25, 2006) [Full Text] [Status]

FSP FAS 129-1—Disclosure Requirements under FASB Statement No. 129 Relating to Contingently Convertible Securities (Superseded) (Issue Date April 9, 2004) [Full Text] [Status]

FSP FAS 132(R)-1—Employers’ Disclosures about Postretirement Benefit Plan Assets (Superseded) (Issue Date December 30, 2008) [Full Text] [Status]

FSP FAS 133-1 and FIN 45-4—Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (Superseded) (Issue Date September 12, 2008) [Full Text] [Status]

FSP FAS 140-1—Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under FASB Statement No. 140 (Superseded) (Issue Date April 14, 2003) [Full Text] [Status]

FSP FAS 140-2—Clarification of the Application of Paragraphs 40(b) and 40(c) of FASB Statement No. 140 (Superseded) (Issue Date November 9, 2005) [Full Text] [Status]

FSP FAS 140-3—Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (Superseded) (Issue Date February 20, 2008) [As Amended] [Full Text] [Status]

FSP FAS 140-4 and FIN 46(R)-8—Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (Superseded) (Issue Date December 11, 2008) [Full Text] [Status]

FSP FAS 141-1 and FAS 142-1—Interaction of FASB Statements No. 141 and No. 142 and EITF Issue No. 04-2 (Superseded) (Issue Date April 30, 2004) [As Amended] [Full Text] [Status]

FSP FAS 141(R)-1—Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (Superseded) (Issue Date April 1, 2009) [Full Text] [Status]

FSP FAS 142-2—Application of FASB Statement No. 142 to Oil - and Gas-Producing Entities (Superseded) (Issue Date September 2, 2004) [Full Text] [Status]

FSP FAS 142-3—Determination of the Useful Life of Intangible Assets (Superseded) (Issue Date April 25, 2008) [Full Text] [Status]

FSP FAS 143-1—Accounting for Electronic Equipment Waste Obligations (Superseded) (Issue Date June 8, 2005) [Full Text] [Status]

FSP FAS 144-1—Determination of Cost Basis for Foreclosed Assets under FASB Statement No. 15 and the Measurement of Cumulative Losses Previously Recognized under Paragraph 37 of FASB Statement No. 144 (Superseded) (Issue Date November 11, 2003) [Full Text] [Status]

FSP FAS 146-1—Determining Whether a One-Time Termination Benefit Offered in Connection with an Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit Arrangement (Superseded) (Issue Date September 3, 2003) [Full Text] [Status]

FSP FAS 150-1—Issuer's Accounting for Freestanding Financial Instruments Composed of More Than One Option or Forward Contract Embodying Obligations under FASB Statement No. 150 (Superseded) (Issue Date October 16, 2003) [Full Text] [Status]

FSP FAS 150-2—Accounting for Mandatorily Redeemable Shares Requiring Redemption by Payment of an Amount that Differs from the Book Value of Those Shares under FASB Statement No. 150 (Superseded) (Issue Date October 16, 2003) [Full Text] [Status]

FSP FAS 150-3—Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150 (Superseded) (Issue Date November 7, 2003) [As Amended] [Full Text] [Status]

FSP FAS 150-4—Issuers' Accounting for Employee Stock Ownership Plans under FASB Statement No. 150 (Superseded) (Issue Date November 7, 2003) [Full Text [Status]

FSP FAS 150-5—Issuer's Accounting under Statement 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable (Superseded) (Issue Date June 29, 2005) [Full Text] [Status]

FSP FAS 157-1—Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (Superseded) (Issue Date February 14, 2008) [As Amended] [Full Text] [Status]

FSP FAS 157-3—Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (Superseded) (Issue Date October 10, 2008) [Full Text] [Status]

FSP FAS 157-4—Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (Superseded) (Issue Date April 9, 2009) [Full Text] [Status]

FSP FAS 158-1—Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides (257 pages) (Superseded) (Issue Date February 21, 2007) [Full Text] [Status]

FSP FIN 45-1—Accounting for Intellectual Property Infringement Indemnifications under FASB Interpretation No. 45 (Superseded) (Issue Date June 11, 2003) [Full Text] [Status]

FSP FIN 45-2—Whether FASB Interpretation No. 45 Provides Support for Subsequently Accounting for a Guarantor's Liability at Fair Value (Superseded) (Issue Date December 10, 2003) [Full Text] [Status]

FSP FIN 45-3—Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (Superseded) (Issue Date November 10, 2005) [Full Text] [Status]

FSP FIN 46(R)-1—Reporting Variable Interests in Specified Assets of Variable Interest Entities as Separate Variable Interest Entities under Paragraph 13 of FASB Interpretation No. 46 (revised December 2003) (Superseded) (Superseded) (Issue Date February 12, 2004) [Full Text] [Status]

FSP FIN 46(R)-2—Calculation of Expected Losses under FASB Interpretation No. 46 (revised December 2003) (Superseded) (Issue Date February 12, 2004) [Full Text] [Status]

FSP FIN 46(R)-3—Evaluating Whether, as a Group, the Holders of the Equity Investment at Risk Lack the Direct or Indirect Ability to Make Decisions about an Entity's Activities through Voting Rights or Similar Rights under FASB Interpretation No. 46 (revised December 2003) (Superseded) (Issue Date February 12, 2004) [Full Text] [Status]

FSP FIN 46(R)-4—Technical Correction of FASB Interpretation No. 46 (revised December 2003) Relating to Its Effects on Question No. 12 of EITF Issue No. 96-21 (Superseded) (Issue Date April 30, 2004) [Full Text] [Status]

FSP FIN 46(R)-5—Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003) (This FSP is applicable to both nonpublic and public reporting enterprises. This issue commonly arises in leasing arrangements among related parties, and in other types of arrangements involving related parties and previously unrelated parties.) (Superseded) (Issue Date March 3, 2005) [Full Text] [Status]

FSP FIN 46(R)-6—Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) (Superseded) (Issue Date April 13, 2006) [Full Text] [Status]

FSP FIN 46(R)-7—Application of FASB Interpretation No. 46(R) to Investment Companies (Superseded) (Issue Date May 11, 2007) [Full Text] [Status]

FSP FIN 48-1—Definition of Settlement in FASB Interpretation No. 48 (Issue Date May 2, 2007) [Full Text] [Status]

FSP FIN 48-2—Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises (Superseded) (Issue Date February 1, 2008) [As Amended] [Full Text] [Status]

FSP FIN 48-3—Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises (Superseded) (Issue Date December 30, 2008) [Full Text] [Status]

FSP FTB 85-4-1—Accounting for Life Settlement Contracts by Third-Party Investors (Superseded) (Issue Date March 27, 2006) [Full Text] [Status]

FSP EITF 85-24-1—Application of EITF Issue No. 85-24 When Cash for the Right to Future Distribution Fees for Shares Previously Sold Is Received from Third Parties (Superseded) (Issue Date March 11, 2005) [Full Text] [Status]

FSP EITF 99-20-1—Amendments to the Impairment Guidance of EITF Issue No. 99-20 (Superseded) (Issue Date January 12, 2009) [Full Text] [Status]

FSP EITF 00-19-2—Accounting for Registration Payment Arrangements (Superseded) (Issue Date December 21, 2006) [Full Text] [Status]

FSP EITF 03-6-1—Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (Superseded) (Issue Date June 16, 2008) [Full Text] [Status]

FSP AAG INV-1 and SOP 94-4-1—Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans (Superseded) (Issue Date December 29, 2005) [Full Text] [Status]

FSP AUG AIR-1—Accounting for Planned Major Maintenance Activities (Superseded) (Issue Date September 8, 2006) [Full Text] [Status]

FSP SOP 78-9-1—Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5 (Issue Date July 14, 2005) [Full Text] [Status]

FSP SOP 90-7-1—An Amendment of AICPA Statement of Position 90-7 (Superseded) (Issue Date April 24, 2008) [Full Text] [Status]

FSP SOP 94-3-1 and AAG HCO-1—Omnibus Changes to Consolidation and Equity Method Guidance for Not-for-Profit Organizations (Superseded) (Issue Date May 19, 2008) [Full Text] [Status]

FSP SOP 94-6-1—Terms of Loan Products That May Give Rise to a Concentration of Credit Risk (Superseded) (Issue Date December 19, 2005) [Full Text] [Status]

FSP FAS 106-1—Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Superseded) (Issue Date January 12, 2004) (Superseded by FSP FAS 106-2, paragraph 2) [Full Text] [Status]

FSP FIN 46-1—Applicability of FASB Interpretation No. 46 to Entities Subject to the AICPA Audit and Accounting Guide, Health Care Organizations (Superseded) (Issue Date July 24, 2003) (Updated as of December 24, 2003) [Full Text] [Status]

FSP FIN 46-2—Reporting Variable Interests in Specified Assets of Variable Interest Entities as Separate Variable Interest Entities under Paragraph 13 of FASB Interpretation No. 46 (Superseded) (Issue Date July 24, 2003) (Updated as of December 24, 2003) [Full Text] [Status]

FSP FIN 46-3—Application of Paragraph 5 of FASB Interpretation No. 46 When Variable Interests in Specified Assets of a Variable Interest Entity Are Not Considered Interests in the Entity under Paragraph 12 of Interpretation 46 (Superseded) (Issue Date July 24, 2003) (Updated as of December 24, 2003) [Full Text] [Status]

FSP FIN 46-4—Transition Requirements for Initial Application of FASB Interpretation No. 46 (Superseded) (Issue Date July 24, 2003) (Updated as of December 24, 2003) [Full Text] [Status]

FSP FIN 46-5—Calculation of Expected Losses under FASB Interpretation No. 46 (Superseded) (Issue Date July 24, 2003) (Updated as of December 24, 2003) [Full Text] [Status]

FSP FIN 46-6—Effective Date of FASB Interpretation No. 46 (Superseded) (Issue Date October 9, 2003) (Updated December 24, 2003) [Full Text] [Status]

FSP FIN 46-7—Exclusion of Certain Decision Maker Fees from Paragraph 8(c) of FASB Interpretation No. 46 (Superseded) (Issue Date November 26, 2003) (Updated February 12, 2004) [Full Text] [Status]

FSP FIN 46-8—Evaluating Whether as a Group the Holders of the Equity Investment at Risk Lack the Direct or Indirect Ability to Make Decisions about an Entity's Activities through Voting Rights or Similar Rights under FASB Interpretation No. 46 (Superseded) (Issue Date December 19, 2003) (Updated as of December 24, 2003) [Full Text] [Status]

FSP EITF 00-19-1—Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation (Superseded) (Issue Date May 31, 2005) (Superseded by FSP FAS 123(R)-1) [Full Text] [Status]

FSP EITF 03-1-1—Effective Date of Paragraphs 10–20 of EITF Issue No. 03-1 (Superseded) (September 30, 2004) (Superseded by FSP FAS 115-1/124-1, paragraph 5) [Full Text] [Status]

Technical Bulletin 01-1 (Superseded) Effective Date for Certain Financial Institutions of Certain Provisions of Statement 140 Related to the Isolation of Transferred Financial Assets (Issue Date 7/01) [As Amended] [As Issued] [Status]

Technical Bulletin 97-1 (Superseded) Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option (Issue Date 12/97) [As Amended] [As Issued] [Status]

Technical Bulletin 94-1 (Superseded) Application of Statement 115 to Debt Securities Restructured in a Troubled Debt Restructuring (Issue Date 4/94) [As Amended] [As Issued] [Status]

Technical Bulletin 87-1 (Superseded) Accounting for a Change in Method of Accounting for Certain Postretirement Benefits (Issue Date 4/87) [As Issued] [Status]

Technical Bulletin 86-1 (Superseded) Accounting for Certain Effects of the Tax Reform Act of 1986 (Issue Date 10/86) [As Issued] [Status]

Technical Bulletin 85-6 (Superseded) Accounting for a Purchase of Treasury Shares and Costs Incurred in Defending against a Takeover Attempt (Issue Date 12/85) [As Amended] [As Issued] [Status]

Technical Bulletin 85-1 (Superseded) Accounting for the Receipt of Federal Home Loan Mortgage Corporation Participating Preferred Stock (Issue Date 3/85) [As Amended] [As Issued] [Status]

Technical Bulletin 84-3 (Superseded) Accounting for the Effects of the Tax Reform Act of 1984 on Deferred Income Taxes of Stock Life Insurance Enterprises (Issue Date 9/84) [As Issued] [Status]

Technical Bulletin 84-2 (Superseded) Accounting for the Effects of the Tax Reform Act of 1984 on Deferred Income Taxes Relating to Domestic International Sales Corporations (Issue Date 9/84) [As Issued] [Status]

Technical Bulletin 84-1 (Superseded) Accounting for Stock Issued to Acquire the Results of a Research and Development Arrangement (Issue Date 3/84) [As Amended] [As Issued] [Status]

Technical Bulletin 83-1 (Superseded) Accounting for the Reduction in the Tax Basis of an Asset Caused by the Investment Tax Credit (Issue Date 7/83) [As Issued] [Status]

Technical Bulletin 82-2 (Superseded) Accounting for the Conversion of Stock Options into Incentive Stock Options as a Result of the Economic Recovery Tax Act of 1981 (Issue Date 3/82) [As Issued] [Status]

Technical Bulletin 81-2 (Superseded) Accounting for Unused Investment Tax Credits Acquired in a Business Combination Accounted for by the Purchase Method (Issue Date 2/81) [As Issued] [Status]

Technical Bulletin 81-1 (Superseded) Disclosure of Interest Rate Futures Contracts and Forward and Standby Contracts (Issue Date 2/81) [As Issued] [Status]

Technical Bulletin 79-19 (Superseded) Investor's Accounting for Unrealized Losses on Marketable Securities Owned by an Equity Method Investee (Issue Date 12/79) [As Amended] [As Issued] [Status]

Technical Bulletin 79-18 (Superseded) Transition Requirement of Certain FASB Amendments and Interpretations of FASB Statement No. 13 (Issue Date 12/79) [As Amended] [As Issued] [Status]

Technical Bulletin 79-17 (Superseded) Reporting Cumulative Effect Adjustment from Retroactive Application of FASB Statement No. 13 (Issue Date 12/79) [As Amended] [As Issued] [Status]

Technical Bulletin 79-16 (Superseded) Effect of a Change in Income Tax Rate on the Accounting for Leveraged Leases (Issue Date 12/79) [As Issued] [Status]

Technical Bulletin 79-8 (Superseded) Applicability of FASB Statements 21 and 33 to Certain Brokers and Dealers in Securities (Issue Date 12/79) [As Issued] [Status]

Technical Bulletin 79-7 (Superseded) Recoveries of a Previous Writedown under a Troubled Debt Restructuring Involving a Modification of Terms (Issue Date 12/79) [As Issued] [Status]

Technical Bulletin 79-5 (Superseded) Meaning of the Term "Customer" as It Applies to Health Care Facilities under FASB Statement No. 14 (Issue Date 12/79) [As Amended] [As Issued] [Status]

EITF 08-5 (Superseded) Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement [Full Text]

EITF 08-8 (Superseded) Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity's Consolidated Subsidiary [Full Text]

EITF 07-2 (Superseded) Accounting for Convertible Debt Instruments That Are Not Subject to the Guidance in Paragraph 12 of APB Opinion No. 14 [Full Text]

EITF 07-3 (Superseded) Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities [Full Text]

EITF 07-4 (Superseded) Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships [Full Text]

EITF 07-5 (Superseded) Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock [Full Text]

EITF 07-6 (Superseded) Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause [Full Text]

EITF 06-1 (Superseded) Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider [Full Text]

EITF 06-2 (Superseded) Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 [Full Text]

EITF 06-3 (Superseded) How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) [Full Text]

EITF 06-4 (Superseded) Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements [Full Text]

EITF 06-5 (Superseded) Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 [Full Text]

EITF 06-6 (Superseded) Debtor's Accounting for a Modification or Exchange of Convertible Debt Instruments [Full Text]

EITF 06-7 (Superseded) Issuer's Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133 [Full Text]

EITF 06-8 (Superseded) Applicability of the Assessment of a Buyer's Continuing Investment under FASB Statement No. 66 for Sales of Condominiums [Full Text]

EITF 06-9 (Superseded) Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year-End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and That of an Equity Method Investee [Full Text]

EITF 06-10 (Superseded) Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements [Full Text]

EITF 06-11 (Superseded) Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards [Full Text]

EITF 06-12 (Superseded) Accounting for Physical Commodity Inventories for Entities within the Scope of the AICPA Audit and Accounting Guide, Brokers and Dealers in Securities [Full Text]

EITF 05-1 (Superseded) Accounting for the Conversion of an Instrument That Became Convertible upon the Issuer's Exercise of a Call Option [Full Text]

EITF 05-4 (Superseded) The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to Issue No. 00-19 [Full Text]

EITF 05-5 (Superseded) Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements) [Full Text]

EITF 05-6 (Superseded) Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination [Full Text]

EITF 05-7 (Superseded) Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues Status: Superseded by Issue No. 06-6

EITF 05-8 (Superseded) Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature [Full Text]

EITF 04-1 (Superseded) Accounting for Preexisting Relationships between the Parties to a Business Combination [Full Text]

EITF 04-5 (Superseded) Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights [Full Text]

EITF 04-6 (Superseded) Accounting for Stripping Costs Incurred during Production in the Mining Industry [Full Text]

EITF 04-7 (Superseded) Determining Whether an Interest Is a Variable Interest in a Potential Variable Interest Entity [Full Text]

EITF 04-8 (Superseded) The Effect of Contingently Convertible Instruments on Diluted Earnings per Share [Full Text]

EITF 04-10 (Superseded) Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds [Full Text]

EITF 04-11 (Superseded) Accounting in a Business Combination for Deferred Postcontract Customer Support Revenue of a Software Vendor Status: Deemed no longer technically helpful

EITF 04-12 (Superseded) Determining Whether Equity-Based Compensation Awards Are Participating Securities [Full Text]

EITF 03-1 (Superseded) The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments Status: Nullified by FSP FAS115-1/FAS124-1

EITF 03-2 (Superseded) Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities [Full Text]

EITF 03-3 (Superseded) Applicability of Topic No. D-79 to Claims-Made Insurance Policies Status: Codified in Issue No. 03-8

EITF 03-4 (Superseded) Determining the Classification and Benefit Attribution Method for a "Cash Balance" Pension Plan [Full Text]

EITF 03-5 (Superseded) Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software [Full Text]

EITF 03-7 (Superseded) Accounting for the Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to Be Settled in Stock (Instrument C of Issue No. 90-19) [Full Text]

EITF 03-8 (Superseded) Accounting for Claims-Made Insurance and Retroactive Insurance Contracts by the Insured Entity [Full Text]

EITF 03-9 (Superseded) Determination of the Useful Life of Renewable Intangible Assets under FASB Statement No. 142 [Full Text]

EITF 03-10 (Superseded) Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers [Full Text]

EITF 03-11 (Superseded) Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not "Held for Trading Purposes" as Defined in Issue No 02-3 [Full Text]

EITF 03-13 (Superseded) Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations [Full Text]

EITF 03-14 (Superseded) Participants' Accounting for Emissions Allowances under a "Cap and Trade" Program [Full Text]

EITF 03-15 (Superseded) Interpretation of Constraining Conditions of a Transferee in a Collateralized Bond Obligation Structure [Not yet discussed]

EITF 03-17 (Superseded) Subsequent Accounting for Executory Contracts That Have Been Recognized on an Entity's Balance Sheet [Full Text]

EITF 02-3 (Superseded) Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities [Full Text]

EITF 02-4 (Superseded) Determining Whether a Debtor's Modification or Exchange of Debt Instruments Is within the Scope of FASB Statement No. 15 [Full Text]

EITF 02-6 (Superseded) Classification in the Statement of Cash Flows of Payments Made to Settle an Asset Retirement Obligation within the Scope of FASB Statement No. 143 [Full Text]

EITF 02-7 (Superseded) Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets [Full Text]

EITF 02-8 (Superseded) Accounting for Options Granted to Employees in Unrestricted, Publicly Traded Shares of an Unrelated Entity [Full Text]

EITF 02-9 (Superseded) Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold [Full Text]

EITF 02-10 (Superseded) Determining Whether a Debtor Is Legally Released as Primary Obligor When the Debtor Becomes Secondarily Liable under the Original Obligation Status: Deemed no longer technically helpful

EITF 02-12 (Superseded) Permitted Activities of a Qualifying Special-Purpose Entity in Issuing Beneficial Interests under FASB Statement No. 140 [Full Text]

EITF 02-13 (Superseded) Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in FASB Statement No. 142 [Full Text]

EITF 02-14 (Superseded) Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock [Full Text]

EITF 02-15 (Superseded) Determining Whether Certain Conversions of Convertible Debt to Equity Securities Are within the Scope of FASB Statement No. 84 [Full Text]

EITF 02-16 (Superseded) Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor [Full Text]

EITF 02-17 (Superseded) Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination [Full Text]

EITF 02-18 (Superseded) Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition [Full Text]

EITF 01-1 (Superseded) Accounting for a Convertible Instrument Granted or Issued to a Nonemployee for Goods or Services or a Combination of Goods or Services and Cash [Full Text]

EITF 01-5 (Superseded) Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment That Will Be Disposed Of [Full Text]

EITF 01-9 (Superseded) Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) [Full Text]

EITF 01-11 (Superseded) Application of Issue No. 00-19 to a Contemporaneous Forward Purchase Contract and Written Put Option Status: Resolved by FAS 150

EITF 01-12 (Superseded) The Impact of the Requirements of FASB Statement No. 133 on Residual Value Guarantees in Connection with a Lease [Full Text]

EITF 01-14 (Superseded) Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred [Full Text]

EITF 00-1 (Superseded) Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures [Full Text]

EITF 00-3 (Superseded) Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware [Full Text]

EITF 00-4 (Superseded) Majority Owner's Accounting for a Transaction in the Shares of a Consolidated Subsidiary and a Derivative Indexed to the Minority Interest in That Subsidiary [Full Text]

EITF 00-5 (Superseded) Determining Whether a Nonmonetary Transaction Is an Exchange of Similar Productive Assets Status: Codified in Issue No. 01-2

EITF 00-6 (Superseded) Accounting for Freestanding Derivative Financial Instruments Indexed to, and Potentially Settled in, the Stock of a Consolidated Subsidiary [Full Text]

EITF 00-7 (Superseded) Application of Issue No. 96-13 to Equity Derivative Instruments That Contain Certain Provisions That Require Net Cash Settlement if Certain Events Outside the Control of the Issuer Occur Status: Codified in Issue No. 00-19

EITF 00-8 (Superseded) Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction with Providing Goods or Services [Full Text]

EITF 00-11 (Superseded) Lessors' Evaluation of Whether Leases of Certain Integral Equipment Meet the Ownership Transfer Requirements of FASB Statement No. 13 [Full Text]

EITF 00-12 (Superseded) Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee [Full Text]

EITF 00-13 (Superseded) Determining Whether Equipment Is "Integral Equipment" Subject to FASB Statements No. 66 and No. 98 [Full Text]

EITF 00-14 (Superseded) Accounting for Certain Sales Incentives Status: Codified in Issue No. 01-9

EITF 00-15 (Superseded) Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 00-16 (Superseded) Recognition and Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation [Full Text]

EITF 00-17 (Superseded) Measuring the Fair Value of Energy-Related Contracts in Applying Issue No. 98-10 Status: Superseded by Issue No. 02-3

EITF 00-18 (Superseded) Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees [Full Text]

EITF 00-19 (Superseded) Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock [Full Text]

EITF 00-20 (Superseded) Accounting for Costs Incurred to Acquire or Originate Information for Database Content and Other Collections of Information Status: Deemed no longer technically helpful

EITF 00-22 (Superseded) Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future [Full Text]

EITF 00-23 (Superseded) Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44 Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R) [Full Text]

EITF 00-24 (Superseded) Revenue Recognition: Sales Arrangements That Include Specified-Price Trade-in Rights [Full Text]

EITF 00-25 (Superseded) Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products Status: Codified in Issue No. 01-9

EITF 99-3 (Superseded) Application of Issue No. 96-13 to Derivative Instruments with Multiple Settlement Alternatives Status: Codified in Issue No. 00-19

EITF 99-4 (Superseded) Accounting for Stock Received from the Demutualization of a Mutual Insurance Company [Full Text]

EITF 99-6 (Superseded) Impact of Acceleration Provision in Grants Made between Initiation and Consummation of a Pooling-of-Interests Business Combination" Status: Nullified by FAS 141

EITF 99-8 (Superseded) Accounting for Transfers of Assets That Are Derivative Instruments but That Are Not Financial Assets [Full Text]

EITF 99-11 (Superseded) Subsequent Events Caused by Year 2000 Status: Deemed no longer technically helpful

EITF 99-12 (Superseded) Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination [Full Text]

EITF 99-13 (Superseded) Application of Issue No. 97-10 and FASB Interpretation No. 23 to Entities That Enter into Leases with Governmental Entities [Full Text]

EITF 99-14 (Superseded) Recognition by a Purchaser of Losses on Firmly Committed Executory Contracts [Full Text]

EITF 99-15 (Superseded) Accounting for Decreases in Deferred Tax Asset Valuation Allowances Established in a Purchase Business Combination As a Result of a Change in Tax Regulations [Full Text]

EITF 99-16 (Superseded) Accounting for Transactions with Elements of Research and Development Arrangements [Full Text]

EITF 99-18 (Superseded) Effect on Pooling-of-Interests Accounting of Contracts Indexed to a Company's Own Stock Status: Resolved by FAS 141

EITF 99-20 (Superseded) Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets [Full Text]

EITF 98-2 (Superseded) Accounting by a Subsidiary or Joint Venture for an Investment in the Stock of Its Parent Company or Joint Venture Partner [Full Text]

EITF 98-3 (Superseded) Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business [Full Text]

EITF 98-5 (Superseded) Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios [Full Text]

EITF 98-6 (Superseded) Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Approval or Veto Rights [Full Text]

EITF 98-7 (Superseded) Accounting for Exchanges of Similar Equity Method Investments Status: Codified in Issue No. 01-2

EITF 98-10 (Superseded) Accounting for Contracts Involved in Energy Trading and Risk Management Activities Status: Superseded by Issue No. 02-3

EITF 98-11 (Superseded) Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations [Full Text]

EITF 98-12 (Superseded) Application of Issue No. 00-19 to Forward Equity Sales Transactions Status: Nullified by FAS 150

EITF 98-13 (Superseded) Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee [Full Text]

EITF 97-1 (Superseded) Implementation Issues in Accounting for Lease Transactions, including Those involving Special-Purpose Entities [Full Text]

EITF 97-2 (Superseded) Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements [Full Text]

EITF 97-3 (Superseded) Accounting for Fees and Costs Associated with Loan Syndications and Loan Participations after the Issuance of FASB Statement No. 125 [Full Text]

EITF 97-4 (Superseded) Deregulation of the Pricing of Electricity---Issues Related to the Application of FASB Statements No. 71 and 101 [Full Text]

EITF 97-5 (Superseded) Accounting for the Delayed Receipt of Option Shares upon Exercise under APB Opinion No. 25 Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 97-6 (Superseded) Application of Issue No. 96-20 to Qualifying Special-Purpose Entities Receiving Transferred Financial Assets Prior to the Effective Date of FASB Statement No. 125 Status: Nullified by FAS 140

EITF 97-7 (Superseded) Accounting for Hedges of the Foreign Currency Risk Inherent in an Available-for-Sale Marketable Equity Security [Full Text]

EITF 97-8 (Superseded) Accounting for Contingent Consideration Issued in a Purchase Business Combination [Full Text]

EITF 97-9 (Superseded) Effect on Pooling-of-Interests Accounting of Certain Contingently Exercisable Options or Other Equity Instruments Status: Nullified by FAS 141

EITF 97-11 (Superseded) Accounting for Internal Costs Relating to Real Estate Property Acquisitions [Full Text]

EITF 97-12 (Superseded) Accounting for Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25 Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 97-13 (Superseded) Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation [Full Text]

EITF 97-14 (Superseded) Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested [Full Text]

EITF 97-15 (Superseded) Accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination [Full Text]

EITF 96-1 (Superseded) Sale of Put Options on Issuer's Stock That Require or Permit Cash Settlement Status: Codified in Issue No. 96-13

EITF 96-2 (Superseded) Impairment Recognition When a Nonmonetary Asset Is Exchanged or Is Distributed to Owners and Is Accounted for at the Asset's Recorded Amount Status: Codified in Issue No. 01-2

EITF 96-3 (Superseded) Accounting for Equity Instruments That Are Issued for Consideration Other Than Employee Services under FASB Statement No.123 Status: Superseded by Issue No. 96-18

EITF 96-4 (Superseded) Accounting for Reorganizations Involving a Non-Pro Rata Split-off of Certain Nonmonetary Assets to Owners Status: Codified in Issue No. 01-2

EITF 96-5 (Superseded) Recognition of Liabilities for Contractual Termination Benefits or Changing Benefit Plan Assumptions in Anticipation of a Business Combination [Full Text]

EITF 96-6 (Superseded) Accounting for the Film and Software Costs Associated with Developing Entertainment and Educational Software Products [Full Text]

EITF 96-7 (Superseded) Accounting for Deferred Taxes on In-Process Research and Development Activities Acquired in a Purchase Business Combination [Full Text]

EITF 96-8 (Superseded) Accounting for a Business Combination When the Issuing Company Has Targeted Stock Status: Nullified by FAS 141

EITF 96-9 (Superseded) Classification of Inventory Markdowns and Other Costs Associated with a Restructuring [Full Text]

EITF 96-10 (Superseded) Impact of Certain Transactions on the Held-to-Maturity Classification under FASB Statement No. 115 [Full Text]

EITF 96-11 (Superseded) Accounting for Forward Contracts and Purchased Options to Acquire Securities Covered by FASB Statement No. 115 [Full Text]

EITF 96-12 (Superseded) Recognition of Interest Income and Balance Sheet Classification of Structured Notes [Full Text]

EITF 96-13 (Superseded) Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock Status: Codified in Issue No. 00-19

EITF 96-14 (Superseded) Accounting for the Costs Associated with Modifying Computer Software for the Year 2000 Status: Deemed no longer technically helpful

EITF 96-15 (Superseded) Accounting for the Effects of Changes in Foreign Currency Exchange Rates on Foreign-Currency-Denominated Available-for-Sale Debt Securities [Full Text]

EITF 96-16 (Superseded) Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights [Full Text]

EITF 96-17 (Superseded) Revenue Recognition under Long-Term Power Sales Contracts That Contain both Fixed and Variable Pricing Terms [Full Text]

EITF 96-18 (Superseded) Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services [Full Text]

EITF 96-20 (Superseded) Impact of FASB Statement No. 125 on Consolidation of Special-Purpose Entities Status: Nullified by FAS 140

EITF 96-21 (Superseded) Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities [Full Text]

EITF 96-22 (Superseded) Applicability of the Disclosures Required by FASB Statement No. 114 When a Loan Is Restructured in a Troubled Debt Restructuring into Two (or More) Loans [Full Text]

EITF 96-23 (Superseded) The Effect of Financial Instruments Indexed to, and Settled in, a Company's Own Stock on Pooling-of-Interests Accounting for a Subsequent Business Combination Status: Resolved by FAS 141

EITF 95-2 (Superseded) Determination of What Constitutes a Firm Commitment for Foreign Currency Transactions Not Involving a Third Party Status: Nullified by FAS 133

EITF 95-3 (Superseded) Recognition of Liabilities in Connection with a Purchase Business Combination [Full Text]

EITF 95-4 (Superseded) Revenue Recognition on Equipment Sold and Subsequently Repurchased Subject to an Operating Lease [Full Text]

EITF 95-5 (Superseded) Determination of What Risks and Rewards, If Any, Can Be Retained and Whether Any Unresolved Contingencies May Exist in a Sale of Mortgage Loan Servicing Rights [Full Text]

EITF 95-6 (Superseded) Accounting by a Real Estate Investment Trust for an Investment in a Service Corporation [Full Text]

EITF 95-7 (Superseded) Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate Investment Trusts [Full Text]

EITF 95-8 (Superseded) Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination [Full Text]

EITF 95-9 (Superseded) Accounting for Tax Effects of Dividends in France in Accordance with FASB Statement No. 109 [Full Text]

EITF 95-10 (Superseded) Accounting for Tax Credits Related to Dividend Payments in Accordance with FASB Statement No. 109 [Full Text]

EITF 95-11 (Superseded) Accounting for Derivative Instruments Containing both a Written Option-Based Component and a Forward-Based Component Status: Resolved by FAS 133

EITF 95-12 (Superseded) Pooling of Interests with a Common Interest in a Joint Venture Status: Nullified by FAS 141

EITF 95-14 (Superseded) Recognition of Liabilities in Anticipation of a Business Combination Status: Nullified by FAS 146

EITF 95-15 (Superseded) Recognition of Gain or Loss When a Binding Contract Requires a Debt Extinguishment to Occur at a Future Date for a Specified Amount Status: Superseded by Issue No. 96-19

EITF 95-16 (Superseded) Accounting for Stock Compensation Arrangements with Employer Loan Features under APB Opinion No. 25 Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 95-17 (Superseded) Accounting for Modifications to an Operating Lease That Do Not Change the Lease Classification [Full Text]

EITF 95-18 (Superseded) Accounting and Reporting for a Discontinued Business Segment When the Measurement Date Occurs after the Balance Sheet Date but before the Issuance of Financial Statements Status: Nullified by FAS 144

EITF 95-19 (Superseded) Determination of the Measurement Date for the Market Price of Securities Issued in a Purchase Business Combination Status: Codified in Issue No. 99-12

EITF 95-20 (Superseded) Measurement in the Consolidated Financial Statements of a Parent of the Tax Effects Related to the Operations of a Foreign Subsidiary That Receives Tax Credits Related to Dividend Payments [Full Text]

EITF 95-21 (Superseded) Accounting for Assets to Be Disposed Of Acquired in a Purchase Business Combination Status: Resolved by FAS 144

EITF 95-22 (Superseded) Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement [Full Text]

EITF 95-23 (Superseded) The Treatment of Certain Site Restoration/Environmental Exit Costs When Testing a Long-Lived Asset for Impairment [Full Text]

EITF 94-1 (Superseded) Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects [Full Text]

EITF 94-3 (Superseded) Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) Status: Nullified by FAS 146

EITF 94-4 (Superseded) Classification of an Investment in a Mortgage-Backed Interest-Only Certificate as Held-to-Maturity Status: Resolved by FAS 125

EITF 94-5 (Superseded) Determination of What Constitutes All Risks and Rewards and No Significant Unresolved Contingencies in a Sale of Mortgage Loan Servicing Rights under Issue No. 89-5 Status: Superseded by Issue No. 95-5

EITF 94-6 (Superseded) Accounting for the Buyout of Compensatory Stock Options Status: Nullified by FIN 44

EITF 94-7 (Superseded) Accounting for Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock Status: Codified in Issue No. 96-13

EITF 94-8 (Superseded) Accounting for Conversion of a Loan into a Debt Security in a Debt Restructuring [Full Text]

EITF 94-9 (Superseded) Determining a Normal Servicing Fee Rate for the Sale of an SBA Loan Status: Nullified by FAS 125

EITF 94-10 (Superseded) Accounting by a Company for the Income Tax Effects of Transactions among or with Its Shareholders under FASB Statement No.109 [Full Text]

EITF 93-2 (Superseded) Effect of Acquisition of Employer Shares for/by an Employee Benefit Trust on Accounting for Business Combinations Status: Resolved by FAS 141

EITF 93-5 (Superseded) Accounting for Environmental Liabilities Status: Incorporated in and effectively nullified by SOP 96-1

EITF 93-6 (Superseded) Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises [Full Text]

EITF 93-8 (Superseded) Accounting for the Sale and Leaseback of an Asset That Is Leased to Another Party [Full Text]

EITF 93-9 (Superseded) Application of FASB Statement No. 109 in Foreign Financial Statements Restated for General Price-Level Changes [Full Text]

EITF 93-12 (Superseded) Recognition and Measurement of the Tax Benefit of Excess Tax-Deductible Goodwill Resulting from a Retroactive Change in Tax Law [Full Text]

EITF 93-13 (Superseded) Effect of a Retroactive Change in Enacted Tax Rates That Is Included in Income from Continuing Operations [Full Text]

EITF 93-14 (Superseded) Accounting for Multiple-Year Retrospectively Rated Insurance Contracts by Insurance Enterprises and Other Enterprises [Full Text]

EITF 93-16 (Superseded) Application of FASB Statement No. 109 to Basis Differences within Foreign Subsidiaries That Meet the Indefinite Reversal Criterion of APB Opinion No. 23 [Full Text]

EITF 93-17 (Superseded) Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation [Full Text]

EITF 93-18 (Superseded) Recognition of Impairment for an Investment in a Collateralized Mortgage Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate Status: Superseded by Issue No. 99-20

EITF 92-1 (Superseded) Allocation of Residual Value or First-Loss Guarantee to Minimum Lease Payments in Leases Involving Land and Building(s) [Full Text]

EITF 92-2 (Superseded) Measuring Loss Accruals by Transferors for Transfers of Receivables with Recourse [Full Text]

EITF 92-3: Earnings-per-Share Treatment of Tax Benefits for Dividends on Unallocated Stock Held by an Employee Stock Ownership Plan (Consideration of the Implications of FASB Statement No. 109 on Issue 2 of EITF Issue No. 90-4) [Full Text]

EITF 92-4 (Superseded) Accounting for a Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary [Full Text]

EITF 92-7 (Superseded) Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative Revenue Programs [Full Text]

EITF 92-8 (Superseded) Accounting for the Income Tax Effects under FASB Statement No. 109 of a Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary [Full Text]

EITF 92-9 (Superseded) Accounting for the Present Value of Future Profits Resulting from the Acquisition of a Life Insurance Company [Full Text]

EITF 92-10 (Superseded) Loan Acquisitions involving Table Funding Arrangements Status: Nullified by FAS 125

EITF 92-13 (Superseded) Accounting for Estimated Payments in Connection with the Coal Industry Retiree Health Benefit Act of 1992 [Full Text]

EITF 91-1 (Superseded) Hedging Intercompany Foreign Currency Risks Status: Nullified by FAS 133

EITF 91-2 (Superseded) Debtor's Accounting for Forfeiture of Real Estate Subject to a Nonrecourse Mortgage [Full Text]

EITF 91-3 (Superseded) Accounting for Income Tax Benefits from Bad Debts of a Savings and Loan Association Status: Resolved by FAS 109

EITF 91-4 (Superseded) Hedging Foreign Currency Risks with Complex Options and Similar Transactions Status: Resolved by FAS 133

EITF 91-7 (Superseded) Accounting for Pension Benefits Paid by Employers after Insurance Companies Fail to Provide Annuity Benefits [Full Text]

EITF 91-8 (Superseded) Application of FASB Statement No. 96 to a State Tax Based on the Greater of a Franchise Tax or an Income Tax [Full Text]

EITF 90-2 (Superseded) Exchange of Interest-Only and Principal-Only Securities for a Mortgage-Backed Security Status: Nullified by FAS 125

EITF 90-3 (Superseded) Accounting for Employers' Obligations for Future Contributions to a Multiemployer Pension Plan [Full Text]

EITF 90-4 (Superseded) Earnings-per-Share Treatment of Tax Benefits for Dividends on Stock Held by an Employee Stock Ownership Plan [Full Text]

EITF 90-6 (Superseded) Accounting for Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to Be Sold Status: Nullified by FAS 144

EITF 90-7 (Superseded) Accounting for a Reload Stock Option Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 90-9 (Superseded) Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring Status: Nullified by FIN 44

EITF 90-10 (Superseded) Accounting for a Business Combination Involving a Majority-Owned Investee of a Venture Capital Company Status: Resolved by FAS 141

EITF 90-11 (Superseded) Accounting for Exit and Entrance Fees Incurred in a Conversion from the Savings Association Insurance Fund to the Bank Insurance Fund Status: Deemed no longer technically helpful

EITF 90-12 (Superseded) Allocating Basis to Individual Assets and Liabilities for Transactions within the Scope of Issue No. 88-16 [Full Text]

EITF 90-14 (Superseded) Unsecured Guarantee by Parent of Subsidiary's Lease Payments in a Sale-Leaseback Transaction [Full Text]

EITF 90-15 (Superseded) Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions Status: Nullified by FIN 46 and FIN 46(R) for entities within the scope of FIN 46 or FIN 46(R) [Full Text]

EITF 90-16 (Superseded) Accounting for Discontinued Operations Subsequently Retained Status: Nullified by FAS 144

EITF 90-17 (Superseded) Hedging Foreign Currency Risks with Purchased Options Status: Affirmed by FAS 133; therefore, no longer necessary

EITF 90-18 (Superseded) Effect of a "Removal of Accounts" Provision on the Accounting for a Credit Card Securitization [Full Text]

EITF 90-20 (Superseded) Impact of an Uncollateralized Irrevocable Letter of Credit on a Real Estate Sale-Leaseback Transaction [Full Text]

EITF 90-21 (Superseded) Balance Sheet Treatment of a Sale of Mortgage Servicing Rights with a Subservicing Agreement [Full Text]

EITF 89-1 (Superseded) Accounting by a Pension Plan for Bank Investment Contracts and Guaranteed Investment Contracts Status: Resolved by FAS 110 and SOP 94-4

EITF 89-3 (Superseded) Balance Sheet Presentation of Savings Accounts in Financial Statements of Credit Unions [Full Text]

EITF 89-4 (Superseded) Accounting for a Purchased Investment in a Collateralized Mortgage Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate Status: Superseded by Issue No. 99-20

EITF 89-5 (Superseded) Sale of Mortgage Loan Servicing Rights Status: Superseded by Issue No. 95-5

EITF 89-7 (Superseded) Exchange of Assets or Interest in a Subsidiary for a Noncontrolling Equity Interest in a New Entity Status: Codified in Issue No. 01-2

EITF 89-11 (Superseded) Sponsor's Balance Sheet Classification of Capital Stock with a Put Option Held by an Employee Stock Ownership Plan [Full Text]

EITF 89-12 (Superseded) Earnings-per-Share Issues Related to Convertible Preferred Stock Held by an Employee Stock Ownership Plan [Full Text]

EITF 89-15 (Superseded) Accounting for a Modification of Debt Terms When the Debtor Is Experiencing Financial Difficulties Status: Superseded by Issue No. 02-4

EITF 89-17 (Superseded) Accounting for the Retail Sale of an Extended Warranty Contract in Connection with the Sale of a Product Status: Nullified by FTB 90-1

EITF 89-18 (Superseded) Divestitures of Certain Investment Securities to an Unregulated Commonly Controlled Entity under FIRREA [Full Text]

EITF 89-19 (Superseded) Accounting for a Change in Goodwill Amortization for Business Combinations Initiated Prior to the Effective Date of FASB Statement No. 72 [Full Text]

EITF 88-1 (Superseded) Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan [Full Text]

EITF 88-3 (Superseded) Rental Concessions Provided by Landlord Status: Resolved by FTB 88-1 and Issues No. 88-10 and 94-3

EITF 88-6 (Superseded) Book Value Stock Plans in an Initial Public Offering Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 88-8 (Superseded) Mortgage Swaps Status: Partially nullified and partially resolved by FAS 133

EITF 88-9 (Superseded) Put Warrants Status: All consensuses nullified by FAS 128, FAS 133, and FAS 150 or superseded by Issue No. 96-13

EITF 88-10 (Superseded) Costs Associated with Lease Modification or Termination Status: Issue 1 resolved by FAS 146 and Issues 2 and 3 nullified by FAS 146

EITF 88-12 (Superseded) Transfer of Ownership Interest as Part of Down Payment under FASB Statement No. 66 [Full Text]

EITF 88-14 (Superseded) Settlement of Fees with Extra Units to a General Partner in a Master Limited Partnership [Full Text]

EITF 88-15 (Superseded) Classification of Subsidiary's Loan Payable in Consolidated Balance Sheet When Subsidiary's and Parent's Fiscal Years Differ [Full Text]

EITF 88-17 (Superseded) Accounting for Fees and Costs Associated with Loan Syndications and Loan Participations Status: Partially nullified by FAS 125 and superseded by Issue No. 97-3

EITF 88-20 (Superseded) Difference between Initial Investment and Principal Amount of Loans in a Purchased Credit Card Portfolio [Full Text]

EITF 88-21 (Superseded) Accounting for the Sale of Property Subject to the Seller's Preexisting Lease [Full Text]

EITF 88-26 (Superseded) Controlling Preferred Stock in a Pooling of Interests Status: Nullified by FAS 141

EITF 88-27 (Superseded) Effect of Unallocated Shares in an Employee Stock Ownership Plan on Accounting for Business Combinations Status: Nullified by FAS 141

EITF 87-1 (Superseded) Deferral Accounting for Cash Securities That Are Used to Hedge Rate or Price Risk Status: Resolved by FAS 133

EITF 87-2 (Superseded) Net Present Value Method of Valuing Speculative Foreign Exchange Contracts Status: Nullified by FAS 133

EITF 87-4 (Superseded) Restructuring of Operations: Implications of SEC Staff Accounting Bulletin No. 67 [Full Text]

EITF 87-5 (Superseded) Troubled Debt Restructurings: Interrelationship between FASB Statement No. 15 and the AICPA Savings and Loan Guide Status: Nullified by FAS 114

EITF 87-6 (Superseded) Adjustments Relating to Stock Compensation Plans Status: Nullified by FIN 44

EITF 87-7 (Superseded) Sale of an Asset Subject to a Lease and Nonrecourse Financing: "Wrap Lease Transactions" [Full Text]

EITF 87-9 (Superseded) Profit Recognition on Sales of Real Estate with Insured Mortgages or Surety Bonds [Full Text]

EITF 87-11 (Superseded) Allocation of Purchase Price to Assets to Be Sold Status: Nullified by FAS 144

EITF 87-13 (Superseded) Amortization of Prior Service Cost for a Defined Benefit Plan When There Is a History of Plan Amendments Status: Resolved by Q&A 87, Question 20

EITF 87-15 (Superseded) Effect of a Standstill Agreement on Pooling-of-Interests Accounting Status: Nullified by FAS 141

EITF 87-16 (Superseded) Whether the 90 Percent Test for a Pooling of Interests Is Applied Separately to Each Company or on a Combined Basis Status: Nullified by FAS 141

EITF 87-17 (Superseded) Spinoffs or Other Distributions of Loans Receivable to Shareholders Status: Codified in Issue No. 01-2

EITF 87-20 (Superseded) Offsetting Certificates of Deposit against High-Coupon Debt Status: Partially resolved by FAS 125 and superseded by Issue No. 96-19

EITF 87-23 (Superseded) Book Value Stock Purchase Plans Status: Issues 1 and 2 nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R) and Issue 3 nullified by SOP 93-6

EITF 87-25 (Superseded) Sale of Convertible, Adjustable-Rate Mortgages with Contingent Repayment Agreement Status: Resolved by FAS 125 and FAS 140

EITF 87-26 (Superseded) Hedging of Foreign Currency Exposure with a Tandem Currency Status: Nullified by FAS 133

EITF 87-27 (Superseded) Poolings of Companies That Do Not Have a Controlling Class of Common Stock Status: Nullified by FAS 141

EITF 87-28 (Superseded) Provision for Deferred Taxes on Increases in Cash Surrender Value of Key-Person Life Insurance Status: Resolved by FAS 109

EITF 87-33 (Superseded) Stock Compensation Issues Related to Market Decline Status: Nullified by FIN 44

EITF 86-1 (Superseded) Recognizing Net Operating Loss Carryforwards Status: Nullified by FAS 109

EITF 86-2 (Superseded) Retroactive Wage Adjustments Affecting Medicare Payments Status: Deemed no longer technically helpful

EITF 86-3 (Superseded) Retroactive Regulations regarding IRC Section 338 Purchase Price Allocations Status: Deemed no longer technically helpful

EITF 86-4 (Superseded) Income Statement Treatment of Income Tax Benefit for Employee Stock Ownership Plan Dividends Status: Nullified by FAS 109

EITF 86-7 (Superseded) Recognition by Homebuilders of Profit from Sales of Land and Related Construction Contracts [Full Text]

EITF 86-10 (Superseded) Pooling with 10 Percent Cash Payout Determined by Lottery Status: Nullified by FAS 141

EITF 86-11 (Superseded) Recognition of Possible 1986 Tax Law Changes Status: Resolved by FAS 109

EITF 86-12 (Superseded) Accounting by Insureds for Claims-Made Insurance Policies Status: Codified in Issue No. 03-8

EITF 86-16 (Superseded) Carryover of Predecessor Cost in Leveraged Buyout Transactions Status: Superseded by Issue No. 88-16

EITF 86-17 (Superseded) Deferred Profit on Sale-Leaseback Transaction with Lessee Guarantee of Residual Value [Full Text]

EITF 86-18 (Superseded) Debtor's Accounting for a Modification of Debt Terms Status: Superseded by Issue 96-19 and resolved by Interpretation 39

EITF 86-19 (Superseded) Change in Accounting for Other Postemployment Benefits Status: Resolved by FAS 106

EITF 86-20 (Superseded) Accounting for Other Postemployment Benefits of an Acquired Company Status: Nullified by FAS 106

EITF 86-21 (Superseded) Application of the AICPA Notice to Practitioners regarding Acquisition, Development, and Construction Arrangements to Acquisition of an Operating Property [Full Text]

EITF 86-24 (Superseded) Third-Party Establishment of Collateralized Mortgage Obligations Status: Deemed no longer needed due to issuance of FAS 125 and FAS 140

EITF 86-26 (Superseded) Using Forward Commitments as a Surrogate for Deferred Rate Setting Status: Resolved by FAS 133

EITF 86-27 (Superseded) Measurement of Excess Contributions to a Defined Contribution Plan or Employee Stock Ownership Plan [Full Text]

EITF 86-29 (Superseded) Nonmonetary Transactions: Magnitude of Boot and the Exceptions to the Use of Fair Value Status: Codified in Issue No. 01-2

EITF 86-31 (Superseded) Reporting the Tax Implications of a Pooling of a Bank and a Savings and Loan Association Status: Nullified by FAS 141

EITF 86-32 (Superseded) Early Extinguishment of a Subsidiary's Mandatorily Redeemable Preferred Stock [Full Text]

EITF 86-34 (Superseded) Futures Contracts Used as Hedges of Anticipated Reverse Repurchase Transactions Status: Nullified by FAS 133

EITF 86-35 (Superseded) Debentures with Detachable Stock Purchase Warrants Status: Superseded by Issue No. 96-13

EITF 86-37 (Superseded) Recognition of Tax Benefit of Discounting Loss Reserves of Insurance Companies Status: Nullified by FAS 109

EITF 86-38 (Superseded) Implications of Mortgage Prepayments on Amortization of Servicing Rights Status: Section A nullified by FAS 122 and FAS 125; Section B nullified by FAS 125; Section C superseded by Issue No. 89-4

EITF 86-39 (Superseded) Gains from the Sale of Mortgage Loans with Servicing Rights Retained Status: Nullified by FAS 122 and FAS 125

EITF 86-41 (Superseded) Carryforward of the Corporate Alternative Minimum Tax Credit Status: Nullified by FAS 109

EITF 86-42 (Superseded) Effect of a Change in Tax Rates on Assets and Liabilities Recorded Net-of-Tax in a Purchase Business Combination Status: Nullified by FAS 109

EITF 86-45 (Superseded) Imputation of Dividends on Preferred Stock Redeemable at the Issuer's Option with Initial Below-Market Dividend Rate [Full Text]

EITF 86-46 (Superseded) Uniform Capitalization Rules for Inventory under the Tax Reform Act of 1986 [Full Text]

EITF 85-3 (Superseded) Tax Benefits Relating to Asset Dispositions following an Acquisition of a Financial Institution Status: Nullified by FAS 109

EITF 85-4 (Superseded) Downstream Mergers and Other Stock Transactions between Companies under Common Control Status: Resolved by FTB 85-5

EITF 85-5 (Superseded) Restoration of Deferred Taxes Previously Eliminated by Net Operating Loss Recognition Status: Resolved by FAS 109

EITF 85-7 (Superseded) Federal Home Loan Mortgage Corporation Stock Status: Resolved by FTB 85-1

EITF 85-10 (Superseded) Employee Stock Ownership Plan Contribution Funded by a Pension Plan Termination Status: Nullified by FAS 88

EITF 85-11 (Superseded) Use of an Employee Stock Ownership Plan in a Leveraged Buyout Status: Deemed no longer technically helpful

EITF 85-14 (Superseded) Securities That Can Be Acquired for Cash in a Pooling of Interests Status: Nullified by FAS 141

EITF 85-15 (Superseded) Recognizing Benefits of Purchased Net Operating Loss Carryforwards Status: Nullified by FAS 109

EITF 85-22 (Superseded) Retroactive Application of FASB Technical Bulletins Status: Deemed no longer technically helpful

EITF 85-24 (Superseded) Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge [Full Text]

EITF 85-26 (Superseded) Measurement of Servicing Fee under FASB Statement No. 65 When a Loan Is Sold with Servicing Retained Status: Resolved by FTB 87-3 and FAS 125

EITF 85-28 (Superseded) Consolidation Issues Relating to Collateralized Mortgage Obligations Status: Resolved by FAS 94

EITF 85-30 (Superseded) Sale of Marketable Securities at a Gain with a Put Option Status: Resolved by FAS 125

EITF 85-33 (Superseded) Disallowance of Income Tax Deduction for Core Deposit Intangibles Status: Nullified by FAS 109

EITF 85-34 (Superseded) Banker's Acceptances and Risk Participations Status: Resolved by FAS 125

EITF 85-35 (Superseded) Transition and Implementation Issues for FASB Statement No. 86 Status: Deemed no longer technically helpful

EITF 85-36 (Superseded) Discontinued Operations with Expected Gain and Interim Operating Losses Status: Nullified by FAS 144

EITF 85-37 (Superseded) Recognition of Note Received for Real Estate Syndication Activities Status: Resolved by SOP 92-1

EITF 85-38 (Superseded) Negative Amortizing Loans Status: Deemed no longer technically helpful

EITF 85-39 (Superseded) Implications of SEC Staff Accounting Bulletin No. 59 on Noncurrent Marketable Equity Securities [Full Text]

EITF 85-40 (Superseded) Comprehensive Review of Sales of Marketable Securities with Put Arrangements [Full Text]

EITF 85-41 (Superseded) Accounting for Savings and Loan Associations under FSLIC Management Consignment Program [Full Text]

EITF 85-42 (Superseded) Amortization of Goodwill Resulting from Recording Time Savings Deposits at Fair Values [Full Text]

EITF 85-43 (Superseded) Sale of Subsidiary for Equity Interest in Buyer Status: Resolved by Issue No. 86-29

EITF 85-45 (Superseded) Business Combinations: Settlement of Stock Options and Awards Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF Abstract No. 84-1 (Superseded) 1984 Tax Reform Act: Deferred Income Taxes of Stock Life Insurance Companies Status: Resolved by FAS 109

EITF Abstract No. 84-2 (Superseded) Tax Reform Act of 1984: Deferred Income Taxes Relating to Domestic International Sales Corporations Status: Resolved by FAS 109

EITF 84-6 (Superseded) Termination of Defined Benefit Pension Plans Status: Nullified by FAS 88

EITF 84-7 (Superseded) Termination of Interest Rate Swaps Status: Partially nullified and partially resolved by FAS 133

EITF 84-8 (Superseded) Variable Stock Purchase Warrants Given by Suppliers to Customers Status: Resolved by FAS 123(R)

EITF 84-11 (Superseded) Offsetting Installment Note Receivables and Bank Debt ("Note Monetization") Status: Resolved by FIN 39

EITF 84-12 (Superseded) Operating Leases with Scheduled Rent Increases Status: Nullified by FTB 85-3

EITF 84-13 (Superseded) Purchase of Stock Options and Stock Appreciation Rights in a Leveraged Buyout Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 84-16 (Superseded) Earnings-per-Share Cash-Yield Test for Zero Coupon Bonds Status: Resolved by FAS 85

EITF 84-17 (Superseded) Profit Recognition on Sales of Real Estate with Graduated Payment Mortgages or Insured Mortgages [Full Text]

EITF 84-18 (Superseded) Stock Option Pyramiding Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 84-21 (Superseded) Sale of a Loan with a Partial Participation Retained Status: Resolved by FAS 125

EITF 84-22 (Superseded) Prior Years' Earnings per Share following a Savings and Loan Association Conversion and Pooling Status: Resolved by FAS 141

EITF 84-25 (Superseded) Offsetting Nonrecourse Debt with Sales-Type or Direct Financing Lease Receivables Status: Resolved by FTB 86-2

EITF 84-29 (Superseded) Gain and Loss Recognition on Exchanges of Productive Assets and the Effect of Boot Status: Resolved by Issue No. 86-29

EITF 84-30 (Superseded) Sales of Loans to Special-Purpose Entities Status: Resolved by FIN 46 and FIN 46(R) for entities within the scope of FIN 46 or FIN 46(R)

EITF 84-33 (Superseded) Acquisition of a Tax Loss Carryforward--Temporary Parent-Subsidiary Relationship Status: Resolved by FAS 144

EITF 84-34 (Superseded) Permanent Discount Restricted Stock Purchase Plans Status: Nullified by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)

EITF 84-35 (Superseded) Business Combinations: Sale of Duplicate Facilities and Accrual of Liabilities [Full Text]

EITF 84-38 (Superseded) Identical Common Shares for a Pooling of Interests Status: Nullified by FTB 85-5

EITF 84-39 (Superseded) Transfers of Monetary and Nonmonetary Assets among Individuals and Entities under Common Control Status: Deemed no longer technically helpful

EITF 84-40 (Superseded) Long-Term Debt Repayable by a Capital Stock Transaction Status: Issue 1 nullified by FIN 46 and FIN 46(R) and Issue 2 resolved by FAS 150

EITF 84-41 (Superseded) Consolidation of Subsidiary after Instantaneous In-Substance Defeasance Status: Resolved by FAS 94

EITF 84-43 (Superseded) Income Tax Effects of Asset Revaluations in Certain Foreign Countries Status: Nullified by FAS 109

EITF 84-44 (Superseded) Partial Termination of a Defined Benefit Pension Plan Status: Resolved by FAS 88

EITF Abstracts—Appendix D—Other Technical Matters

Topic D-4 (Superseded) Argentine Government Guarantee of U. S. Dollar-Denominated Loans to the Argentine Private Sector [Full Text]

Topic D-6 (Superseded) Income Capital Certificates and Permanent Income Capital Certificates Status: Deemed no longer technically helpful

Topic D-7 (Superseded) Adjustment of Deferred Taxes to Reflect Change in Income Tax Rate Status: Resolved by FAS 109

Topic D-12 (Superseded) Foreign Currency Translation—Selection of Exchange Rate When Trading Is Temporarily Suspended [Full Text]

Topic D-13 (Superseded) Transfers of Receivables in Which Risk of Foreign Currency Fluctuation Is Retained Status: Superseded by FAS 125

Topic D-14 (Superseded) Transactions involving Special-Purpose Entities [Nullified by FIN 46 and Fin 46(R) for entities within the scope of FIN 46 or FIN 46(R)] [Full Text]

Topic D-15 (Superseded) Earnings-per-Share Presentation for Securities Not Specifically Covered by APB Opinion No. 15 Status: Rescinded by the SEC because of the issuance of FAS 128

Topic D-16 (Superseded) Hedging Foreign Currency Risks of Future Net Income, Revenues, or Costs Status: Nullified by FAS 133

Topic D-17 (Superseded) Continued Applicability of the FASB Special Report on Implementation of Statement 96 Status: Resolved by FAS 109

Topic D-18 (Superseded) Accounting for Compensation Expense If Stock Appreciation Rights Are Cancelled [Superseded by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)] [Full Text]

Topic D-19 (Superseded) Impact on Pooling-of-Interests Accounting of Treasury Shares Acquired to Satisfy Conversions in a Leveraged Preferred Stock ESOP [Nullified by FAS 141] [Full Text]

Topic D-20 (Superseded) Disclosure of Components of Deferred Tax Expense Status: Deemed no longer technically helpful

Topic D-21 (Superseded) Phase-in Plans When Two Plants Are Completed at Different Times but Share Common Facilities [Full Text]

Topic D-22 (Superseded) Questions Related to the Implementation of FASB Statement No. 105 Status: Nullified by FAS 133

Topic D-25 (Superseded) Application of APB Opinion No. 10, Paragraph 7, to Market Values Recognized for Off-Balance-Sheet Financial Instruments Status: Resolved by FIN 39

Topic D-26 (Superseded) SEC Disclosure Requirements Prior to Adoption of Standard on Accounting for Postretirement Benefits Other Than Pensions Status: Deemed no longer technically helpful

Topic D-27 (Superseded) Accounting for the Transfer of Excess Pension Assets to a Retiree Health Care Benefits Account [Full Text]

Topic D-28 (Superseded) SEC Disclosure Requirements Prior to Adoption of Standard on Accounting for Income Taxes Status: Deemed no longer technically helpful

Topic D-29 (Superseded) Implementation of FASB Statement No. 107 Status: Deemed no longer technically helpful

Topic D-32 (Superseded) Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations [Full Text]

Topic D-33 (Superseded) Timing of Recognition of Tax Benefits for Pre-reorganization Temporary Differences and Carryforwards [Full Text]

Topic D-35 (Superseded) FASB Staff Views on Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" [Full Text]

Topic D-36 (Superseded) Selection of Discount Rates Used for Measuring Defined Benefit Pension Obligations and Obligations of Postretirement Benefit Plans Other Than Pensions [Full Text]

Topic D-37 (Superseded) Classification of In-Substance Foreclosed Assets Status: Nullified by FAS 114

Topic D-38 (Superseded) Reclassification of Securities in Anticipation of Adoption of FASB Statement No. 115 Status: Deemed no longer technically helpful

Topic D-40 (Superseded) Planned Sale of Securities following a Business Combination Expected to Be Accounted for as a Pooling of Interests [Superseded by FAS 141] [Full Text]

Topic D-41 (Superseded) Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of FASB Statement No. 115 [Full Text]

Topic D-42 (Superseded) The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock [Full Text]

Topic D-43 (Superseded) Assurance That a Right of Setoff Is Enforceable in a Bankruptcy under FASB Interpretation No. 39 [Full Text]

Topic D-44 (Superseded) Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value Status: Superseded by FSP FAS 115-1/124-1

Topic D-45 (Superseded) Implementation of FASB Statement No. 121 for Assets to Be Disposed Of Status: Superseded by FAS 144

Topic D-47 (Superseded) Accounting for the Refund of Bank Insurance Fund and Savings Association Insurance Fund Premiums [Full Text]

Topic D-48 (Superseded) The Applicability of FASB Statement No. 65 to Mortgage-Backed Securities That Are Held-to-Maturity Status: Superseded by FAS 125

Topic D-49 (Superseded) Classifying Net Appreciation on Investments of a Donor-Restricted Endowment Fund [Full Text]

Topic D-50 (Superseded) Classification of Gains and Losses from the Termination of an Interest Rate Swap Designated to Commercial Paper [Full Text]

Topic D-51 (Superseded) The Applicability of FASB Statement No. 115 to Desecuritizations of Financial Assets [Full Text]

Topic D-52 (Superseded) Impact of FASB Statement No. 125 on EITF Issues Status: No longer necessary because the impact of FAS 125 and FAS 140 has been incorporated into relevant STATUS sections

Topic D-53 (Superseded) Computation of Earnings per Share for a Period That Includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock [Full Text]

Topic D-54 (Superseded) Accounting by the Purchaser for a Seller’s Guarantee of the Adequacy of Liabilities for Losses and Loss Adjustment Expenses of an Insurance Enterprise Acquired in a Purchase Business Combination [Full Text]

Topic D-56 (Superseded) Accounting for a Change in Functional Currency and Deferred Taxes When an Economy Becomes Highly Inflationary [Full Text]

Topic D-58 (Superseded) Effect on Pooling-of-Interests Accounting of Certain Contingently Exercisable Options to Buy Equity Securities Status: Superseded by Issue No. 97-9

Topic D-59 (Superseded) Payment of a Termination Fee in Connection with a Subsequent Business Combination That Is Accounted for Using the Pooling-of-Interests Method [Nullified by FAS 141] [Full Text]

Topic D-60 (Superseded) Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion Feature [Superseded by Issue No. 98-5 for instruments issued after May 20, 1999] [Full Text]

Topic D-63 (Superseded) Call Options “Embedded” in Beneficial Interests Issued by a Qualifying Special-Purpose Entity Status: Nullified by FAS 140

Topic D-64 (Superseded) Accounting for Derivatives Used to Hedge Interest Rate Risk Status: Nullified by FAS 133

Topic D-65 (Superseded) Maintaining Collateral in Repurchase Agreements and Similar Transactions under FASB Statement No. 125 [Full Text]

Topic D-66 (Superseded) Effect of a Special-Purpose Entity's Powers to Sell, Exchange, Repledge, or Distribute Transferred Financial Assets under FASB Statement No. 125 [Full Text]

Topic D-67 (Superseded) Isolation of Assets Transferred by Financial Institutions under FASB Statement No. 125 [Full Text]

Topic D-68 (Superseded) Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of an Investee [Full Text]

Topic D-69 (Superseded) Gain Recognition on Transfers of Financial Assets under FASB Statement No. 140 [Full Text]

Topic D-71 (Superseded) Accounting Issues Relating to the Introduction of the European Economic and Monetary Union (EMU) [Full Text]

Topic D-72 (Superseded) Effect of Contracts That May Be Settled in Stock or Cash on the Computation of Diluted Earnings per Share [Full Text]

Topic D-73 (Superseded) Reclassification and Subsequent Sales of Securities in Connection with the Adoption of FASB Statement No. 133 Status: Resolved by FAS 133

Topic D-75 (Superseded) When to Recognize Gains and Losses on Assets Transferred to a Qualifying Special-Purpose Entity Status: Superseded by FAS 140

Topic D-76 (Superseded) Accounting by Advisors for Offering Costs Paid on Behalf of Funds, When the Advisor Does Not Receive both 12b-1 Fees and Contingent Deferred Sales Charges [Full Text]

Topic D-77 (Superseded) Accounting for Legal Costs Expected to Be Incurred in Connection with a Loss Contingency [Full Text]

Topic D-79 (Superseded) Accounting for Retroactive Insurance Contracts Purchased by Entities Other Than Insurance Enterprises Status: Codified in Issue No. 03-8

Topic D-81 (Superseded) Accounting for the Acquisition of Consolidated Businesses Status: Rescinded by the SEC

Topic D-82 (Superseded) Effect of Preferred Stock Dividends Payable in Common Shares on Computation of Income Available to Common Stockholders [Full Text]

Topic D-84 (Superseded) Accounting for Subsequent Investments in an Investee After Suspension of Equity Method Loss Recognition When an Investor Increases Its Ownership Interest from Significant Influence to Control through a Market Purchase of Voting Securities [Full Text]

Topic D-85 (Superseded) Application of Certain Transition Provisions in SEC Staff Accounting Bulletin No. 101 [Full Text]

Topic D-87 (Superseded) Determination of the Measurement Date for Consideration Given by the Acquirer in a Business Combination When That Consideration Is Securities Other Than Those Issued by the Acquirer [Full Text]

Topic D-90 (Superseded) Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to a Nonemployee [Full Text]

Topic D-91 (Superseded) Application of APB Opinion No. 25 and FASB Interpretation No. 44 to an Indirect Repricing of a Stock Option [Superseded by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)] [Full Text]

Topic D-92 (Superseded) The Effect of FASB Statement No. 135 on the Measurement and Recognition of Net Periodic Benefit Cost under FASB Statements No. 87 and No. 106 Status: Nullified by FAS 145

Topic D-93 (Superseded) Accounting for the Rescission of the Exercise of Employee Stock Options [Superseded by FAS 123(R) except for entities within the scope of paragraph 83 of FAS 123(R)] [Full Text]

Topic D-94 (Superseded) Questions and Answers Related to the Implementation of FASB Statement No. 140 Status: Superseded by FTB 01-1

Topic D-95 (Superseded) Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share Status: Superseded by Issue No. 03-6

Topic D-99 (Superseded) Questions and Answers Related to Servicing Activities in a Qualifying Special-Purpose Entity under FASB Statement No. 140 Status: [No longer necessary because Topic D-99 has been incorporated into FASB Staff Implementation Guides, Questions 22A, 24A, 25A–B, and 28A–D in Q&A 140]

Topic D-100 (Superseded) Clarification of Paragraph 61(b) of FASB Statement No. 141 and Paragraph 49(b) of FASB Statement No. 142 [Full Text]

Topic D-101 (Superseded) Clarification of Reporting Unit Guidance in Paragraph 30 of FASB Statement No. 142 [Full Text]

Topic D-102 (Superseded) Documentation of the Method Used to Measure Hedge Ineffectiveness under FASB Statement No. 133 [Full Text]

Topic D-103 (Superseded) Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred Status: Renumbered as Issue No. 01-14

Topic D-104 (Superseded) Clarification of Transition Guidance in Paragraph 51 of FASB Statement No. 144 [Full Text]

Topic D-105 (Superseded) Accounting in Consolidation for Energy Trading Contracts between Affiliated Entities When the Activities of One but Not Both Affiliates Are within the Scope of Issue No. 98-10 Status: Superseded by Issue No. 02-3

Topic D-106 (Superseded) Clarification of Q&A No. 37 of FASB Special Report, A Guide to Implementation of Statement 87 on Employers’ Accounting for Pensions Status: Superseded by FAS 158

Topic D-109 (Superseded) Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133 [Full Text]

IRC section 162(a) states the basic rule for deducting business expenses from gross income.  The section states that in order to deduct business expenses from a taxpayer's gross income, those expenses must be "ordinary and necessary."  As this opinion implicitly points out, the definitions of the terms ordinary and necessary are the result of case law and not something defined in the code.

An expense is ordinary if it is customary or usual within a particular trade, business, or industry or relates to a transaction 'of common or frequent occurrence in the type of business involved.'   Deputy v. du Pont. 308 U. S. 488, 495 (1940).

An expense is necessary if it is appropriate and helpful for the development of the business.  Commissioner v. Heininger, 320 U. S. 467, 475 (1943).

On top of these definitions, the tax court overlays an additional requirement: reasonableness.

The Court of Appeals for the Sixth Circuit, to which any appeal of this case would lie, has held that for expenses to be deductible as ordinary and necessary, they must be reasonable, because 'the element of reasonableness is inherent in the phrase 'ordinary and necessary.'  Commissioner v. Lincoln Elec. Co. 176 F.2d 815, 817 (6th Cir. 1949).

The facts in this case are fairly straightforward.  The taxpayers owned, among others, a corporation called Top Line Express, Inc. and a limited liability company called Grasshopper Leasing, L. L.C.  Top Line Express is trucking company.  Grasshopper is truck leasing company.  Grasshoper often would lease trucks to Top Line Trucking.

During the tax years 2004 and 2005, Grasshopper paid Top Line approximately $210,000 for management and administrative services.  Because Grasshopper is a passthrough entity, its income and expenses passthrough to its members and are reported on the member's individual income tax return.  In this case, the taxpayers reported the $210,000 management and administrative services as deductions on their individual income tax return.

The IRS disallowed these deductions, arguing the expenses did not meet the section 162(a) rule, i. e. they were not ordinary and necessary business expenses of Grasshopper.

After stating the general rule of law discussed above, the tax court held for the IRS.  In its analysis, the court found dispositive the following facts:

[P]etitioners have failed to demonstrate how the management fees in question were determined.  They have no contemporaneous documentation. There was no written contract for the management fees.  We question whether these amounts were determined at arm's length, since petitions was the sole owner of both Grasshopper Leasing and Top Line Express. (7).

According to petitioner's testimony. over half the hours allegedly worked by Top Line employees on behalf of Grasshopper consisted of services in the categories of sales management, safety, and driver relations.  Petitioners have not convinced us that it was necessary for Grasshopper to incur expenses for such services. since Grasshopper had no customers other than Top Line and other related entities.  Moreover. Grasshopper had [no] need to recruit, train, test, track, or dispatch truck drivers, since it employed no drivers.  In addition, we are not convinced that [the] consulting services that petitioner allegedly provided to Grasshopper were performed in his capacity as an employee of Top Line rather than in his individual capacity as sole owner of Grasshopper.  Indeed, because Grasshopper had no other owners and no employees, it is not apparent with whom at Grasshopper petitioner might have consulted, other than himself. (10).

Hopefully it becomes clear to the reader the scam that the taxpayer in this case was trying to pull off.  It should become equally clear how the tax court saw right through it.

The taxpayer thought he could create business deductions in a passthrough entity by having his LLC pay "management expenses" to his corporation.  This creates taxable income for the corporation and expense for the LLC.  The LLC is a passthrough entity, thus the expense flows through to his individual income tax return, where he can use those expenses to offset other income such as wages and interest income.  The revenue is of course taxable income inside his corporation, but probably taxed at lower corporate rates, and most likely offset by significant expenses in his trucking business.

Notwithstanding the fact that the IRS caught the taxpayer, it makes no sense to me why the taxpayer tried to shift income from a passthrough entity into a corporate entity.  Shareholders of the corporate entity pay two levels of tax: the corporate level tax, and the dividend tax.  Now that the taxpayer has created taxable income in his corporate entity, he will pay dividend tax when he, as the sole shareholder, receives the income.

It would be interesting to know if the IRS will let the taxpayer unwind this transaction.  The worst case scenario for the taxpayer would be for the IRS to not only disallow the deduction (which is what occurred here) but also require Top Line to pay tax on the income. after all, there is no requirement that revenue be "ordinary and necessary" before it is subject to tax!

Finally, the best part of the opinion is when the tax court took note that Grasshopper had no employees, let alone truck drivers, so why did Grasshopper need to pay for driver safety.  If you are going to set up a scam, at least make sure it passes the "hold your nose" prueba.

May 27, 2010

The taxpayers received income, and distributions, from a partnership but never received a K-1. Because they did not receive the K-1, they did not report the income on their 2005 tax return. The Tax Court holds that nonreceipt of the K-1 is not a defense to the 20% accuracy-related penalty; the taxpayers have an obligation to make a good faith attempt to obtain the K-1.

This case follows a general theme from the past few days; pass-through entities can be traps for the unwary. For comparison with the holding in this case, see Jones v. Commissioner (posted here ), where the taxpayers also did not receive a K-1, and they made no reasonable attempt to obtain one. Consequently, the Tax Court assessed an accuracy-related penalty.

It also came out at trial that the taxpayers provided their CPA a K-1 from the partnership in 2004 with a small amount of income. (3 fn.4). Although under no obligation under the tax code, as a matter of best practice, practitioners should make an inquiry when information provided in year 1 is missing or incomplete in year 2. Suppose, for example, in year 1 the taxpayer provided a W-2 from XYZ, Inc. but in year 2 the taxpayer did not provide a W-2 from XYZ. A practitioner should ask whether the taxpayer changed jobs, or if the W-2 is missing.

This point is even more important when you know the taxpayer has a p'ship interest. The taxpayer should receive a K-1 every year until she disposes of the interest, which is itself a taxable event that has significant implications. As applied to the Ziegelers, I do not know whether their CPA made such an inquiry, but if she had, it might have saved the Ziegelers significant time and money. Moreover, the new AICPA Statement on Standards for Tax Services, effective Jan. 1, 2010, state that practitioners should make use of prior year returns to "avoid the omission of items" on the current year return. Tax Executive Committee, Statement on Standards for Tax Services 17 (2009).

Respondent determined a $25,123 deficiency in petitioners’ 2005 Federal income tax and a $5,025 accuracy-related penalty under section 6662(a). Petitioners concede liability for the $25,123 deficiency. The issue remaining for decision is whether petitioners are liable for the section 6662(a) accuracy-related penalty. (2).

Randi Bach (Ms. Bach), a certified public accountant (C. P.A.), prepared petitioners’ 2005 Federal income tax return.

Petitioner did not provide Ms. Bach with a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. from HealthFirst or any additional information that would have enabled her to calculate his income from HealthFirst. (3).

In order to prevail on this issue, the taxpayer must prove by a preponderance of the evidence that the taxpayer meets each requirement of the following three-prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reliance; (2) the taxpayer provided all necessary and accurate information to the adviser; and (3) the taxpayer actually relied in good faith on the adviser’s judgment. Neonatology Associates, P. A. v. Commissioner, supra at 98-99. The ultimate responsibility for a correct return lies with the taxpayer, who must furnish the necessary information to the agent who prepares the return. ASAT, Inc. v. Commissioner, 108 T. C. 147, 176 (1997). (6).

Petitioners have failed to meet their burden of proving that they acted with reasonable cause and in good faith. Though petitioners never received a Schedule K-1, they never requested one, nor did they make any attempt to calculate and report the income from HealthFirst. (7).

Petitioners’ contention that nonreceipt of a Schedule K-1 constitutes reasonable cause is mistaken. See Deas v. Commissioner, T. C. Memo. 2000-204 (nonreceipt of Schedule K-1 did not constitute reasonable cause where taxpayer failed to report partnership income). (7).

Also, the fact that a C. P.A. prepared petitioners’ tax return does not establish good faith reliance on an independent, competent professional in this case. Petitioners did not provide Ms. Bach with necessary and accurate information for her to correctly determine petitioner’s income. (7)

Ms. Bach credibly testified that had petitioner informed her of the income from HealthFirst, she would have reported it. Ms. Bach was not required to perform an audit of petitioner’s books and records. (8).

The issues for decision are: (1) Whether petitioner’s former husband’s distributive share of the income of two pass-through entities is includable in their joint income for the year at issue.

Mr. Jones is a 45-percent shareholder of Hadley & Pech, Inc. (Hadley & Pech), an aviation management company that is an S corporation, and a 50-percent owner of Archipelago Aviation, LLC (Archipelago), a limited liability company that charters aircraft and is taxed as a partnership. Roger Sutton (Mr. Sutton), who was a friend of Mr. Jones’, owns the remaining 55 percent of Hadley & Pech and 50 percent of Archipelago.  (3).

For 2005 Hadley & Pech and Archipelago had $101,927 and $212,298 of ordinary net business income, respectively. Mr. Jones’ shares of that income, as Mr. Sutton eventually reported to the Internal Revenue Service (IRS) on the Schedules K-1, were $45,867 and $106,149, respectively. Hadley & Pech’s cash distributions for 2005 consisted of $115,000 to Mr. Sutton and $10,000 to Mr. Jones, while Archipelago did not make any distributions for 2005.  (4).

Although Mr. Jones received only a $10,000 cash distribution from Hadley & Pech in 2005, as a shareholder he was required to recognize his 45-percent share of the S corporation’s income even though it was not distributed. (7).

Archipelago reported ordinary net business income of $212,298 on its partnership return but did not make distribution to Mr. Sutton or Mr. Jones during 2005.  As a 50-percent partner, Mr. Jones is required to recognize and report $106,149, his share of the partnership income even though it was not distributed to the partners. (9).

This is an unfortunate, but correct, outcome for Mr. & Mrs. Jones.  Pass-through entities, such as partnerships and S-corporations, are double-edge swords for the unwary.  On the one hand, distributions of cash from the entity are generally not taxed.  But on the other hand, the partner's/shareholder's share of net income is taxable, EVEN IF NO DISTRIBUTIONS WERE MADE.

There were two more decisions for the court to decide: innocent spouse relief, and accuracy-related penalty.  Ms. Jones won the first and lost the second.

May 20, 2010

The Tax Court held that a divorce decree allocating existing tax liabilities equally between spouses is not controlling for innocent spouse relief claims.

Petitioner and Mr. Acoba divorced on June 13, 2002. As part of the judgment of divorce, petitioner and Mr. Acoba each agreed to pay “50% of Internal Revenue Service debt for back taxes, interest, and penalties”. (3).

Petitioner argues that she should be liable for only 50 percent of the liabilities for the years at issue as provided in the divorce decree. (7).

Section 6013(d)(3) provides that if a joint return is filed, the tax is computed on the taxpayers’ aggregate income and liability for the resulting tax is joint and several. See also sec. 1.6013-4(b), Income Tax Regs. But the Internal Revenue Service (IRS) may relieve a taxpayer from joint and several liability under section 6015 in certain circumstances.  (5).

To obtain relief from joint and several liability, a spouse must qualify under section 6015(b), or, if eligible, may allocate liability under section 6015(c). In addition, if relief is not available under section 6015(b) or (c), a spouse may seek equitable relief under section 6015(f). (5).

This case does not involve a deficiency or an understatement of tax and, therefore, relief under section 6015(b) and (c) is not available to petitioner. (5).

Rev. Proc. 2003-61, sec. 4.01, 2003-2 C. B. at 297, sets forth seven threshold conditions that must be satisfied before the Commissioner will consider a request for equitable relief under section 6015(f). (7).

[A]fter weighing all the factors, the Court concludes that petitioner’s intimate involvement in the financial matters of the marriage and her knowledge of the protracted financial decline of the marriage should have put her on notice that filing a joint Federal income tax return was, for her, a poor choice. (13-14).

Unfortunately for Ms. Acoba, as the tax court points out, her divorce agreement does not defeat her "joint and several" liability for unpaid taxes.  This means the IRS can pursue either of them for 100% of the tax liability, regardless of their private agreement to share the burden equally.  If Ms. Acoba pays the entire amount, either voluntarily or involuntarily via IRS levy, the divorce decree will serve as her means for getting reimbursed by her husband.  Of course, if he has no money, she is going to have a hard time collecting.  She effectively becomes an unsecured creditor of her ex-husband, not a good place to be.

January 27, 2010

Question for the Tax Court

May a taxpayer deduct education expenses as trade or business expenses when the education expenses directly related to the taxpayer's existing trade or business, but were part of a program of study that led to a new trade or business?

During the years at issue, 2005 and 2006, Mr. Shah was an undergraduate student at New York University (NYU), where he majored in film and television studies. (3).  To meet his graduation requirements he was required to complete both the core courses of his major and elective courses from other fields of study. (3).  A substantial number of the elective courses. were in computer science, web design, and multimedia. (3).

While attending high school in Chicago, IL, Mr. Shah began performing information technology services for clients of his Dad's business. (3).  Part of the work involved working on websites for these clients. (4).  He earned between $5,000 and $10,000 during 2003 and 2004 providing these services. (3).

After graduating from NYU, he began working in the entertainment industry. creating multimedia content for his employer's website. (4).

On his 2005 and 2006 tax return, Mr. Shah deducted the costs of the classes he took at NYU that related to his trade or business as a website designer while in high school. (8).

When are Education Expenses Deductible as a Trade or Business Expense?

The Tax Court does not recite the applicable regulations in their opinion, but they are helpful for the analysis so I have provided them below.

Regulation 1.162-5(a) states in part:  [e]xpenditures made by an individual for education. are deductible as ordinary and necessary business expenses (even though the education may lead to a degree ) if the education -

(1) Maintains or improves skills required by the individual  in his employment or other trade or business, or

(2) Meets the express requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.

Exceptions to the General Rule

Regulation 1.162-5(b)(2) states in part:  The first category of nondeductible educational expenses. are expenditures made by an individual for education which is required. to meet the minimum educational requirements for qualification in his employment or other trade or business.

Regulation 1.162-5(b)(3) states in part:  The second category of nondeductible education expenses. are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business.

Argument Made by Taxpayer

Petitioner maintains that he deducted only tuition and book costs for those classes related to his computer work.  (7).  Specifically, petitioner posits that since he was employed in Web design and multimedia while in high school, classes he took at NYU related to those fields should be considered to be qualifying work-related education that improved skills and not a program of study that qualifies him for a new trade or business. (8).

While his computer and Web design courses may have improved his skills, they also helped qualify petitioner for a new trade or business. (8).  These courses were necessary for him to earn his bachelor's degree since he could not have graduate from NYU without those credits. (8).  Therefore, these courses were part of a course of study that will lead to qualifying petitioner in a new trade or business. (8).  As we stated in Warren v. Commissioner, supra:  "what is important under the regulations is that the degree 'will lead' petitioner to qualify for a new trade or business. (8) citations omitted.  Consequently, we hold that petitioner may not deduct his tuition and book expenses for 2005 and 2006. (8).

The Court reached the right conclusion, but for the wrong reason.

The Court concludes that Mr. Shah's bachelor's degree qualifies him for a new trade or business different from his web design trade or business, but they don't say what that new trade or business is.  In reaching this conclusion, the Court places emphasis on the fact that Mr. Shah could not graduate NYU without the credits in website design and multimedia classes.  I suppose the inference we are meant to draw from this point is that education leading to a bachelor's degree in XYZ implicitly qualifies the taxpayer for a new trade or business.

However, this ignores the first sentence in the regulation that allows a deduction for education expenses "even though the education may lead to a degree."  Based on the first sentence of the regulations, it would seem irrelevant then that the credits in web design and multimedia classes were required to graduate from NYU.  In fact, if this were the standard, almost every type of secondary education expense would be nondeductible as trade or business expenses.

The Court should have placed their emphasis on the type of bachelor's degree Mr. Shah was pursuing, "film and television studies."  The Court then could reasonably hold that "film and television studies" qualified Mr. Shah for a trade or business different from web design, namely "film and television."  Mr. Shah points out, however, that he only deducted the courses that specifically related to his web design trade or business.  But the Tax Court correctly responds that the regulations exclude education expenses that are "part of a program of study that qualifies him for a new trade or business."  Mr. Shah's web design classes were "part of a program of study".

Separately, the Court might have focused on the first category of nondeductible education expenses, those that "meet the minimum requirements of his employment or other trade or business."  Presumably, Mr. Shah's bachelor's degree "meets the minimum requirements of. [an] other trade or business."

January 21, 2010

This is a long post because the decision will have some widespread implications, even though it is a tax court summary opinion, which is by definition of no precedential value.

Question for the Tax Court

Is a registered nurse working in an administrative role in the healthcare industry entitled to deduct the costs of an MBA with a focus in healthcare management, or does the MBA qualify her for a new trade or business, thus not deductible?

Petitioner, Ms. Singleton-Clarke, is a registered nurse (RN) with 24 years experience.  From 2004 to 2007 she worked for Civista Medical Center.  (3).  Her job title was quality improvement coordinator and her responsibilities were to coordinate the quality improvement and risk management activities for the hospital. (3).  The minimum education and experience requirements were 'a Bachelor of Science degree in Nursing or equivalent education and experience'. and 'current licensed as a RN. ' (4).

From 2007 to 2008 she worked for Children's National Medical Center in Washington, D. C.  (4).  Her job requirements stated:  'Bachelor's in Nursing; Master's in Public Health preferred.  Two years quality improvement experience in a hospital setting. ' (4).

In late 2008, she began working at St. Mary's Hospital.  Her title is performance management coordinator, and. her duties focus on coordinating, planning, and implementing the Hospital's performance improvement activities.  The job qualifications are:  RN license required.  B. S. Health Care Administration required--Masters preferred.

Petitioner began taking courses at the University of Phoenix in March 2005, graduating in April 2008 with an MBA/HCM.  (5).  The MBA/HCM provides students 'with the business management skills needed to manage successfully in today's health care delivery systems.'  The program features courses in 'health care organizations, health care finance, quality and database management, health care infrastructure, and health care strategic management.'

Ms. Singleton-Clarke paid the entire cost of the program and none of her employers had a reimbursement policy for the MBA/HCM program.  Ms. Singleton-Clarke deducted $14,787 in unreimbursed employee business expenses for education expenses.  The IRS disallowed the entire amount.

When Are Education Expenses Deductible?

Section 1.162-5, Income Tax Regs. Expenses for Education (the regulation), interpreting section 162, Trade or Business Expenses, governs whether a taxpayer may deduct education expenses.  The regulation provides that a taxpayer may deduct education expenses as ordinary and necessary business expenses

if the education--

(1) Maintains or improves skills required by the individual in his employment or other trade or business, or

(2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.

Segundo. 1.162-5(a)(1) and (2), Income Tax Regs.

Conversely, the regulation provides that if the education qualifies the individual for a new trade or business, then the education expenses are not deductible because the education is a personal expense or constitutes an accumulation of personal capital. Segundo. 1.162-5(b)(3), Income Tax Regs.

Whether the education qualifies the taxpayer for a new trade or business is an objective inquiry analyzing the tasks and activities the taxpayer was able to perform before the education in comparison to those the taxpayer was qualified to perform afterward. (citations omitted). In other words, the relevant standard is whether the education objectively qualifies the taxpayer for a new trade or business. (citations omitted).  Accordingly, the taxpayer's subjective intent in undertaking the education is not relevant, and likewise it is not material whether the taxpayer does in fact become employed in a new trade or business. (citations omitted).

IRS's First Contention:  The MBA/HCM was a prerequisite to the St. Mary's job

The IRS contends that without receiving the MBA/HCM in April 2008 petitioner would not have obtained her final job, the one she started in September 2008 at St. Mary's, because the St. Mary's job description. required at least a bachelor of science in health care administration, which petitioner had not previously earned.

We believe that St. Mary's would have gladly hired petitioner. even without the MBA/HCM.  All three positions, [prior to her St. Mary's position], required an RN license or a bachelor's in nursing, with clinical or risk management experience; credential the petitioner possessed. (10).

[W]e find that the MBA/HCM may have been a helpful addition to her qualifications, but was not an essential prerequisite for petitioner to secure the position at St. Mary's. 

IRS's Second Contention:  The MBA qualifies petitioner for a new trade or business

The IRS contends that the MBA/HCM does qualify petitioner for a new trade or business, because in respondent's words, under the regulation 'the tasks and activities she was qualified for before she obtained the degree are different than those which she is qualified to perform afterwards'.

Tax Court's Answer:  The MBA does not qualify petitioner for a new trade or business

An MBA degree is different from a degree that serves as foundational qualifications to attain a professional license.  For instance, this Court had denied deductions for law school expenses, because a law degree qualifies a taxpayer for the new trade or business of being a lawyer. (11).

An MBA is a more general course of study that does not lead to a professional license or certification. (11).

This Court has had differing outcomes when deciding whether a taxpayer may deduct education expenses related to pursuing an MBA, depending on the facts and circumstances of each case. (12).

Analyzing petitioner's situation, her facts and circumstances far more closely resemble the cases that allowed a deduction for pursuing an MBA.  Petitioner worked for 1 year as a quality control coordinator and had more than 20 years of directly related work experience, gaining vast clinical and managerial knowledge in acute and subacute health care settings, before beginning the University of Phoenix MBA/HCM program. (15).

[T]he MBA/HCM may have improved petitioner's preexisting skill set, but objectively, she was already performing the tasks and activities of her trade or business before commencing the MBA. (16).

I think the Tax Court missed the mark here.  They do a wonderful job of articulating the law but then drop the ball when applying the facts to the law.  Its analysis regarding whether an MBA qualifies the taxpayer for a new trade or business is overly generous, and is almost certain to allow any taxpayer with even remote ties to any sort of existing trade or business a free ride on the Fisc's shoulders for an MBA. 

A walk through the regulations will help highlight my point.  The regulations lay out a test that has two prongs, both of which must be satisfied before education expenses are deductible. 

The first prong can be satisfied in one of two ways: either by showing that the MBA "improves existing skills required by the employer or trade or business" OR by showing that the MBA "is required condition of retaining the current job".  Here, Ms. Clarke's MBA was not a condition to her keeping her job, thus she had to show that the MBA improves the skills required by her current job, namely " coordinating, planning, and implementing the Hospital's performance improvement activities."  No big disagreement here, an MBA improves this required skill.

The second prong is always the more difficult prong for taxpayers to pass.  The second prong requires a showing that the MBA does not qualify you for a new trade or business.  It does not matter whether the taxpayer actually takes a job in a new trade or business, it only matters that the taxpayer is now qualified to do something different.  A key question is whether the taxpayer's current trade or business should be considered in determining if the education qualifies the taxpayer for a "new" trade or business.  Based on examples provided in the IRS regulations, I think the answer is yes.  How do you know if the taxpayer is qualified to do something "new" without comparing a "hypothetical new trade or business" to the "old trade or business"?

Here, Ms. Clarke's "old" trade or business is in the field of healthcare management.  Now that she has an MBA, is she qualified to leave healthcare management and go work in a different industry? This is where the Tax Court's analysis completely breaks down.  The Court considers an MBA, "a general course of study" that may or may not qualify the taxpayer for a new trade or business depending on the facts and circumstances.  It might be helpful to know that all MBA's from accredited institutions require 2/3 of the studies to be in various areas of accounting, marketing, operations management, etc.  The other 1/3 can focus in concentrations or other areas of study.  Ms. Clarke's MBA/HCM from the University of Phoenix is no different.  36-54 credit hours must be in required courses of study such as accounting, marketing, business law, management, economics, etc.  After which, 15 credits can be taken in areas of study/concentration such as Health Care Management.

I find it extremely unreasonable to conclude that this course of study does not qualify Ms. Clarke to leave the field of healthcare management and pursue any myriad of job opportunities in other industries with her new MBA.  I would conclude that she is absolutely qualified to "perform tasks and activities different" from those she was qualified to do before her MBA.  To conclude otherwise ignores the fact that 2/3 of her course of study were not relevant to her existing position.

December 17, 2009

Question for the Tax Court

May Mr. Menzies deduct unreimbursed employer expenses for business use of his personal vehicle even though he discarded the day planner that he recorded his mileage in?

Mr. Menzies held two jobs during 2005 interspersed with two periods of unemployment.  (2).  During the first half of 2005, he worked as a fire restoration field technician. (2).  During the second half of 2005, he worked as a field operations supervisor for a security company. (2).  Both jobs required Mr. Menzies to use his personal vehicle to travel during the day to various jobsites. (3).

The taxpayer deducted $18,649 in unreimbursed employee business expenses on schedule A of his 2005 tax return. (4).  The expenses consisted of $12,249 for business use of his personal vehicle, $400 for travel, and $6,000 for other miscellaneous unreimbursed employee business expenses. (4).

The IRS disallowed the taxpayer's entire deduction for lack of substantiation. (5).

Law for Unreimbursed Employee Business Expenses

Section 162(a) allows a deduction for ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business. (6).  Generally, the performance of services as an employee constitutes a trade or business.  Primuth v. Commissioner. 54 T. C. 374, 377 (1970). (6).  For such expenses to be deductible, the taxpayer must not have received reimbursement and must not have the right to obtain reimbursement from his employer.  See Orvis v. Commissioner. 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T. C. Memo. 1984-533. (6).

If a taxpayer establishes than an expense is deductible but is unable to substantiate the precise amount, the Court may estimate the amount, bearing heavily against the taxpayer whose inexactitude is of his own making.   Cohan v. Commissioner. 39 F.2d 540, 543-44 (2d Cir. 1930) (the Cohan rule or simply Cohan ). (6).

Section 274(d), however, supersedes the Cohan rule with regard to certain expense.  Section 274(d) requires stricter substantiation for. travel, meals, and listed property such as personal automobiles. (7).

Answer from the Tax Court: no record, no deduction

[Here], the taxpayer calculated the amount of the deduction ($12,249) by multiplying the business mileage by the standard mileage rates in effect during 2005. (8).  Each workday, the taxpayer recorded the mileage from his first worksite to the last worksite of the day in a "day planner". (8).  He noted all the sites he visited during the day; however, he did not record the mileage between sites. (8).

Mr. Menzies testified that he discarded his day planner in 2007, sometime after filing his 2006 return and receiving his refund, because he felt the documentation was no longer necessary. (8).  He was therefore unable to produce any records to substantiate the business mileage, and, further, he did not attempt to reconstruct a record of his business mileage. (8).

The Court believes Mr. Menzies incurred unreimbursed vehicle expense related to his work. during 2005.  However, the Court may not estimate vehicle expenses under Cohan.  Therefore, we must sustain the IRS's determination. (9).

NOTE:  The Court also sustained the IRS's determination with respect to the $400 in travel expenses, but did allow 50% of Mr. Menzies' $6,000 in other miscellaneous unreimbursed items; subject to the 2% floor of course.  I think they felt sorry for him!

Ouch! This was a very harsh lesson for the taxpayer.  Taxpayer's should keep records supporting the amounts on their tax returns for at least three years.  The IRS makes this very clear on page 91 of the Form 1040 instructions .  Of course, I am sure taxpayers thoroughly read the Form 1040 instructions before preparing their tax returns, all 174 pages!

Having read several tax court opinions over the last six months, it has become very apparent that the IRS's "go to" argument against taxpayers is lack of substantiation for their deductions.  Given the importance of record keeping, the three-year guidance should be front and center on the instructions to every tax form, not buried 91 pages into a 174 page document.

Moreover, Mr. Menzies claimed his unreimbursed employee business expenses on Form 2106-EZ .  The instructions for this form do not even mention the three-year record keeping requirement, only that records must be kept.  As applied here, Mr. Menzies did keep records, he just did not keep them long enough.

This case was recently featured on TaxProf Blog because of the Tax Court's novel application of the Cohen  rule to Mr. Raggassa's charitable contribution deductions.

Questions for the Tax Court

Does lack of substantiat ion preclude deductions for charitable contributions?

Is a preliminary notice from the IRS, for example a 30-day letter, required before the IRS can assess a valid deficiency?

Is the IRS bound by the communications of its representatives, even if the taxpayer relies on those communications to their detriment?

Mr. Regassa claimed the following deductions on his 2005 Tax Return. (4).  The IRS disallowed a large portion because Mr. Regassa could not substantiate the deductions taken.

Mr. Regassa claims that he did not receive any preliminary notices, such as the so-called 30-day letter, that the IRS normally sends to taxpayers.  Therefore, depriving him of an opportunity to discuss the adjustments with the IRS before they determined his deficiency. (5).

He also claims that the IRS representative, Mr. Theodore, misled him during a conversation when Mr. Theodore said, the IRS was "all set" with respect to the adjustments.  Mr. Regassa interpreted Mr. Theodore's comments to mean he did not owe anything to the IRS.  Consequently, Mr. Regassa nearly missed the deadline to file a petition with the Tax Court upon discovering he still owed $1,575. (7-8).

The Tax Court answered "No" to question 2

Preliminary notices and administrative meetings may be courteous and may allow taxpayers to resolver early misconceptions by the Commissioner, but section 6212(a) (setting forth the requirements for issuing a notice of deficiency) or any other section does not require them. (6-7).  As long as the notice of deficiency reveals on its face that the Commissioner has made a determination for a particular year, in a particular amount, and after reviewing the information specific to the particular taxpayer, then barring unusual facts or circumstances not present here, the notice of deficiency is valid. (6).

The Tax Court answered "No" to question 3

[T]he Commissioner is empowered to retroactively correct mistakes of law, even where a taxpayer has relied to his detriment on the Commissioner's mistake.

The Tax Court answered "No" to question 1 (but see Blog Comments at the end of this post)

For each charitable contribution of money less than $250 made before 2006 the pertinent regulation requires that the taxpayer substantiate the contribution with a canceled check, a receipt, or other reliable evidence showing the name of the donee, the date of the contribution, and the amount of the contribution.

[P]recedents exist to all a Cohan estimate for charitable contributions, especially where we find the taxpayer was candid, forthright, and credible.  Stockwell v. Commissioner, T. C. Memo. 2007-149 (stating unconditionally that "We may estimate cash charitable contributions under the Cohan rule").

Mr. Regassa provided no substantiation of his charitable contributions.  However, the IRS's blanket disallowance goes too far.  Mr. Regassa's religious commitment appears genuine.  In summary, for charitable contributions, using our best judgment on the entire record before us, and under Cohan bearing heavily against Mr. Regassa's own inexactitude, we find it credible that at least once a month throughout 2005 Mr. Regassa attended and mad a cash contribution of at least $25 to a qualified Ethiopian Orthodox Church in Washington, D. C.

While this decision might seem to give taxpayers a break, please take note the Tax Court recognizes Mr. Regassa's charitable deductions pertained to years before 2006.  Why is this important? Because the Pension Protection Act of 2006 added paragraph (f)(17) to section 107 of the Internal Revenue Code.  That paragraph reads as follows:

No deduction shall be allowed under subsection (a) for any contribution of a cash, check, or  other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.

This new provision provides no wiggle room and will mostly likely preclude taxpayers from arguing the Cohen rule in the future, at least with respect to charitable contributions.  The Tax Court should have pointed this out, or at least addressed it.

As a final note, the Tax Court also disallowed the insurance, auto and truck, and cost of goods sold deductions.  Mr. Regassa was apparently unaware of how his tax preparer had calculated these amounts.  And, gambling losses are only deductible to the extent of gambling winnings.

November 10, 2009

This blog post is about the taxation of cash value life insurance policies upon termination.  For a good explanation of the insurance terminology used in this opinion click here .

Question for the Tax Court

Does surrender of a whole life insurance policy with a cash value greater than the net investment in the policy create ordinary income or capital gain? (2, 4).

In 1980, Harvey Barr, took out a whole life insurance policy on the life of his mother, Lillian Barr. (3).  The face amount of the policy was $200,000 and the annual premiums were $8,929.  (3).  For the first 8 or 9 years, Lillian paid the premiums indirectly by gifting the amount to Harvey. (3).  At the end of that time, "the policy borrowed against itself to pay the premiums; i. e. premiums were automatically paid from dividend accumulations and loans against the cash value of the policy." (4).

By 2005, the cash value of the policy was $361,353, the total indebtedness was $354,399, and the net investment in the policy was $225,390.  (4).  Mr. Barr "surrendered the policy effective December 20, 2005." (5) (the net investment in the policy approximately equals Mr. Barr's cumulative premium payments, e. g. $8,929 x 25 = $223,225).

The insurance co. mailed Mr. Barr a check for $11,648.33.  Then the insurance co. issued Mr. Barr a 1099-R from the insurance company "showing a gross distribution and taxable amount of $135,963.44 for 2005." (6)   He did not include this amount on his 2005 individual income tax return. (6).  The $135,963 is calculated by subtracting the net investment in the policy from the cash value of the policy.(wait! how come I am taxed on $135k but only got cash of $11k?)

Does the Taxpayer have Income?

Before determining whether the taxpayer's gain is ordinary or capital, the tax court first determines whether the taxpayer realized a gain at all. (6-7). 

Section 72(e)(5)(A) states that "[a]ny amount received upon the surrender of a life insurance contract which is not received as an annuity is specifically included in gross income to the extent that it. exceeds the investment in the contract." (6).

[Here], the total cash value, $361,353.58. was withheld to repay the outstanding policy loan balance.  The satisfaction of the loan had the effect of a pro tanto [i. e. partial] payment of the policy proceeds to Mr. Barr and constituted income to him at that time.  Thus, Mr. Barr constructively received the policy's cash value of $361,353.58.  Mr. Barr's net investment at the time he surrendered the policy was $225,390.14  Accordingly. he is taxable under section 72(e) on the [difference], $135,963.44

And if so, is it Ordinary or Capital Gain?

To recognize a capital gain or loss, Mr. Barr must have engaged in a "sale or exchange" of a capital asset.  Segundo. 1222(1)-(4).  Generally, the lapse, cancellation, surrender, or termination of a contract does not equate to a sale or exchange. (8).  [Our cases hold that] the surrender of an insurance policy is not a "sale or exchange" of a capital asset and thus do not result in capital gain. (8).

Accordingly, we find the resultant gain is ordinary income. (9).

The Effect of Tax Free Build-up on the U. S. Treasury Coffers

Mr. Barr paid cash to insurance co. for nine years in the form of premiums.  He then took a loan, albeit from insurance co. and used the proceeds of the loan to continue paying cash premiums to insurance co. from approximately 1989 to 2005.  When all is said and done, he has paid insurance co. approximately $225,390.

Next, insurance co. invests the premiums received from Mr. Barr and generates an investment return of $135,963 (called the "inside build-up").  Neither the insurance co. nor Mr. Barr pays taxes on this investment return while the insurance contract is in effect.  Quite a coup, but legal!  It is similar to a qualified retirement plan where the investment gains build-up tax free.

Mr. Barr, however, had a problem.  He owed the insurance co. $354,399 for the loans he took out to pay the policy premiums.  Where does he get the money from to pay this loan?  The cash value of the contract.

At the time he cashed out the policy, the insurance co. applied the cash value against Mr. Barr' outstanding debts.  As the court points out, this constituted "constructive receipt" of the policy's cash value.  It is as if the insurance co. paid Mr. Barr $361,353 and Mr. Barr then used that money to pay off his debt.  Because Mr. Barr's contract cost, i. e. net investment, was $225,390, he is only taxed on the difference between the cash value and his cost.  see Section 72(e).

Is it fair that Mr. Barr is credited with having received $135,963 but only $11,648.33 in cash was actually paid to him?  Indeed it is.  Had Mr. Barr paid the premiums with his own cash, instead of borrowing against the policy, he would have received $135,963 in cash when he surrendered the policy.  But because he borrowed money from the insurance co. he had to pay it back.  He could have forked over $354,399 to the insurance co. out of his own pocket, but presumably he did not have the money.  Therefore, he used the cash value of the life insurance contract to pay of his debt.

In effect, Mr. Barr held a life insurance policy for the better part of 20 years without having to pay single penny towards premiums.  It is now time to pay the piper.  Of course, Mr. Barr still has a great deal.  His tax bill is only $39,608 plus an accuracy penalty of $7,922 for a total of $47,530.  If you recall, his yearly premiums were $8,929.  He held the insurance contract from 1980 to 2005, or 25 years.  Dividing the $47,530 by 25 = $1,901.  Effectively, his cost of the life insurance contract is reduced significantly. 

Who pays the difference between the $1,901 and the $8,929?  You and me of course!  Without the tax-free inside build-up, the cash value of Mr. Barr's insurance contract would have been reduced significantly.  Most likely, there would not be enough cash value to cover the policy loans, therefore Mr. Barr would have to pay this himself.  Instead, "We The People" help Mr. Barr pay for the life insurance contract on his Mother.

I think it's a bad deal for We The People, especially where the purpose was to pay for "the anticipated estate tax liability [on his Mom's estate]." (3).  So why doesn't Congress fix this?  Answer first this question:  who stands to get hurt the most if Congress starts taxing the inside build-up?  Insurance Companies.  Answer second this question:  do insurance companies lobby congress?  Need I say more?

October 22, 2009

According to bank records, the taxpayers owed $8,042.10 to CitiFinancial and $2,875 to Chase. (2-3).  However, they disputed amounts owed. (2-3).  CitiFinancial agreed to settle the debt for $7,500 and Chase agreed to settle the debt for $1,000.  (2-3).  Both banks issued 1099-C's to the taxpayer for the difference between the settlement amount and the original amount of the debt. (2).  The IRS asserts that the taxpayers should recognize cancellation of debt (COD) income for this difference.  (1).

Cancellation of Debt Income (3)

Section 61(a)(12) includes in the general definition of gross income "income from discharge of indebtedness".  When the amount of a debt is disputed, "a subsequent settlement of the dispute would be treated as the  amount of the debt cognizable for tax purposes."  Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir. 1990) (holding that unenforceable debt is also disputed as to amount, and its settlement does not give rise to cancellation of indebtedness income).  There must be evidence of a dispute; a settlement standing alone does not prove that a good-faith dispute existed.

Evidence of Bona Fide Dispute Existed

Here, the taxpayers provided "evidence [that] supports a conclusion that a bona fide dispute existed regarding. the debt. & Quot; (4).  The amount of the taxpayer's debt "that was definite and liquidated" was $7,549.66 and $1,000 for CitiFinancial and Chase respectively.  (5). Therefore, the taxpayer does not have cancellation of indebtedness income from Chase.  (5).  But they do have $49.66 of cancellation of indebtedness income from CitiFinancial.  (5).

This case represents a caveat to COD income section of the tax code.  But, the dispute must bona fide . and the taxpayer must provide evidence of the dispute.  The Zarin case is on of the primary authorities on this topic.  In Zarin. a New Jersey casino allowed the taxpayer to run up a huge gambling debt, despite a State law that required the casino to limit the amount of credit extended to a single player.  Because the debt was not enforceable by the casino, the taxpayer and the casino settled their $3.5 million debt for $500,000.  The Third Circuit held that because the debt was unenforceable it was not liquidated.  It concluded the liquidated debt, and the amount of debt relevant for section 61(a)(12), was the $500,000.

This caveat may not help many taxpayers in these trying times because the debts being settled are normally not disputed debts.  But in the rare case that disputed debts are settled for less than the disputed amount, tax professionals should consider whether this disputed debt exception is helpful to clients.

October 15, 2009

This opinion (and post) is quite long, but it's worth reading if you really want to understand spousal relief.

Questions for the Tax Court

Is Ms. Sykes [petitioner] entitled to relief under section 6015(b), (c), or (f). (10).

Spousal Relief From Joint and Several Tax Liability

Under section 6013(d)(3), a husband and wife filing a joint return are jointly and severally liable for all tax for the taxable year, including interest and penalties. (14).

Section 6015 relieves a spouse of joint and several liability in three situations:  (1) if the spouse did not know or have reason to know of the deficiency when the return was signed, and satisfies other conditions; (2) if a divorced or separated spouse seeks to limit individual liability to the portion of the deficiency attributable to him or her; and (3) in the case of a deficiency or of a tax shown on a return but not paid, if it is inequitable to hold the spouse liable for the tax.  See sec. 6015(b), (c), and (f), respectively.  The last provision, found in section 6015(f), only applies if relief is not available to the taxpayer under the other two provisions. (14-15).

Tax Court's Section 6015(b) Analysis

Under section 6015(b), the first situation above, A spouse has reason to know of the understatement if a "reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the. understatement." Price v. Commissioner. 887 F.2d 959, 965 (9th Cir. 1989). (16).

Factors to consider in analyzing whether a spouse had reason to know of the understatement include: (1) the spouse's level of education; (2) the spouse's involvement in the family's business and financial affairs; (3) the presence of expenditures that appear lavish or unusual when compared to the family's past levels of income, standard of living, and spending patterns; and (4) the culpable spouse's evasiveness and deceit concerning the couple's finances. Price v. Commissioner. 965. (17).

[Here], Ms. Sykes held two bachelor degrees, kept all the records for her husband's law practice in 2003, was the sole party responsible for reviewing the documents to be presented to the tax return preparer for the tax year 2003. (17).  Her husband was not deceptive about financial matters, and in fact frequently discussed with her. business and family financial matters. (17).  She either knew or should have known, as the manager of the law practice that business expenses were being twice deducted and that excessive deductions for advance client costs were being claimed. (18).  Thus, because she knew or should have known of the understatement of tax, she does not qualify for relief under section 6015(b).

Tax Court's Section 6015(c) Analysis

[U]nder section 6015(c)(3)(C), apportionment of liability does not apply if the Commissioner "demonstrates that an individual making an election under this subsection had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual. ".  This Court has defined actual knowledge as "an actual and clear awareness (as oppose to a reason to know) of the existence of an item which gives rise to the deficiency (or portion thereof)".  Cheshire v. Commissioner, 115 T. C. 183, 195 (2000). (20).

And, consistent with Cheshire, such actual knowledge does not include knowledge of the tax laws or knowledge of the legal consequences of the operative facts. (21).

It is clear to the Court that Ms. Sykes had actual knowledge of all items giving rise to the deficiency in joint tax.  She was solely responsible for keeping the finances of the law practice; had actual knowledge of the year the Cadillac Escalade was purchased and placed in service; helped prepare the 2003 income tax return by reviewing items with the preparer and reviewing and gathering all financial documents. (22).

Tax Court's Section 6015(f) Analysis

Section 6015(f) relief is available if, taking into account all of the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or deficiency, and if relief is not available under section 6015(b) or (c). (22).

Rev. Proc. 2003-61 states the requesting spouse must satisfy all of the following threshold conditions to be eligible for relief under section 6015(f). Ms. Sykes satisfies these threshold requirement for equitable relief. (24.)  However, the I. R.S. argues that as described under the revenue procedure, she is not entitled to relief under section 6015(f) because petitioner had knowledge of the items giving rise to the deficiency; had knowledge or reason to know that intervenor would not or could not pay the tax liability shown on the return; and if held liable for the payment of the tax she would not suffer an economic hardship. (24).

[T]he Court determines that petitioner is not entitled to relief under section 6015(f). (26).  [Ms. Sykes] knew at the time she signed the 2003 tax return that [her husband] owed a separate in come tax liability for tax year 2001 in excess of $50,000. (25).  This liability was not satisfied until after the 2003 return was filed, and the money used to [pay] the debt was provided by [her husband's] family.  This information supports the conclusion that Ms. Sykes knew that. [her husband] could not pay the tax liabilities shown on the return. (25).

Three strikes and your out.  Ms. Sykes failed the test for relief under (b), (c), and (f).  It goes to show that spousal relief is not a "get out of tax owed" free card.  It is truly for those occasions where it would be inequitable to hold the truly 'unknowing' spouse 'jointly and severally' liable for the tax of his or her deadbeat spouse.

On August 9, 2004, [the I. R.S.] issued Mr. Brandon a proposed assessment regarding section 6672 trust penalties. (3). On February 27, 2006, [the I. R.S.] assessed the. trust penalties. (3). Mr. Brandon died in a motorcycle accident on April 27, 2006. (3). On November 2, 2006, [after having been informed about Mr. Brandon's death] the revenue officer issued Mr. Brandon a Letter 3172, Notice of Federal Tax Lien. relating to the unpaid trust penalties. [On] November 3, 2006, the next day, the revenue office recorded, with the clerk of Denton County, Texas, Form 668(Y)(c), Notice of Federal Tax Lien, relating to Mr. Brandon's property.

Issue for the Court

[W]hether there was an abuse of discretion in sustaining the notice of Federal tax lien (NFTL) relating to the 2003 trust fund recovery penalties (trust penalties) assessed against Mark Brandon (Mr. Brandon). (2).

Although the court phrases the issue as an abuse of discretion, the court really answers the question of when a lien attaches and whether the lien remains attached when property transfers at death.

The estate contends that as of April 27, 2006, Mr. Brandon's date of death, the title to all Mr. Brandon's property "passed to the devisees or legatees of the estate of Mark Brandon, the estate of Mark Brandon, or the executor of the estate of Mark Brandon [and] therefore, the NFTL is invalid." The estate further contends that Mr. Brandon "had no property interest when the NFTL was issued on November 2, 2006" to which any lien could attach. (5).

The [I. R.S.] contends that the lien attached to Mr. Brandon's property on February 27, 2006, the date of assessment. promover. the attachment occurred before Mr. Brandon's death and. the lien remained attached even at his death. (5).

We agree with the [I. R.S.].

[A] lien arises at the time the assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. (5).

After a lien attaches to property, it remains attached and is not invalidated by a transfer of property. See United States v. Bess. 357 U. S. 51, 57 (1958) (holding that the transfer of property after attachment of a lien does not invalidate the lien). (6). Therefore, Mr. Brandon's death, which occurred 2 months after the lien attached to his property, does not adversely affect the validity of the NFTL. (6).

The Willocks challenge the IRS's use of a lien to collect $191,724 in unpaid taxes and penalties related to their 2001 tax return. (2).  The Tax Court sustains the lien because the Willocks "offered no collection alternatives or other defenses to the lien." (6).

This opinion moves pretty fast; and fortunately so because it is not all that exciting. A chronology of events leading up to this opinion is helpful here:

December 7, 2005 - IRS mails a Notice of Deficiency to the taxpayers. (2).

April 11, 2006 - IRS assesses the tax, penalty, and interest because the taxpayer did not respond to the NOD within the requisite 90-day period. (2).

January 23, 2007 - IRS files Notice of Federal Tax Lien. (3).

January 30, 2007 - IRS mails taxpayer the Notice of Federal Tax Lien and Your Right to a Hearing Under IRC 6320 (Letter 3172 ). (3).

July 23, 2007 - IRS schedule telephone CDP hearing for August 14, 2007. (3).

August 14, 2007 - at the hearing, "[taxpayers] did not present any reason why the filing of the Federal  tax lien should not remain in place, nor did [taxpayers] present any collection alternatives during the hearing." (3).

August 23, 2007 - IRS mails taxpayers a Notice of Determination. (4).

October 1, 2007 - Taxpayers file petition with the Tax Court. (4).

October 7, 2008 - Tax Court holds hearing to discuss taxpayer's motion for summary judgment. (4).

June 18, 2009 - Tax Court denies taxpayer's motion for summary judgment. (4).

At the telephone CDP hearing, the Willocks disputed the amount of tax owed, that is, they disputed the underlying tax liability assessed by the IRS. (3). But, "[b]ecause the petitioners had a prior opportunity to dispute the underlying tax liability for 2001, they would not be permitted to do so during the CDP hearing." (3). In other words, the Willocks had an opportunity to dispute the amount of the liability and they let it pass. Consequently, at the CDP hearing they could only dispute the IRS's collection methods. As the Court points out, in the absence of any relevant arguments from the taxpayers, a lien is a lawful method of enforcing collection of an outstanding tax liability. (6).

Section 6501(a) provides, as a general rule, that taxes must be assessed within three years after a return is filed. This is the basic statute of limitations provision in the Internal Revenue Code. There are exceptions to this general rule, one of which is in section 6501(c)(4)(A). This section states that if "both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon." In other words, the taxpayer can extend the three-year statute of limitations imposed on the Internal Revenue Service.

A review off the above chronology shows that the three-year limitation had expired long before the IRS assessed the tax on April 11, 2006. As is usually the case, there is more here than meets the eye. In footnote no. 2, the Tax Court states that the taxpayers signed Form 872 prior the expiration of the three-year statute of limitations. (4). Form 872 is an agreement between the taxpayer and the IRS that adheres to the requirements under section 6501(c).

I did a search of the IRS website and could not find Form 872. This leads me to believe the IRS has transitioned to a different form. Form 921 appears to be its replacement.

August 07, 2009

Ms. Ortega deducted $19,885 in education expenses associated with her doctoral degree in psychology on her 2004 tax return. She claimed the expenses were deductible as a trade or business expense because she was already a mental health practitioner. The IRS denied the deduction because the doctoral degree qualified her for a new trade or business, i. e. staff psychologist. The Tax Court agreed with the IRS.

Ms. Ortega's Career and Education History

Ms. Ortega earned her masters degree in psychology from the University of Nebraska in 1996. After several years of working as a Mental Health Practitioner for the State of Nebraska, she went back to the University of Nebraska to earn a doctorate in psychology. Upon earning her doctoral degree in psychology, she moved to New York and began work as a staff psychologist for the Federal Bureau of Prisons. New York required a doctoral degree to practice psychology, therefore Ms. Ortega could not practice as a staff psychologist without it. 

When are Education Expenses Deductible as Trade or Business Expenses?

The Tax Court succinctly states the law here:

Expenditures made by an individual for education are deductible as ordinary and necessary business expenses if the education maintains or improves skills required by the individual in her employment or other trade or business. Segundo. 1.162-5(a), Income Tax Regs. However, the general rule under section 1.162-5(a) does not apply [and the expenses are not deductible] if the expenses fall within either of the two specified categories: (1) The expenses are incurred to meet the minimum education requirements for qualification in the taxpayer's trade or business; or (2) they qualify the taxpayer for a new trade or business. Segundo. 1.162-5(b).

If the education in question qualifies the taxpayer to perform tasks and activities significantly different from those she could perform before the education, then the education is deemed to qualify the taxpayer for a new trade or business. Browne v. Commissioner. 73 T. C. 723, 726 (1980).

The mere capacity to engage in a new trade or business is sufficient to disqualify the expense for deduction. Weiszman v. Commissioner. 52 T. C. 1106, 1111 (1969).

Did Ms. Ortega's Doctoral Degree Qualify Her for a New Trade or Business?

Ms. Ortega asserts the doctoral degree did not qualify her for a new trade or business because she continued to work in the field of psychology before and after her education.

The Tax Court disagreed. State law controls the outcome here. In both Nebraska and New York, the only requirement for being a mental health practitioner was a masters degree in psychology, which Ms. Ortega already had. In contrast, both states required a doctoral degree in psychology to practice as staff psychologist. When Ms. Ortega left Nebraska and went to work in New York, she started practicing as a staff psychologist. Accordingly, "the doctorate. [q]ualified her to perform tasks and activities significantly different from those she could perform before the eduction." Therefore, her education expenses were not deductible as a trade or business expense.

This is not a completely straightforward area of the law, but the decision here is correct. For example, though I already practice tax law as a CPA, my law degree will qualify me to be a lawyer. Therefore, even if I never intend to practice as a lawyer, my law degree expenses are not deductible.

Finally, even if Ms. Ortega was allowed to deduct the education expenses in question, the deduction would be limited by section 67. Section 67 imposes a two-percent floor on miscellaneous itemized deductions. That is, itemized deductions, other than those listed in section 67, are deductible "only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income." Segundo. 67(a). Adjusted gross income is defined in section 62. Alternatively, you can look at page 1 of the Form 1040 to see how to calculate AGI.

The IRS challenged Mr. Trollope's transactions with Arrow Capital Associates, Inc. After receiving certain documents during discovery, however, the IRS conceded the issue. The Tax Court must decide if Mr. Trollope is entitled to an award of litigation costs pursuant to section 7430.

Mr. Trollope's Transactions With Arrow

Mr. Trollope and Mr. Larik each owned 1,500 shares of Arrow. Through a series of transactions, Mr. Trollope purchased Mr. Larik's 1,500 shares, or a 50% interest in Arrow. The initial transaction involved Arrow lending $1.9 million and $.7 million to Mr. Trollope and Mr. Larik respectively ($1.9 + $.7 = $2.6; keep this figure in mind). Through a stock purchase agreement, Mr. Trollope then agreed to purchase Mr. Larik's 50% interest for $2.6 million. To fund the purchase, Mr. Trollope used the $1.9 million he was lent from Arrow, and assumed Mr. Larik's $.7 million note. After becoming the sole shareholder, and owning 3,000 shares, Mr. Trollope sold 1,500 shares to Arrow in exchange for cancellation of his $1.9 million note and cancellation of the $.7 million note he had assumed on behalf of Mr. Larik.

The IRS issued a 30-day letter stating that the last transaction, Arrow's purchase of 1,500 shares from Mr. Trollope, was a constructive dividend. Mr. Trollope argued in response that he "had not received a constructive dividend from Arrow, but rather had stepped in to facilitate a stock redemption as Arrow's agent." Despite Mr. Trollope's argument, the IRS issued a Notice of Deficiency  (NOD). Shortly thereafter, Mr. Trollope filed a petition with the Tax Court challenging the NOD.

During the discovery process, Mr. Trollope provided additional documentation that resulted in the IRS conceding the issue. Mr. Trollope filed a motion to recover $122,402 in litigation costs under section 7430.

Section 7430 Requirements

The Tax Court provides the four-part test taxpayers must satisfy to receive an award of litigation costs under section 7430:

To qualify under section 7430, taxpayers must establish that they: (1) Were the prevailing party within the meaning of section 7430(c)(4); (2) exhausted the applicable administrative rememdies; (3) did not unreasonably protract the proceedings; and (4) have claimed costs that are reasonable.

Section 7430(c)(4) defines the term prevailing party. As is usually the case, the section provides a general rule and then states exceptions. The first exception to the term prevailing party is section 7430(c)(4)(B). Under this section, if the IRS's position is substantially justified, then the taxpayer will not be considered a prevailing party. Despite the seemingly strong language, the threshold here is quite low.

"Substantially justified" is defined as "justified to a degree that could satisfy a reasonable person" and having a "reasonable basis both in law and fact". Respondent's position may be incorrect and yet be substantially justified "if a reasonable person could think it correct." Whether respondent acted reasonably ultimately turns on the available information which formed the basis for respondent's position as was as on the relevant law.

[Further] For a position to be substantially justified, "substantial evidence" must exist to support it. That phrase does not mean a large or considerable amount of evidence, but rather 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'

The IRS's Position was Substantially Justified

The IRS's constructive dividend argument was based on the view that the transactions between Arrow and Mr. Trollope were "independent transactions resulting in a dividend. under section 301(a) and 302(b)(1)." While Mr. Trollope's view, supported by the facts, showed the transactions were a "single integrated transaction resulting in exchange treatment under section 302(a).

The Tax Court holds for the IRS because Mr. Trollope did not provide "all of the relevant information under his control" prior to the issuance of the NOD. Mr. Trollope provided only the stock purchase agreement to the IRS prior to the formal discovery process. Despite a "multiyear dialogue" between the IRS and Mr. Trollope prior to issuing the NOD, Mr. Trollope never provided the loan documents, corporate minutes, or any other documentation to support the "integrated transaction" argumento. All of which were under his control. Thus, relying solely on the stock purchase agreement, it was reasonable for the IRS to take the legal position that the transaction in question was a constructive dividend.

I often wonder what is the "real story" behind these types of facts. Why, for example, wouldn't Mr. Trollope provide any and all necessary documentation to support his position? Particularly since this was supposedly a "multiyear" dialogue. Did Mr. Trollope simply become frustrated during the audit process and refuse to cooperate?

Also, the Court's opinion does not discuss what specific documents were provided to the IRS during discovery that caused the IRS to concede the issue. These facts might help illuminate the real story here. 

Before discussing this case, I want to point out the apparent cowboy motif in the opinion's opening paragraph. For example, the words or phrases: mounted a takeover, ride turned rough, pony up, and saddle are used to describe the crux of the case. Judge Holmes's clerk is either from the midwest or just using some creativity in the only place where allowed in a court opinion.

The events that follow occurred between 1999 and 2005.

Canterbury Holdings is a U. S. limited liability company with five members: three individuals, a trust, and a retirement plan. The individual members included an investment banker, a New Zealand business man, and Kenneth Kopp, founder of The North Face . Canterbury bought under-performing sports-apparel brands intending to make them profitable. One such brand was the Canterbury brand  (hereafter "Brand"), a famous New Zealand rand that built its name focusing on rugby.

The Brand was owned by LWR Industries, Ltd.  (LWR), a New Zealand publicly traded company. Approximately two-thirds of the outstanding shares were owned by Brierly Investments, Ltd. (BIL), and the remaining one-third traded on the New Zealand stock exchange, NZX. Canterbury's plan to purchase the Brand included a tender offer for the LWR shares traded on NZX and an option agreement with BIL for the remaining outstanding shares.

Canterbury feared the New Zealand public would not be receptive to a U. S. company owning one of its biggest and oldest brands. To address this concern, they formed a New Zealand shell company, Canterbury Holdings, Ltd. (Canterbury NZ), to purchase and hold LWR's stock. Canterbury NZ was capitalized by Canterbury's partners with NZ$10,000,000. NZ$ stands for New Zealand Dollars, and at the time of the tender offer the exchange rate was .5294 NZ$ for 1.00 US$. In 1999, the tender offer was successfully completed. LWR was subsequently delisted from the NZX, and BIL and Canterbury NZ executed an option agreement for the remaining shares.

Canterbury's three partners where in no position to manage and run LWR, consequently Canterbury NZ signed a management agreement with BIL to collectively manager LWR. The agreement provided that LWR would pay both BIL and Canterbury NZ for managing its operations. The Canterbury partners took up positions in Canterbury NZ and received a salary for their services.

In late 2000, LWR stopped paying BIL as provided in the agreement. Canterbury disputed the amount owed BIL, asserting BIL was not living up to its side of the agreement. BIL accepted NZ$ 4,010,000 as payment in full for its management services, and reduced the option agreement price from NZ$ 22,700,000 down to NZ$ 6,250,000. The option agreement was paid in cash and notes collateralized by purchased LWR securities. Canterbury, NOT Canterbury NZ . paid the NZ$ 4,010,000 to BIL, and Canterbury, NOT Canterbury NZ . paid the interest on the note.

Canterbury deducted both the management fees and the interest expense on its 2000 and 2001 partnership tax returns. The IRS denied both deductions and assessed section 6662 accuracy and underpayment penalties.

As a general rule, shareholders cannot deduct expenses paid on behalf of a corporation. Instead, these amounts are considered capital expenditures under Regulation 1.263(a)-2(f).

But section 162(a) allows a deduction for ordinary and necessary trade or business expenses incurred or paid during the taxable year in carrying on any trade or business. "[A]ndthere is nothing in the Code that bars a shareholder from deducting payments from his corporation's expenses, if those expenses are also ordinary and necessary to his own trade or business." Lohrke v. Comm'r. 48 T. C. 679, 688-89 (1967).

The Lohrke test requires, 

that a shareholder who wants a deduction for paying his corporation's expenses must show two things: (1) that his purpose was to protect or promote his own business, and (2) that the expenses paid were ordinary and necessary to that business. Lohrke at 688.

The Tax Court finds here that,

during the years at issue, Canterbury itself had no actual business apart from stitching a deal for, then managing LWR. [There] was no existing operating business, credit standing, or a preexisting reputation to maintain. Its desire to build a future reputation is simply not enough for us to grant its current deductions as "protecting and promoting its trade or business". [A] more direction connection with an existing business is needed to sustain a deduction in this area.

Canterbury also argues that Canterbury NZ was merely a nominee that should be disregarded. This argument is rejected because Canterbury NZ served a useful business purpose, namely it provided a local presence in New Zealand.

At the end of the opinion, the Tax Court points out, "[T]he Code and caselaw simply do not allow Canterbury to ignore its organizational choices when convenient for tax purposes. Further, "[W]hile a taxpayer is free organize his affairs for as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice."

I blogged previously about section 6673(a)(1) penalties assessed against taxpayers ( here ). But this is the first case I have seen - albeit I have only been blogging for two months - where the Court assessed section 6673(a)(2) costs against a taxpayer's attorney for "unreasonably and vexatiously" delaying proceedings before the Court. 

Taxpayer’s Belligerence  

The taxpayer, Mr. Powell, conducted research of the Internal Revenue Code, case law, etc. which led him to the conclusion that he was not required to file a tax return or pay taxes. This false conclusion resulted in his failure to file tax returns from 1999 through 2002 and his failure to pay some $434,796 in outstanding liabilities.

In October 2005, the IRS sent Mr. Powell a Notice of Intent to Levy and Notice of Your Right to a Hearing. Mr. Powell, however, persisted in his ways even after reading the IRS's publication, "The Truth About Frivolous Tax Arguments." In response to Mr. Powell's belligerence, the IRS sent him a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, dated August 11, 2006, sustaining the levy and warning him of potential 6673 sanctions. In September 2006, Mr. Powell filed a petition with Tax Court challenging the levy notice.

Almost a year later, the IRS filed its first Motion for Summary Judgment. The Court denied the IRS’s motion stating, “satisfaction of the requirements of section 6330 [Notice and Opportunity for Hearing Before Levy] should be demonstrated at trial rather than in a summary adjudication,” (as we will see, this comes back to haunt the IRS.) In November 2008, the IRS filed its second Motion for Summary Judgment and a Motion to Impose a Penalty Under section 6673.

In the interim, Mr. Powell retained the services of an attorney, Mr. Barringer, to represent him in the proceedings before the Tax Court. Mr. Barringer responded the IRS’s second motion for summary judgment by seeking more time for discovery and requesting the Court deny the IRS’s motion until Mr. Powell receives satisfactory answers to his questions regarding the meaning of “taxpayer” and “individual” under the Internal Revenue Code.

The Court grants the IRS's second motion for summary judgment. In addition, the Court set an April 20, 2009 hearing for Mr. Barringer to Show Cause why he should not be required to pay attorney’s fees under section 6673(a)(2). In its Order to Show Cause, the Court points out that Mr. Barringer employed the discovery process to delay trial.

Petitioner’s argument [i. e. Mr. Barringer] that respondent’s motions [i. e. IRS] should be denied because they are premature until petitioner secures responses to his various inquiries is patently for the purpose of delay. Petitioner’s interrogatories [interrogatories are written questionnaires] indirectly assert stale tax defiance arguments about terms such as “taxpayer”, “person”, “non-resident alien”, “income”, and other non-meritorious arguments about delegated authority.

On May 20, 2009, Mr. Barringer filed his Response and Objection stating he did not cause delay of the proceedings, but that “his conduct…was consistent with the demands of his [client].” And further, “[his client] sought to know exactly how all the provisions of the I. R.C. apply to him.”

Time and Costs Awarded: Abuse of Discovery Process and Second Motion for Summary Judgmen t

The Court rejects the IRS’s request for time and costs for the second motion for summary judgment because it was a choice by the IRS to file the first motion, which the Court warned against. Accordingly, Mr. Barringer – though not completely blameless – is not required to pay time and costs for the IRS’s attorneys in the second motion for summary judgment.

Mr. Barringer protests the abuse of discovery charge, stating that he was simply representing his client based on his client’s directive, and that it would have been futile to try and convince his client, Mr. Powell, otherwise.

Mr. Barringer’s reasoning is rejected by the Court because section 3.1 of the Model Rules of Professional Conduct, incorporated into proceedings before the Tax Court by Rule 201(a) of the Tax Court Rules of Procedure, prevent an attorney from “defending a proceeding…unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law.” Under these Model Rules, Mr. Barringer was prohibited from defending Mr. Powell's frivolous claims. Consequently, the Court grants the IRS’s motion for time and costs for abuse of the discovery process, and awards the IRS $4,725 under section 6673(a)(2).

In the middle of its opinion, the Court references section 3.1 of the Model Rules of Professional Conduct and states, “[I]n the absence of any acknowledgement of current law, there is no indication of a good-faith attempt to change it.” Mr. Barringer, or any other attorney, no doubt should represent his client zeolously. But all attorneys are bound by the Model Rules of Professionl Conduct. These rules are incorporated into proceedings before the Tax Court by rule 201(a) of the Tax Court Rules of Procedure. Here, neither the taxpayer nor his counsel had any interest in putting forth a good faith argument for “extension, modification, or reversal of existing law.”

The Court's decision here imposes section 6673 costs because the attorney abused the discovery process by advancing Mr. Powell's position. The implication of this particular decision is that an attorney is effectively barred, by both the Model Rules and section 6673, from even representing a taxpayer whose only grounds for challenging his or her tax liability are frivolous.

July 23, 2009

Form 2555. Foreign Earned Income Exclusion, is no doubt one of the more difficult forms taxpayers, and their tax preparers, may encounter. While the Court's opinion here is subject to section 7463(b) - meaning it may not be treated as precedent for any other case - it is still a good explanation of section 911, the foreign earned income exclusion. 

An exclusion is different from a deduction, but in most instances it functions just the same. 

The taxpayer, Mr. Musshafen, works for Parker Drilling Management Services, Inc. an oil drilling company located in Houston, Texas. Oklahoma is his home, but he works on a rig in Kuwait. He works 35-days-on and 35-days-off. While on duty, he works 12-hour days and is on call 24 hours per day. During his off-duty days, he returns home to his family in Oklahoma. After consulting with his CPA, Mr. Musshafen excluded a portion of his PDMS wages from his 2004 and 2005 tax return under the foreign earned income exclusion. The IRS disallowed the exclusion and assessed section 6662(a) accuracy penalties. 

The Foreign Earned Income Exclusion  

Section 911(a) excludes from gross income the foreign earned income and the housing cost of a qualified individual . Section 911(d) defines a qualified individual as, an individual whose tax home is in a foreign country and . who is either (1) a U. S. citizen who establishes he/she is a bona fide resident of a foreign country for an entire year (the bona fide residence test), or (2) a U. S. citizen who is present in a foreign country for at least 330 days during a 12 consecutive month period (the physical presence test). Under section 911(d):

The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162 (a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States. Confused yet? In simpler terms, tax home can have two different meanings under 911(d). Its first definition is the same as that for deducting travel expenses - principal place of business. BUT, if a person has an abode in the U. S. her abode is the tax home, not the foreign country. The Tax Court defines abode as, "the location where [a person] has a strong economic, family, and personal ties." This means "residence, domicile or place of dwelling." 

Tax Court Holds Mr. Musshafen's Tax Home is Oklahoma

The Tax Court cites several cases that analyzed the same issue (taxpayer works on an oil rig) and finds that Mr. Musshafen's tax home is Oklahoma. Because Mr. Musshafen returned to Oklahoma during his 35-day off schedule, he spent about 182.5 days per year in Oklahoma. Moreover, his family lived in Oklahoma, he had an Oklahoma driver's license, and he never really left the jobsite to mingle with Kuwaiti citizens. 

On balance, his "economic, family, and personal ties" were with Oklahoma. Therefore, he did not meet the tax home test and was not entitled to the foreign earned income exclusion. 

Here is an excerpt from Form 2555's instructions for 2008:

Your tax home is our regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. If you do not have a regular or principal place of business because of the nature of your trade or business, our tax home is your regular place of abode (the place where you regularly live).  You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States. However, if you are temporarily present in the United States, or you maintain a dwelling in the United States (whether or not that dwelling is used by your spouse and dependents), it does not necessarily mean that your abode is in the United States during that time. What should become instantly apparent - if you are still reading - is that the Form's instructions are so vague they are misleading. That is probably why the instructions contain an example that mirrors Mr. Musshafen's facts, and conclude a taxpayer with his circumstances does not pass the tax home test. 

Fortunately for Mr. Musshafen, the Tax Court realized how confusing the law is, and abated the section 6662(a) penalties. The IRS should do us all a favor and re-write the instructions for Form 2555.

July 21, 2009

Mr. Meruelo owns a partnership interest in Intervest Financial, LLC via Meruelo Capital Management, LLC (a single-member limited liability company) (hereafter “MCM”). Mr. Meruelo’s portion of Intervest’s 1999 loss was $4,538,844; the losses stemmed from foreign currency transactions. On his 1999 tax return, he claimed the entire loss as a deduction. The return was filed in October 2000. The IRS has not: audited Intervest’s 1999 partnership tax return, notified Intervest of a pending audit of its 1999 partnership tax return, issued a final partnership administrative adjustment (FPAA) to Intervest for 1999.

On October 10, 2003, just before the three-year statute of limitations expired, the IRS issued a Notice-of-Deficiency (NOD) to the Meruelo’s. The NOD indicated that the IRS disallowed their Intervest loss because of sections 465 and 704(d). Section 465 limits losses to amounts at-risk. Section 704(d) limits partnership losses to a partner’s basis. But these sections are not at issue here.

The Meruelos motion the Court to dismiss this case for lack of jurisdiction on two grounds. First, they argue that the NOD is invalid because the deficiency is related to an affected item of Intervest. As such, the IRS is required to either issue a notice of FPAA or accept Intervest’s 1999 as filed, neither of which had been done. Second, the Meruelos argue in the alternative that the items in the NOD are not in fact affected items.

Limited Jurisdiction and Affected Item

The Tax Court “is a court of limited jurisdiction. Whether [the Court] has jurisdiction over the subject matter of a dispute is an issue that either party may raise at any time. Here… jurisdiction rests on finding that the NOD issues to [the Meruelos] was valid and that [their] petition to this Court was timely.”

Fortunately, the Court defines “affected item” before moving on to its analysis. There is no sense paraphrasing the Court here.

The term “partnership items” includes any item of income, gain, loss, deduction, or credit that the Secretary has determined is more appropriately determined at the partnership level than at the partner level. See sec. 6231(a)(3); sec. 301.6231(a)(3)-1(a), Proced. & Administración. Regs. The term does not include an “affected item”, defined by statute as any item to the extent the item is affected by a partnership item. See sec. 6231(a)(5); Adkison v. Commissioner. 129 T. C. 97, 102 (2007).

Affected items are of two types. The first type is a computational adjustment made to a partner’s tax liability to reflect adjustments to partnership items. See sec. 6231(a)(6). When partnership-level proceedings are complete, the Commissioner may assess computational adjustments against a partner without issuing a notice of deficiency. See secs. 6225(a), 6230(a)(1); N. C.F. Energy Partners v. Commissioner. 89 T. C. 741, 743-744 (1987).

The second type of affected item requires a partner-level determination; it is an adjustment to a partner’s tax liability (other than to reflect a penalty, addition to tax, or additional amount relating to an adjustment to a partnership item) to reflect the proper treatment of a partnership item that is dependent upon factual determinations to be made at the partner level. See sec. 6230(a)(2)(A)(i); Domulewicz v. Commissioner. supra at 22-24.

The normal deficiency procedures apply to affected items that require partner-level determinations (other than penalties, additions to tax, and additional amounts that relate to adjustments to partnership items). See sec. 6230(a)(2)(A)(i). These procedures require the timely issuance of an NOD as a precondition to the Commissioner’s assessment of a deficiency or accuracy-related penalty related to affected items. A valid NOD requires that any partnership-level proceeding involving the related partnership be complete. See sec. 6225(a); GAF Corp. v. Commissioner. supra at 528; Maxwell v. Commissioner. supra at 788.

When an FPAA is issued to the partnership and a partnership-level proceeding as to the FPAA is properly brought in this Court, the partnership-level proceeding is complete when our decision becomes final. See sec. 6225(a)(2). When the Commissioner opts not to begin a partnership-level proceeding or issue an FPAA within the normal period of limitations, the partnership-level proceeding is considered complete when the Commissioner accepts the partnership’s return as filed. See Roberts v. Commissioner. 94 T. C. 853, 860-861 (1990). Whether the Commissioner has accepted a partnership return as filed is a question of fact that turns in part on a finding of whether the Commissioner opted to allow the normal period of limitations to expire without beginning a partnership-level proceeding. Véase id.

The Tax Court dismisses the Meruelo’s motion. In addressing their first argument, the Court points out that the IRS concedes it may no longer adjust Intervest’s partnership items because the normal statute of limitations has expired. Accordingly, the restriction to complete partnership-level proceedings under section 6225(a) prior to issuing an NOD is lifted. As such, the NOD is valid.

The Meruelos argued in the alternative that their items were not affected items. Of course they were. A partner’s basis and amounts at risk are necessarily partner-level determinations; the second type of affected items. Therefore, their alternative argument also fails.

The Court takes note that while the NOD was issued to MCM, Mr. Mereulo placed no weight on this fact in his argument; he attacked only the IRS’s proceedings, or lack thereof, with Intervest. I am not sure what, if any, difference this would make.

Lastly, Mr. Mereulo’s alternative argument is just silly (silly is a term of art in Tax Law). Perhaps they did not understand “affected items.”

Mr. Merrill (yes he’s related to a Merrill Lynch founder) did not file tax returns for 2004 or 2005. When the IRS prepared the returns on his behalf they used the single filing status. Mr. Merrill asserts that he should be afforded the married filing jointly (MFJ) status because he is in a long-term domestic partnership with Mr. Boyle, his partner of 18 years.

During the years at issue, Mr. Merrill and Mr. Boyle lived in North Carolina. North Carolina did not then – and does not today – recognize same-sex marriages. In 2008, Mr. Merrill and Mr. Boyle moved to California and were legally married.

The issue for the Court is whether a long-term domestic partnership qualifies for the married filing jointly status.

Section 7703(a)(1) states that an individual’s marital status shall be determined at the end of the tax year. “Whether a taxpayer is married for Federal income tax purposes is determined by reference to the laws of the State of the taxpayer’s marital domicile.” Further, “where a taxpayer did not file a return and a substitute for return was prepared using single filing states, the taxpayer may claim married filing joint status only by subsequently filing a return.”

The Tax Court upholds the single filing status because Mr. Merrill did not file a return claiming the MFJ status after the IRS prepared his return using the single filing status. The Court points out that Mr. Merrill admitted he was not legally married under the laws of any state during 2004 or 2005, but it does not appear this was the basis for their decision.

Next, Mr. Merrill argues that the Tax Code discriminates against same-sex couples in violation of their constitutional rights. The Court does not address this argument but rather cites case law, which has consistently denied these types of constitutional claims brought by not only same-sex couples, but married and single persons alike.

Mr. Merrill also challenges the constitutionality of the Defense of Marriage Act (DOMA). The Court does not address the constitutionality of DOMA because that question is irrelevant to Mr. Merrill’s filing status.

The California Quandary

The Court seems to suggest that had Mr. Merrill and Mr. Boyle been married under the laws of their State of domicile they would be afforded the MFJ status. As stated, the couple was legally married in 2008 under the laws of California. Since that time, however, California has overturned their same-sex marriage laws (here ). Presumably, Mr. Merrill’s marriage was preserved by the Calif. Supreme Court’s ruling since it was already in existence prior to the passing of Proposition 8. I would expect, therefore, that Mr. Merrill and Mr. Boyle are now filing tax returns under the MFJ status.

Other blogs referencing this case:

July 13, 2009

Pursuant to a Property Settlement Agreement entered into in 1980, 75% of Mr. Strand’s military retirement pension payments were payable to Mrs. Strand.

In 2004 and 2005, Mrs. Strand received $12,621 and $12,952 respectively. The Defense Finance and Accounting Services (DFAS) issued Mrs. Strand a 1099-R, but she did not report the amounts on her tax returns. The IRS issued a notice of deficiency for each year. Mrs. Strand filed a petition disputing the deficiencies.

Generally, amounts received from pension accounts are taxable under section 61(a)(11). Mrs. Strand makes three arguments against including the the payments in gross income. The third argument will not be addressed in this post.

The first argument is that 2004 and 2005 is the first time since 1986 – when the payments started – that she has been required to include the amounts in gross income. The Tax Court rejects the first argument because “each tax year stands on its own and must be separately considered.” Further, “It is well settled…that the Commissioner cannot be estopped from correcting a mistake of law, even where a taxpayer may have relied to his detriment on that mistake.”

Second, she argues that the payments are divisions of property thus excludable from income under section 1041. Section 1041 states that no gain or loss shall be recognized on a transfer of property between spouses under a divorce agreement. For example, if H and W agree, as part of their divorce, that W gets 100% of H’s stock in General Electric, then under section 1041 W does not have to recognize gain on receipt of GE stock. W does, however, have a capital gain when she sells the stock. Her gain will be equal to the sale price less H’s basis. Segundo. 1041(b). H’s basis in the GE stock is generally what he paid for it. Segundo. 1012.

The Tax Court first points out that section 1041 is inapplicable because the property settlement occurred prior to section 1041’s enactment. Relying on prior case law, however, the Court holds that when Mrs. Strand received an interest in her ex-husband’s military retirement account she recognized no gain or loss. But, a pension is “simply a right to receive a future income stream from the retiree’s employer.” Since neither she nor her ex-husband had basis in that “income stream”, the payments from the account are taxable.

Qualified Domestic Relations Orders

It is worth pointing out that the pension payments, like the ones here, are also taxable today to Mrs. Strand under section 72 and section 402(a).

Mrs. Strand is considered an “alternate payee” under section 402(e)(1). An alternate payee is a spouse or former spouse who receives retirement distributions under a qualified domestic relations order (“QDRO”). As such, she is treated as “the distributee of any distribution payment made.” Under section 402(a), amounts distributed to a distributee are taxable to the distributee under section 72.

July 10, 2009

This is considered by many a very important decision by the Tax Court and was addressed several days ago in the Wall Street Journal (here ). I was not very fond of WSJ's explanation. I invite you to compare and contrast this analysis with what the article stated.

The Garnett’s Entity Holdings

The Court decides here ‘what the law actually says,’ and not ‘did the taxpayer comply with the law,’ the facts, therefore, are somewhat irrelevant. A brief explanation, however, to set the background is helpful.

The taxpayers, the Garnetts, owned interests in several partnerships. GFF stands for Garnett Family Farms. Through their various GFF, LLC entities, the taxpayers owned interests in 6 LLPs, 1 LLC, and 2 entities considered Tenants-In-Common. They directly owned interests in 1 LLP and 1 LLC. A diagram is worth more than a thousand words here.

On their 2000 through 2002 tax returns, the Garnetts reported income and losses that flowed through to them from their interests in the LLPs and LLCs. The IRS asserts that the Garnetts hold their interests as “limited partners” and are therefore subject to the limitations imposed by section 469(h)(2).

Passive Activity Rules and Seven Material Participation Tests

Section 469(a) disallows losses associated with passive activities. A passive activity is defined – in sec. 469(c) – as a trade or business in which the taxpayer does not materially participate. Section 469(h)(1) states, taxpayers who are involved in an activity on a “regular, continuous, and substantial” basis are treated as materially participating. Section 469(h)(2) provides an exception for interest in limited partnerships. Under 469(h)(2) a taxpayer whose interest is held in a limited partnership is not treated as materially participating except as provided by the regulations.

The regulations, sec. 1.469-5T(a), set out seven ways in which a taxpayer can show material participation. In the case of 469(h)(2) limited partnership interests, however, only three of the seven can be used to determine material participation. Those three are (1), (5), and (6). Segundo. 1.469-5T(e)(2). Consequently, it is more difficult to establish material participation if the taxpayer’s interest is considered a 469(h)(2) interest. The seven tests are as follows:

(1) The individual participates in the activity for more than 500 hours during such year;

(2) The individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual's participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

(4) The activity is a significant participation activity (within the meaning of paragraph (c) of this section) for the taxable year, and the individual's aggregate participation in all significant participation activities during such year exceeds 500 hours;

(5) The individual materially participated in the activity (determined without regard to this paragraph (a)(5)) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;

(6) The activity is a personal service activity (within the meaning of paragraph (d) of this section), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; o

(7) Based on all of the facts and circumstances (taking into account the rules in paragraph (b) of this section), the individual participates in the activity on a regular, continuous, and substantial basis during such year.

The really important test is (4). This is where most taxpayers can satisfy the material participation test. This test allows taxpayers to aggregate significant participation activities . A significant participation activity is a trade or business activity where the taxpayer participates for more than 100 hours during the year. By aggregating significant participation activities the 500 hour threshold for test (4) becomes much easier to reach.

Tax Court Holds an LLC/LLP Interest is not Covered by Section 469(h)(2)

The Tax Court points out that aside from one State, LLCs and LLPs were not even in existence at the time Congress passed 469(h)(2). It is therefore unlikely Congress contemplated these entity types when the legislation was drafted.

As justification for 469(h)(2) the legislative history takes particular note, that a limited partner necessarily voids his or her liability protection by materially participating in the partnership’s business. As a result, there is a presumption that the limited partner is passive. The legislative history also states the “Secretary would have regulatory authority to treat ‘substantially equivalent entities’ as limited partnerships for purposes of section 469(h)(2).”

The Tax Court contrasts the legal characteristics of limited partnerships with limited liability partnerships and limited liability corporations; one difference appears determinative. An LLC member or an LLP partner maintain their liability protection even though he or she materially participates in the partnership’s business. Thus, the presumption mentioned earlier seems misplaced when applied to LLC and LLP interests.

What Really Changes

In an earlier decision, Gregg v. United States. 186 F. Supp. 2d 1123 (D. Or. 2000), the Oregon District Court came to the same conclusion as the Tax Court. The difference being that decision was authority for taxpayers in the 9th Circuit, while the Tax Court’s decision here applies to all taxpayers.

My research in this area revealed that most secondary sources already indicated a lack of statutory support for the IRS’s position in this case. Consequently, I think most tax return preparers already used all seven tests to determine material participation for LLC members.

The Garnett’s case is just getting started. They still have to prove they materially participated in each of their eleven entities, although now it will be a little easier. In addition, as was before this case, they have to satisfy the at-risk rules of section 465 and the partnership basis rules of section 704 to deduct losses.

The Tax Court, at the request of the Service, ignored the indirect ownerships when interpreting 469(h)(2). Question for the readers – assuming there are any – which entity do the Garnett’s apply the material participation tests to? The GFF entities or the second tier?

July 09, 2009

I recently had a discussion with the Internal Revenue Service regarding a client’s account. The customer service representative kept saying to me, “the computer says…” At one point I wanted to say, “let me speak to the computer, because the human here is not helping.”

Mr. & Ms. Fitzpatrick felt the brunt of the Service’s bureaucracy, but at least in the end they received restitution. I have taken a few liberties with the facts here for comedic effect…but not many.

The Story of Bud and Sally

The problems started when the IRS’s computer (let’s call him Bud) sent a notice to the Fitzpatricks in March 2007 indicating they failed to report $22,581 in social security benefits on their 2005 tax return. Bud apparently received an SSA-1099 and matched the form to their 2005 return. When Bud identified a mismatch, he generated a deficiency notice.

The taxpayers responded to Bud with a letter stating they did not qualify for nor did they receive social security benefits during 2005. In response, Bud instructed them to get a letter from the Social Security Administration acknowledging the mistake. After contacting the SSA, Mr. Fitzpatrick learned he was due $196.00 in survivor’s benefits but that nothing had been paid in 2005. Naturally, SSA’s computer (let’s call her Sally – equal opportunity) failed to provide documentation, so Bud sent another deficiency notice in August 2007.

In November 2007, the taxpayers filed a petition with the Tax Court. Not long after, Bud assigned the case to an Appeals officer – finally a human! The Appeals officer’s records indicate several conversations with the Fitzpatricks and their representative, an Enrolled Agent. The AO’s records – really Bud’s records - indicate the difficulty the Fitzpatricks faced trying to contact and obtain a corrected SSA-1099 from Sally. There is no indication, however, that anyone from the Appeals office attempted to call a human where Sally works.

Attempts to contact Sally still failing, the AO processed the case for trial. In early July 2008, as part of the pre-trial activities, a paralegal (human) from the IRS hand-delivered a letter to the Boston SSA office to obtain certified records for trial. The SSA office responded; viola! Sally issues a corrected 1099.

Issue for the Tax Court

In total, the Fitzpatricks spent $3,982 in court fees trying to resolve the error started by Sally and compounded by Bud. The issue for the Tax Court is whether the Fitzpatricks are due litigation costs under section 7430.

Sections 7430(a) and (b) allow reimbursement for reasonable administrative costs and reasonable litigation costs to the prevailing party, unless the prevailing party either unreasonably protracted the proceeding or has not exhausted available administrative remedies.

The IRS concedes all the requirements here except that the Fitzpatricks are a prevailing party as that term is defined in section 7430(c). A prevailing party means, a party that has “substantially prevailed” with respect to either an amount in controversy or a significant issue. section 7430(c)(4)(A)(i)(I), (II). If, however, the IRS substantially justifies their position, then no party is considered the “prevailing party.” section 7430(c)(4)(B).

The Court points out that Tax Payer Bill of Rights 2 shifted the burden under 7430(c)(4) from the taxpayer to the IRS. Thus, the IRS must produce evidence their position was substantially justified. The IRS need only show they “acted reasonably on all facts and circumstances and the legal precedents relating to the case…” to substantially justify their position. In addition, under section 6201(d):

In any court proceeding where a taxpayer asserts a reasonable dispute with respect to income reported on a third-party information return and fully cooperates with the IRS, ‘the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.’(emphasis added).

The IRS argues they acted reasonably by relying on the third-party information reported by the SSA. The Fitzpatricks argue that once the IRS was informed in mid-2007 that the SSA-1099 was erroneous it was not reasonable to litigate the case without first meeting their burden under 6201(d).

The Court agrees with the Fitzpatricks. The IRS did not meet their burden under 6201(d) until July 2008 (remember the human paralegal), three months after the Court issued a notice of trial. “Thus, on this record, it is clear that between the filing of the petition in November 2007, and the paralegal’s inquiry in July 2008, respondent did not conduct any independent investigation despite petitioners’ continuing challenge to the accuracy of the Form SSA-1099.”

The IRS makes several policy argument in response to the Court’s holding. Among others, they suggest that the decision will require them to validate all third-party information returns prior to issuing a notice of deficiency. They also argue the administrative burden would be both “unreasonable and overwhelming.”

The Court rejects both arguments by pointing out that section 6201(d) “does not apply to prelitigation actions.” “The issue here is whether respondent was reasonable in adopting and maintaining the administrative position as his litigation position, in view of the affirmative duty imposed by section 6201(d)…”

Unfortunately, or fortunately depending on your view, this case no precedential weight and it may not be appealed, because it is subject to the provisions of section 7463(b).

This opinion is subject to section 7463(b), which means the opinion may not be treated as precedent for any other case (even though this information is in the opinion, I will provide this disclosure going forward if applicable). This, however, does not diminish its usefulness. Private letter rulings, for example, may not be used as precedent either under section 6110(k)(3), however, many practitioners use them as guidance in analyzing particular fact and law scenarios.

There are three penalty sections at play in this case: 6651(a)(1), 6651(a)(2), and 6654(a). The taxpayer concedes she is liable for a deficiency for her 2003 and 2004 tax returns. But she contests penalties imposed under 6651(a)(1) & (2), and 6654(a).

Section 6651(a)(1) imposes a penalty for failure to file a tax return. Section 6651(a)(2) imposes a penalty for failure to pay tax shown on a tax return. And Section 6654(a) imposes a penalty for failure to pay estimated income tax. To overcome a section 6651(a) penalty the taxpayer must show the failure was due to reasonable cause and not due to willful neglect – see language in same section.

To overcome a section 6654(a) penalty, in addition to reasonable cause, the taxpayer must either be disabled, or 62 and retired – see section 6654(e)(3)(B). For the section 6654(a) penalty there is also a provision under 6654(e)(3)(A) that gives the Secretary discretion to waive the penalty because of casualty or disaster, and under circumstances which would be against equity and good conscience.

The taxpayer, Ms. Humes, was experiencing emotional problems during the years at issue. The only evidence offered by Ms. Humes at trial regarding her illness was her own testimony. She testified that she stopped working in August 2004, was hospitalized the same month, and was one year in arrears on her mortgage payments. Her house was foreclosed on in 2005. The Tax Court acknowledges that there are circumstances in which a taxpayer's illness may constitute reasonable cause for all three penalties imposed here.

Section 6654(a) Penalties

The Tax Court disposes of the 2003 section 6654(a) penalty without any reference to Ms. Humes’s illness. Under 6654(c) & (d), estimated tax payments equal to 25% of the “required annual payment” are due in four equal installments. The required annual payment is the lesser of 90% of the current year’s tax, or 100% of the prior year’s tax. The 100% prior year tax clause does not apply in cases where the tax return was not filed in the prior year.

The IRS did not introduce any evidence that Ms. Humes failed to file her 2002 tax return. If she did file it, they did not introduce evidence of the 2002 tax shown on the return. Without any indication as to Ms. Humes’s 2002 tax return, the Court must apply the formula as written without exception. Consequently, under the 6654(d) formula Ms. Humes’s required annual payment for 2003 is $0.00 (100% of the prior year = $0.00; which is always going to be less than 90% of the current year’s tax). Either the IRS was not prepared for trial, or they did not understand the law.

Since the IRS was auditing both 2003 and 2004, there was ample evidence on the record that Ms. Humes was liable for 2004 estimated tax payments. Using the 6654(d) formula for the 2004 tax year, the 100% clause applies to the 2003 tax return admitted at trial. The Court, nonetheless, agrees with Ms. Humes that her illness met the definition of a disability under 6654(e)(3)(B)(i)(II) and abates the failure to pay estimated tax penalty.

Section 6651(a)(1) and (2) Penalties

The Tax Court sustains both penalties for 2004, but finds Ms. Humes established reasonable cause for 2003 and abates the penalties for that year.

In April 2004, Ms. Humes filed for an extension, thus the 2003 tax return’s due date was August 15, 2004. She testified at trial that her illness prevented her from working after August 2004 and that she was hospitalized in the same month. The Tax Court agrees this is enough to show reasonable cause under 6651(a)(1) for failure to file a tax return. Ms. Humes also testified that she was not able to manage her finances in 2004, she was one year in arrears on her mortgage payments, and the mortgage was foreclosed in 2005. The Court agrees here as well, Ms. Humes established reasonable cause for failure to pay the tax shown on her 2003 return.

Ms. Humes loses here because she failed to introduce evidence of her illness in 2005 and its impact on her ability to file her 2004 tax return and pay the tax shown on the return. In contrast to April 2004 where Ms. Humes at least filed for an extension, there is nothing in the opinion regarding her efforts to comply with the 2004 filing requirement in April 2005. She also provided no evidence regarding her ability to pay the tax shown on her 2004 tax return. Such evidence could include her income, assets, and liabilities in 2005.

It seems the Tax Court was more than willing to help Ms. Humes, but they were not going to make her case for her. Producing evidence at trial is critical. In this case both sides lost an issue simply because they failed to produce evidence.

July 02, 2009

This case is important because the IRS is issuing levies left and right these days. This opinion is a good discussion of section 6330, notice and opportunity for hearing before levy .

How does a seemingly simply issue turn into an almost fifteen year dispute with the IRS? Ask the Kovaceviches. The issue is seemingly simple. The Kovaceviches say that the IRS did not properly apply five checks to their outstanding tax liability from 1992. Twenty-eight pages later the Tax Court says the IRS did apply the payments properly. In the interest of full-disclosure, there is a lot of the opinion I am leaving out.

The 1992 dispute started when the IRS determined Mr. Kovacevich was an employee of his law firm and not an independent contractor. Mr. K. challenged the determination in tax court and lost. As a result, his law firm owed back employment taxes. Mr. K’s business deductions as an independent contractor were disallowed, as well as his personal deduction for ½ self-employment tax paid. The law firm’s employment tax liability was settled by the self-employment taxes paid by Mr. K. The payments were credited to his firm’s liability pursuant to section 3402(d).

In April 2005, the Service sent Mr. K a notice of intent to levy for amounts still owed from 1992. Between the 1992 and today, the following events transpired:

1999 – IRS deficiency notice for 1992 tax year

2003 – Tax Court upholding deficiency notice

2006 – Ninth Circuit upholds Tax Court’s decision

In response to the levy notice, the K’s requested a collections due process (CDP) hearing and presented copies of four checks they claimed were not applied to the 1992 tax year. The appeals officer upheld the levy because she considered the K’s “misapplied check” argument a challenge to the underlying tax liability; a matter not within the scope of a levy hearing under 6330(c)(2)(B).

The IRS concedes the officer’s reading of 6330(c)(2)(B) an error. Nonetheless, the Tax Court lays out a fine analysis of section 6330(c) beginning on page 12. The language of (c)(2)(A) states, “a person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy…” Since the K’s did not challenge the liability rather the unpaid amount, their check theory was within the scope of a hearing

Interestingly, because the appeals officer’s incorrect reading of 6330(c) is an “error of law. she necessarily abused her discretion, unless her error was harmless.” To show harmless error, the IRS asserts that the exclusion to 6330(c)(2)(A) under (c)(4) applies. Under 6330(c)(4) an issue “raised and considered at previous administrative or judicial proceeding” may not be raised again. Since one of the checks at issue was considered by the Tax Court at the 2003 deficiency trial it could not be properly considered at the CDP hearing.

To show harmless error for the remaining four checks, the IRS would need to show the checks were applied properly in the first place. Each check was considered in turn by the Tax Court. The Tax Court states, “a taxpayer who makes a voluntary payment may designate which liability he or she wishes to pay.” The Court then conducts an exhaustive analysis between the IRS’s records and the writings on each of Mr. K’s checks. Only one of Mr. K’s checks indicated the 1992 tax year. The other checks had writings that indicated other tax years and were properly applied accordingly.

The obvious problem with Mr. K’s argument – the Court points this out – is that if it is assumed for the sake of argument that the IRS erroneously applied his checks, he still owes money. The checks were in fact applied to one of the K’s tax liabilities. So shifting the checks from one tax year to another gets him nowhere. It suggests Mr. K’s motives for the fight were illogical from the start.

July 01, 2009

The Manning brothers are successful day traders – not Payton and Eli; Jim and John. But make no mistake, the IRS went after these boys with all the aggression of a 250lb middle linebacker. The tax year at issue is 2003.

The Tax Court’s opinion is pretty long, but the facts are pretty straightforward. Jim Manning – the taxpayer in the suit – ran a day trading office in Austin, TX for Assent, LLC, a broker-dealer. Jim was not Assent’s employee, he operated the office through his own LLC.

Customers (other day traders) paid commissions to Assent for making stock trades. The normal commission paid was $5 per 1,000 shares traded. Customers with very large trading volumes would receive discounts. But even if a customer did not achieve high trading volumes, Jim could ask Assent for commission reduction to stay competitive – there were other broker-dealers day traders could go to. Out of those commissions paid to Assent Jim would receive a cut.

In addition to individual accounts, Jim also brought in other entities to conduct their day trading through his office. One of these entities was Warrior, LLC, formed by Jim’s brother John. Warrior was the office’s biggest customer and paid average commissions of $3.75 - $4.25 per thousand shares traded. Assent kept $2 profit and Jim’s cut was the rest

Sometimes it took so long to get Assent’s approval to lower commission rates, that Jim would enter into “outside” agreements to take less of a cut and pass the savings on to the customers. Jim entered into just such an agreement with Warrior. For example, Warriors commissions were reduced to $2.25 per thousand shares traded. In this situation Warrior would still pay Assent $3.75 per thousand shares. Assent would keep $2.00 and pay $1.75 to Jim. Jim in turn would pay $1.50 to Warrior and net $.25.

For tax reporting purposes, Jim treated all “outside” commission adjustments the same. He reported the commission rate adjustment payments to each customer on a 1099-B (Proceeds From Broker and Barter Exchange Transactions). He then took a deduction on his Schedule C. Warrior reported all the commission rate adjustment payments it received as income for tax purposes.

The IRS challenges Jim’s deduction for the rate adjustments related to Warrior. Conversely, they allowed deductions for rate adjustments to unrelated parties. The IRS asserts the payments to Warrior were (1) not ordinary and necessary under section 162(a), (2) illegal payments under section 162(c)(2), and (3) lacked economic substance. The Tax Court rejects all three arguments.

The payments are ordinary because it is a common occurrence to lower commissions in the day trader industry. It did not matter whether the adjustment was paid by Assent or Jim so long as the adjustments were negotiated at arm’s length. The payments were necessary because Assent was slow to adjust rates. The Tax Court states, “an expense may be necessary even where the taxpayer could have avoided it by pursuing a different course of conduct.”

Illegal payments under section 162(c)(2) are those that specifically violate “federal statutes, including state laws which are assimilated into federal law by federal statutes, and legislative and interpretive regulations thereunder.” Here, the IRS relies on an ethics rule promulgated by the NASD (National Association of Security Dealers) against commission-sharing as foundation for its illegality argument. First, these were not commission-sharing arrangement as that term is defined. Moreover, since the IRS did not cite any federal statute that was violated, the payments are not illegal under section 162(c)(2).

Finally, the IRS argues the commission adjustments lacked economic substance because the agreement was not at arm’s length. Taxpayer Manning provided enough evidence to show the Court that Warrior could have received the same rates elsewhere.

Just goes to show you, when dealing with the Service, the best offense is a good defense.

June 30, 2009

Mr. Florance appears to be making a name for himself in the halls of the U. S. Tax Court. He was the recipient of not one, but two decisions from the Tax Court yesterday.

The facts are almost identical in each case, the only real difference is the year at issue. In the first case Mr. Florance failed to file his tax return for 2003, and in the second case he failed to file for 2005. The IRS assessed a deficiency, to which Mr. Florance asserts he is not liable for because "he did not consent to becoming a taxpayer and therefore is not subject to the income tax laws of the United States." This might be my favorite frivolous argument yet.

In response to Mr. Florance's assertion, the IRS filed a motion to dismiss and asked the Court to impose section 6673 penalties. Section 6673 penalties are reserved for frivolous arguments and "proceedings instituted primarily for delay." The Tax Court can impose up to $25,000 in penalties.

The best part is at the motion to dismiss hearing for the 2003 tax return. Mr. Florance did not show up. The IRS wins right? Well, not here because the IRS asked the Court to dismiss its own motion. Turns out, the IRS found more of Mr. Florance's unreported income and they needed additional time to assess higher deficiencies.

After the factual background is presented, the Tax Court begins its discussion with:

"Mr. Florance is no stranger to this Court, In Florance v. Commissioner. T. C. Memo. 2005-60, affd. 174 Fed. Appx. 200 (5th Cir. 2006) and Florance v. Commissioner. T. C. Memo. 2005-61, affd. 174 Fed. Appx. 200 (5th Cir. 2006). Florance asserted similar tax defier arguments for the 1994 through 1997 tax years and was sanctioned by this Court under section 6673 in the respective amounts of $10,000 and $12,500. In this case he asks us to consider his frivolous arguments once again."

Mr. Florance loses. The Tax Court imposes a $15,000 section 6673 penalty for the 2003 tax year, and a $17,500 section 6673 penalty for the 2005 tax year.

Here is the opinion for the 2003 tax return

Here is the opinion for the 2005 tax return

June 29, 2009

Mr. Beane obviously did not hire a very good bean counter.

Mr. Beane was founder and chief-executive of AAVID Engineering. In 1992, Mr. Beane was granted 1,518,000 nonstatutory stock options. The stock options were scheduled to vest 25% per year over a four-year period. In 1996, AAVID went public. Between 1997 and 2000, Mr. Beane exercised all his options and sold the underlying stock.

A nonstatutory stock option (or nonqualified) is any option that does not meet the qualification criteria found in section 422. If a stock option meets the requirements of section 422 the employee is given preferential treatment pursuant to section 421. Generally, an employee must include in gross income compensation in cash and in-kind for services rendered. Under section 421, the employee will generally have income only after she has exercised the options and sold the underlying stock.

Nonstatutory stock options, on the other hand, result in gross income when the option is granted or upon exercise pursuant to section 83. In the latter instance (upon exercise), the difference between the fair market value of the stock and the price paid to exercise the options is treated as compensation in the year of exercise. Depending on the fair market value of the stock, this can result in a huge tax bill to the employee without a lot of money to pay it with (although, the employee could immediately sell the stock or take a loan against the stock to pay the tax bill).

When Mr. Beane exercised his stock options he made a myriad of errors in reporting his gain. For each of the three years Mr. Beane exercised the options, he reported the gain three different ways.

In 1997 he reported income from exercised options as ordinary income.

In 1998 he reported the income as trade or business income. He also reported the income subject to self-employment taxes.

In 1999, he reported income for exercised options as self-employment income.

The IRS issued Mr. Beane a notice of deficiency for his 1998 tax return because he not only reported his gain incorrectly but he also reported less than 100% of it. His total gain on exercised options in 1998 was $21,886,688. But he only reported $13,511,014. Moreover, he reported this amount as trade or business income and paid self-employment taxes.

In 1999, Mr. Beane’s gain from exercised options was $4,938,543, but this time he reports $10,139,696. Again, he reported it as self-employment income and paid self-employment taxes.

The resources spent here trying to unwind Mr. Beane’s 1998 and 1999 tax returns appear to frustrate the Tax Court. Y por buenas razones. The case here is a fairly simple. AAVID should have included the gain on Mr. Beane’s annual W2 as compensation. This would subject the gain to backup withholding and employment taxes. This is all spelled out rather clearly in IRS’s publication 525. Instead, Mr. Beane underreports one year, overreports the next, and pays self-employment taxes to boot.

I originally intended to write about President Obama's DOJ Tax Division nomination. But this week brings the tragedy of Washington's Metro crash, and unexpectedly (at least in my mind) an assault on Tax Law as one of the "but for" causes. An argument even Mrs. Palsgraf would not make.

The premise. articulated by Professor Sarah Lawsky, suggests a connection between tax-advantaged sale-leaseback transactions WMATA entered into for rail-cars and Monday's crash. At the outset, I have no real issue with exploring the idea and kicking it around the academic water cooler. These are the kinds of topics I expect professors and policy think-tanks to explore, and which I enjoy reading and thinking about myself. Unfortunately, the idea seems to have generated a life of its own, and in my mind is being twisted.

Sen. Grassley has latched on to the suggested connection between sale-leasebacks and the crash. The tragedy is not yet five days old, causes of the crash are unknown, and already members of Congress are drafting a spending bill using some of their favorite rhetoric, tax-shelters and banks. (here ).

So allow me to untwist this. Tax law did not cause nor contribute to Monday's crash. Even if it turns out that old rail-cars were solely the cause of Monday's crash, tax law still has nothing to do with it. There, I said it. My short life as tax blogger may be over. but my wife will still read my posts.

If equipment is kept beyond its useful life the tendency to break down increases. Here, there were no tax incentives for WMATA to keep the rail-cars in service beyond their useful life (in fact, most tax law provides an incentive to get rid of old equipment and buy new equipment, e. g. section 179). There were financial pressures for keeping the rail-cars, WMATA had no money. WMATA could break their lease, but they made a financial decision not to break their lease and keep the rail-cars in service. Their decision did not consider the tax consequences; and why would it, they are tax-exempt. In hindsight, a financial decision put before safety - maybe, we do not even the cause of the crash. But make no mistake, they were not tax-induced into keeping old rail-cars.

Did the counter-party to the sales-leaseback benefit? Por supuesto. But so do thousands of other Americans when we buy tax-favored municipal bonds. If WMATA had kept the cars in service because they didn't have the credit rating to float additional bonds for new rail-cars, would we blame municipal bonds as well? No lo creo.

Does WMATA need money? Usted apuesta. Will Congress give it to them? Usted apuesta. But let's be clear, tax laws are not the reason WMATA needs new rail cars. Tax law did not cause nor contribute to Monday's crash.

June 25, 2009

There is more to this opinion than just the regular run-of-the-mill taxpayer penalty. I encourage you to read on.

In the early 80’s, Mr. Pack, at the advice of his CPA, invested $25k in a limited partnership called Platte Leasing Associates. A $25k investment in 1981 equates to about a $60k investment today (per the calculator on The Federal Reserve Bank of Minn.'s website). Prior to Mr. Pack’s investment, he was informed via several documents that Platte was taking significant tax risks, and would most likely be challenged by the IRS. Within those documents was a section that stated Platte’s general partners were involved in other partnerships that were currently under IRS audit. As a result of those audits, the partnerships deductions were disallowed.

In 1983, Platte passed-through ordinary losses and interest expense, which Mr. Pack reported on his 1983 tax return. Similarly, in 1985, Platted passed-through ordinary income and interest expense, which Mr. Pack reported on his 1985 tax return.

In the early 90’s, the IRS adjusted Platte’s 1983 & 1985 tax returns. In 2006, the Tax Court upheld those adjustments. Shortly thereafter, the IRS sent Mr. Pack a notice of deficiency relating to his 1983 and 1985 tax returns.

The issue for the Tax Court is whether penalties imposed by section 6653(a) and 6661(a) apply to Mr. Pack. Don’t go looking for section 6661(a); it is not part of the current tax code, it was repealed in 1989. Section 6653(a) – under the 1954 tax code - imposes a 5% penalty for underpayments “due to negligence or intentional disregard of rules or regulations.” Section 6653(a)(2) imposes an additional tax “equal to 50 percent of the interest payable under section 6601.” This means, that whatever interest penalty the Pack’s have to pay because of underpayment, increase it by 50%.

Here, the Tax Court has to determine if the Pack’s acted negligently. The Tax Court points out that in the Ninth Circuit (where this appeal would lie), “[in] cases involving a deduction for loss that results from an investment [a determination as to negligence] depends on both the legitimacy of the underlying investment, and due care in claiming the deduction."

Mr. Pack attempts to show reasonable reliance on his CPA to avoid the negligence penalty. He relies on a three-prong test set out by the Third Circuit in Neonatology Associates, P. A. v. Comissioner, 299 F.3d 221, (3d Cir. 2002). The three prongs are:

(1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment.

As to the first prong, The Tax Court cites the CPA’s lack of investment experience to show Mr. Pack’s reliance was unjustified. The second prong was not an issue. The Tax Court also agrees with the IRS’s on the third prong; Mr. Pack knew of his CPA's conflict of interest. Lastly, the documents that accompanied the Platte investment contained several warnings regarding the tax risks that should have resounded loudly in Mr. Pack’s head.

Mr. Pack loses because the document he received in connection with the Platte investment was a clear warning, and he ignored it.

At first glance, the Tax Court’s application of Neonatology’s first prong appears incorrect. Based on the context of the Third Circuit's opinion, the first prong refers to the professional’s expertise as a tax adviser not as an investment adviser. In Neonatology, the taxpayer received tax advice from their insurance agent, “rather than from a competent, independent tax professional.” Neonatology, 299 F.3d at 234. Here, the IRS attacked the CPA’s expertise as an investment adviser and said nothing of his expertise as a tax adviser.

But as stated above, the standard for negligence here is defined by the Ninth Circuit. The Ninth Circuit requires a showing that the underlying investment was legitimate to avoid the negligence penalty. This has the impact of turning Neonatoloty's three-prong test into a six-prong test. Now, Mr. Pack has to show he acted reasonably not only with respect to taking the deduction, but also with respect to investing in Platte in the first place. Since Mr. Pack did not seek independent investment advice he fails the test.

My only policy argument against the Ninth Circuit's negligence test is that it is different than the test used in the Fifth Circuit. The Tax Court cites the Ninth Circuit's opinion in Saks v. Commissioner. 82 F.3d 918 (9th Cir. 1996). The Saks Court rejects the Fifth Circuit's opinion in Chamberlain v. Commissioner. 66 F.3d 729, (5th Cir. 1995). In Chamberlain, the issue of negligence is based solely on whether the taxpayer acted negligently in claiming the loss.

While I think the Fifth Circuit is the better approach, it seems wholly unfair that taxpayers in the ninth circuit should be subjected to a more stringent negligence test than taxpayers in the fifth circuit.

Study Objective 1 - Identify and Discuss the Major Characteristics of a Corporation

Study Objective 4 - Differentiate Preferred Stock from Common Stock

Study Objective 5 - Prepare the Entries for Cash Dividends and Understand the Effect of Stock Dividends and Stock Splits

Study Objective 7 - Prepare a Comprehensive Stockholders' Equity Section

Capítulo 11

Capítulo 11

In chapter 11 of the text you will find a sentence that reads, "A corporation is formed by grant of a state charter." Conduct research in your school library or on the World Wide Web to find the "basic steps to incorporating a corporation." If researching the web, go to www. bizfiling. com and search for What are the costs . Click on Mississippi.

1. What are the corporate requirements relating to officer information, stock information, and corporate records?

2. When must annual reports be filed and what is the filing fee?

3. What are the income tax rates for corporations?

4. What is the franchise tax rate for corporations?

Solutions: Information available on website.

Note: The website is constantly being updated. Please check to see that the information requested in this exercise is available.

Exercise 2 - World Wide Web Research and Forming a Corporation Activity

For over a century, Delaware has been the home for America’s premier corporations. More than half of the Fortune 500 companies are incorporated in Delaware. To learn more about incorporating, go to www. accessincorp. com .

1. What are the advantages and disadvantages of incorporating your business?

2. What is a registered agent and why does your corporation need one?

Common stock, $1 par, 500 shares

issued and 480 shares outstanding $ 500

Paid-in Capital in Excess of Par Value 10,000

Retained Earnings 7,000

Total paid-in capital and retained earnings 17,500

Less: Treasury stock (20 shares) 450

Total stockholders’ equity $17,050

2. To reissue the shares under bonus and stock compensation plans; to increase trading by signaling that management believes the stock is underpriced ; to have additional shares available for use in acquiring other companies; and to reduce the number of shares outstanding and thereby increase earnings per share.

Exercise 5 - Library or World Wide Web Research and Stockholders' Equity Activity

Obtain a copy of Colgate's Annual Report from your school library or research the World Wide Web to find information to answer the following questions. If researching the web, go to www. colgate. com .

1. What accounting firm is responsible for Colgate's independent audit?

2. How much did Colgate pay out in dividends during the last fiscal year? Did the dividends go to preferred or common stockholders?

3. On which financial statement(s) did you find information concerning the amount of dividends paid?

4. Does Colgate own treasury stock? If so, how much did Colgate pay for the treasury stock?

5. On which financial statement(s) did you find information concerning Colgate's treasury stock?

Market News is the definitive place to view real-time UK regulatory disclosures.

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Show all announcements excluding NAVs & FRNs

Show all announcement types

See up to 500 stories per page

See ‘Most read news’ ticker at the top of the page

Select stories by Name/code, source, type, index or sector

Stock Market Questions

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Buying and selling the same stock in the same day. Buen día

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"Family Life During the Great Depression" written? When are the text "Family Life During the Great Depression" written? And who has written it. unesdoc. unesco. org unesdoc. unesco. org

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can I sell on the 5th and still get paid the dividend? if the stock pays a dividend to holders of record on the 1st, can I sell on the 5th and still get paid the dividend?

What caused the depression and what made it great? What caused the depression and what made it great?

WHAT IS THE BENIFIT OF HOLDING YOUR OWN STOCK CERTIFICATES WHAT IS THE BENIFIT OF HOLDING YOUR OWN STOCK CERTIFICATES

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why do companies inveted money in stock market why companies inveted money in stock market & shares with their brand name & purchase the shares & securities of other companies why so?

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who stared the great depresion (what countrey) what country stared the great depresion and why? did the do it for fame in forton? or did it just happen on it own?

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what is Contracts? what is Contracts:

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when mines enter production I hold stock in a Canadian mining company that has yet to enter production which seems to be 18 months to two years away. The final steps in preparing …

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If a company buys another compay If a company buys another compay and offer to pay $55.00 a share - does the stick holder have to sell or can he keep his shares thank you Debbie

what is stock market? what is stock market?

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Good buy - call and put same time? want know good buy - call and put same time. or just buy one at time

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View the step-by-step solution to: 1. Baldwin Company had 40,000 shares of common stock

This question was answered on Aug 13, 2011. View the Answer

1. Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011 the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock for the year was $12. What number of shares of stock (rounded) should be used in computing diluted earnings per share?

A. 55,000 B. 61,667 C. 65,000 D. 56,667

2. Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U. S. GAAP than with International Financial Reporting Standards?

A. Change in depreciation methods B. Change to the LIFO method from the FIFO method C. Change in reporting entity D. Change in accounting estimate

3. In its 2011 income statement, WME reported $695,000 for service revenue earned from membership fees. WME received $681,000 cash in advance from members during 2011. In its reconciliation schedule, WME should show a

A. $14,000 negative adjustment to net income under the indirect method for the increase in unearned revenue. B. $14,000 positive adjustment to net income under the indirect method for the decrease in unearned revenue. C. $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue. D. $14,000 positive adjustment to net income under the indirect method for the increase in unearned revenue.

4. During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011. On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares. Angel's net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%. What will Angel report as diluted earnings per share for 2011, rounded to the nearest cent?

A. $6.43 B. The correct answer isn't given. C. $6.25 D. $6.22

5. On December 31, 2010, Albacore Company had 300,000 shares of common stock issued and outstanding. Albacore issued a 10% stock dividend on June 30, 2011. On September 30, 2011, 12,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2011?

A. 303,000 B. 312,000 C. 327,000 D. 342,000

6. When a transfer is made between cash and cash equivalents with no gain or loss, how is the transaction treated in the statement of cash flows?

A. It's included as an operating activity. B. It'sincluded as an investing activity. C. It'sincluded as a noncash financing activity. D. It's not reported.

7. Yellow Company is a calendar-year firm with operations in several countries. At January 1, 2011, the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares of stock for $30. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:

Vesting Date Amount Vesting Fair Value per Option Dec. 31, 2011 20% $37 Dec. 31, 2012 30% $8 Dec. 31, 2013 50% $12

Assuming Yellow prepares its financial statements in accordance with International Financial Reporting Standards, what is the compensation expense related to the options to be recorded in 2012?

A. $60,000 B. $130,000 C. $40,000 D. $95,000

8. After issuing its financial statements, a company discovered that its beginning inventory was overstated by $100,000. Its tax rate is 30%. As a result of this error, net income was

A. overstated by $30,000. B. overstated by $70,000. C. understated by $30,000. D. understated by $70,000.

9. C Co. reported a retained earnings balance of $200,000 at December 31, 2010. In September 2011, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2010, had been paid and fully expensed in 2010. C has a 30% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2011 statement of retained earnings?

A. $214,000 B. $221,000 C. $220,000 D. $210,000

10. Horrocks Company granted 180,000 restricted stock awards of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Horrocks' common shares have a market price of $10 per share on January 1, 2010, the grant date, and at December 31, 2011, averaging $10 throughout the year. When calculating diluted EPS at December 31, 2011, the net increase in the denominator of the EPS fraction will be

A. 120,000 shares. B. 0 shares. C. 180,000 shares. D. 60,000 shares.

11. In its 2011 income statement, WME reported $11,000 of interest expense on its outstanding bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should show a

A. $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium. B. $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount. C. $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium. D. $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.

12. On January 1, 2011, G Corp. granted stock options to key employees for the purchase of 80,000 shares of the company’s common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2013, by the grantees still in the employ of the company. No options were terminated during 2011, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was $31 per share at the date of the grant. G Corp. used the binomial pricing model and estimated the fair value of each of the options at $10. What amount should G charge to compensation expense for the year ended December 31, 2011?

A. $400,000 B. $320,000 C. $307,200 D. $384,000

13. Bowers Corporation reported the following ($ in 000s) for the year: Balance Beginning Ending Accounts Receivable $600 $850 Allowance for bad debts 40 35

Sales on account were $1,900, and bad debt expense was $18 for the year. How much cash was collected from customers on account?

14. Under its executive stock option plan, Q Corporation granted options on January 1, 2011, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2013 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated, however unexpected turnover during 2012 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2013?

A. $0 B. $20 million C. $19 million D. $18 million

15. During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011. On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares. Angel's net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%. What is Angel's basic earnings per share for 2011, rounded to the nearest cent?

16. Powell Company had the following errors over the last two years: 2009: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000. 2010: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000.

By how much should retained earnings be adjusted on January 1, 2011? (Ignore taxes)

A. Increase by $25,000 B. Decrease by $25,000 C. Increase by $15,000 D. Decrease by $6,000

17. During 2011, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2011. Falwell's net income for the year ended December 31, 2011, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2011.

What is Falwell's diluted earnings per share for 2011, rounded to the nearest cent?

A. $4.90 B. $3.14 C. The answer can’t be determined from the information given. D. $4.34

18. During the current year, East Corporation had 2 million shares of common stock outstanding. Two thousand, $1,000, 8% convertible bonds were issued at face amount at the beginning of the year. East reported income before tax of $3 million and net income of $1.8 million for the year. Each bond is convertible into ten shares of common stock. What is diluted EPS (rounded)?

19. A firm reported ($ in millions) net cash inflows (outflows) as follows: operating $75, investing ($200), and financing $350. The beginning cash balance was $250. What was the ending cash balance?

20. Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2007 and the machine was placed in service at the beginning of 2008. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $4 million. At the beginning of 2011, Red decided to change to the sum-of-the-years'-digits method. The residual value remains at $4 million. Ignoring income taxes, what will be Red's depreciation expense for 2011?

A. $6.6 million B. $4.8 million C. $5.4 million D. $11.55 million

21. Which of the following is not a change in reporting entity?

A. Presenting consolidated financial statements for the first time B. Reporting using comparative financial statements for the first time C. All are changes in reporting entity D. Changing the companies that comprise a consolidated group

22. During 2011, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2011. Falwell's net income for the year ended December 31, 2011, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2011.

What is Falwell's basic earnings per share for 2011, rounded to the nearest cent?

A. The correct answer isn't given. B. $5.00 C. $4.40 D. $3.14

23. Burnet Company had 30,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2011. What is the effect of the options?

A. The options will dilute EPS by $.09 per share. B. The options will dilute EPS by $.33 per share. C. The options are anti-dilutive. D. The options will dilute EPS by $.17 per share.

24. During 2011, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:

2009 $120,000 understated 2010 $150,000 overstated

P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2011 would be

A. $150,000 understated. B. $150,000 overstated. C. $30,000 overstated. D. correct.

25. During the current year, High Corporation had 3 million shares of common stock outstanding. Five thousand, $1,000, 6% convertible bonds were issued at face amount at the beginning of the year. High reported income before tax of $4 million and net income of $2.4 million for the year. Each bond is convertible into ten shares of common. What is diluted EPS (rounded)?

CorporalStarAlbatross5022 posted a question · Aug 13, 2011 at 10:58am

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What's the first teaser stock from Jeff Brown's Exponential Tech Investor?

Bonner & Partners, which is yet another spinoff of Bill Bonner’s Agora publishing empire, has beefed up its newsletter offering a bit by launching a new newsletter that’s seems like it’s in the same vein as Agora’s Breakthrough Technology Alert — an expensive letter focused on new technologies and, more specifically, on the early stage […]

Which travel firm are they calling "the best stock in the market across all sectors"

The “stock of the month” email teasers from Cabot follow a bit of a formula, but they also sometimes point us to interesting stocks… so we’re going to take a quick look at this latest ad, which I started seeing about a week ago, and see what Timothy Lutts and the Cabot folks are pitching […]

What's Oxford Club's $42.4 BILLION “Consumer Rebate Program?”

Are you really going to get a big ol’ check from the government? Well, maybe. But it’s not so secret as the Oxford Club folks would like you to believe… and you don’t need them (or their $49 subscription) to learn about it. You probably don’t need me for that, either, free or not, but […]

What's Nicholas Vardy pitching as plays on Cuba?

I’ve got a few thoughts to share with you about GSV Capital and a few other areas where I’ve seen questions or interest from readers recently, but first I want to get a quick teaser solution or two out for my favorite Irregulars…. One pitch that’s sent a lot of questions our way of late, […]

The ad says this stock will boom either on a takeover, or as it benefits from massive spending on improving the electrical grid

“The next MegaTrend is here and ready to make a bundle from it. I just spent six months researching it, and I’ve dug out what I think is my greatest stock pick ever. “My only concern is that this company gets bought out in the next six months. “And that I miss out on its long […]

What's the tiny stock being teased by Penny Stock Millionaire?

I’ve got several teaser pitches percolating right now, but this one quickly rose to the top after a couple readers sent it to me this morning. ¿Por qué? Not because I’m all that excited about the stock (it shouldn’t be a public company, frankly), but because the promises of absurd returns are so specific and over-the-top […]

Doc Gumshoe looks at the world of dieting -- you can't sell "Temperance and Moderation"

[ed. note: Michael Jorrin, who I like to call Doc Gumshoe, is a longtime medical writer (not a doctor) who writes about non-financial health and medical issues for us a couple times a month. Like all of our authors, he chooses his own topics and his words and opinions are his alone. Enjoy!] While working […]

Ernie Tremblay says this "Imminent Decision" will "unlock massive $18 billion market" and "spark a 224,00% sales surge for a $2 Microcap"

This ad first showed up in our inboxes under the “end surgery forever” headline in late January, and the following article firsta appeaered on January 26. We have not gone through and updated the article, though the basic pitch is just about the same in the new version of the ad today as it was […]

Checking into some lithium teases by Keith Kohl's Energy Investor newsletter

This is not a brand-new ad, and it has been discussed by Gumshoe readers a few times — but apparently I’ve never written about it or looked closely at it, so we’ll remedy that today. And, of course, we’ll name the “secret” stocks being teased for you. Keith Kohl opens his ad by promising that […]

Add on buy in gold

Just a brief note here to let the Irregulars know that I increased the size of my investment in First Mining Finance by about 50% today. This is not because of any abrupt change in the story or the valuation, simply a decision to allocate a little bit more to junior/exploratory gold because it seems […]

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KeyMod™ The New Standard in Modularity

Round recoil feature works in all axes, tapered fit of KeyMod™ nut ensures fore/aft tension bias.

Tapered/chamfered surfaces act to place load on part to ensure that there is no slip under recoil and part will return to the same position (V-Block design) each time it is installed. Without these tampered/chamfered surfaces accessories will be much more prone to movement under recoil and counter recoil.

Chamfered and a controlled depth feature allows for mounting hardware to sit much lower profile inside the handguard, this allows running suppressors inside of handguards (where applicable) or accessories under the gas block on slim-fitting handguards.

The through-hole is sized to clear a sling swivel, this means that sling attachment points are as low-profile as possible.

Readily available gages and inspection criteria, and use of standard angle cutters make it an affordable option for machining/manufacturing.

Widespread adoption leading to a robust and growing accessory list from most every major tactical accessories manufacturer.

Design is public domain. This was done on purpose so as to create a standard anyone is free to work with, just like the Picatinny (MIL-STD 1913) system. The free use of the standardized Picatinny system is what has allowed the small arms accessory market to expand to produce much effective tools. Any means and methods of attachment not yet patented are free for anyone to develop without potential royalties.

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Securities representing equity ownership in a corporation. providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation. In the event of liquidation. common stockholders have rights to a company's assets only after bondholders, other debt holders, and preferred stockholders have been satisfied. Typically, common stockholders receive one vote per share to elect the company's board of directors (although the number of votes is not always directly proportional to the number of shares owned). The board of directors is the group of individuals that represents the owners of the corporation and oversees major decisions for the company.

Common shareholders also receive voting rights regarding other company matters such as stock splits and company objectives. In addition to voting rights, common shareholders sometimes enjoy what are called "preemptive rights". Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues another offering of stock. This means that common shareholders with preemptive rights have the right but not the obligation to purchase as many new shares of the stock as it would take to maintain their proportional ownership in the company.

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On the Brink of Higher Interest Rates

9 Facts All Traders Need To Know About the SPY

9 Facts All Traders Need To Know About the SPY

Hey Traders from around the planet. I hope you are doing outrageously perfect today. Why am I always so happy? Because I get to do what I love every single day! Trade, teach and live life! My write-up today is going to be a simple and hopefully enriching one. Let’s talk the SPY. Here are my thoughts on it. The SPY has had 5 bullish weeks in a row. This week will make 6 if it continues higher The last time SPY had 6 bullish weeks in a row was September - October of 2015 Back in August.

Fed Stuck Between Hard Place and a Grenade

Fed Stuck Between Hard Place and a Grenade

He who trims himself to suit everyone will soon whittle himself away. Raymond Hull The Fed is stuck in between a hard place and a grenade, given this option, they will choose the hard place as unless you are looking for a one-way to ticket to nowhere you won’t choose the grenade. The Fed has nowhere to go; there is only one option available inflate the money supply or die trying to. Central bankers worldwide have already started to work on the next level of QE. It’s called negative interest.

Grain Market Outlook: Corn Realities

Grain Market Outlook: Corn Realities

Export sales for corn came in at 1.172 million metric tons up 7% from the week prior and 37% over the four week average. Big U. S. corn buyers were present with Japan buying 306 thousand and Mexico 339 thousand metric tons. That is the second consecutive week of over 1 million metric tons despite old crop carryover being over double the year prior. This week’s number is neutral at best as the market won’t rally over it but it won’t break either. This leaves room for funds holding big.

FOMC Alert: What Do Interest Rate Spreads Say Now?

FOMC Alert: What Do Interest Rate Spreads Say Now?

The Federal Reserve meets today, amid widespread expectations that 1) there will be no rate changes at this meeting and 2) that the Fed will signal a move to higher rates as international financial stresses abate. US labor markets continue to improve. Stocks have retraced the bulk of the Jan/Feb losses. Commodities including oil have been edging higher. While the US economy is still subject to negative external shocks, it appears to have (temporarily) weathered the “risk off” move from.

The Awesome Power of Belief: 4 Steps to Bring Vital Belief into your Trading

The Awesome Power of Belief: 4 Steps to Bring Vital Belief into your Trading

Everyone knows that belief in oneself contributes immensely to success. This is true for any endeavor—whether it be in trading, sport, entrepreneurship, the professions, or the arts—and at any level, from novice to expert. In trading, the best traders have a positive self-belief most of the time. They weren't born with it; most learned to develop it. But even the most successful traders can have their moments. Successful Traders Have Doubts In a report summarizing interviews with over.

Tesla Up 52%

Tesla Up 52%

Shares of Tesla fell 100 points from Mid-December to early February for no apparent reason besides the general bearish climate. The selling was so severe that it seemed like Tesla was being sold due to some imagined link with the price of crude oil. That would be like selling shares of Ford because the price of hay is falling. To its credit, however, since the February low, Tesla has been the very model of a short squeeze. A whopping 28% of the float is short, which has fueled a.

Russia And China Load Up On Gold

10 Reasons Why You Should Consider Speculating in Futures

Trading Psychology: Moving Beyond Fear

Why Silver Could Be The Next Hot Market

Euro Futures Should Decline for Several Months

Is a Market Reversal Coming?

Under Armour, Inc. Class A Common Stock Quote & Summary Data

** El verde destaca el ETF de mayor rendimiento en% de cambio en los últimos 100 días.

Descripción de la Compañía (como archivado en la SEC)

Our principal business activities are the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The brand's moisture-wicking fabrications are engineered in many designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles. Our Connected Fitness strategy is focused on connecting with our consumers and increasing awareness and sales of our existing product offerings through our global wholesale and direct to consumer channels. We plan to engage and grow this community by developing innovative applications, services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live. Más.

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245/50 15" tires, any alternative?

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245/50 15" tires, any alternative?

I would think you have 8" wide rims don't you. Bf might not make that specific tire in that size but there's alot of other brand options that will. Go back to the link I previously posted. They have allot of brands and options within those brands and then show the sizes available, I know bf has a tire called G-force sport in a 245/45 15".I hope this helps, but I'm a little confused exactly what your lookin for.

ive got 255/60/15's on my car. they were my stepfathers tires. i needed a tires when i bought my car, he had these tires goodyear eagle GTII's that he had on his 84 z28. he cant use them anymore becuase i know has a set of 16" IROC wheels. anyways i love the way they look on my car, really give it a performance look. i also think they help a little with handling, im not sure about that but i suspect it handles better with those than with factory sized tires. just a suggestion becuase i like them

My son's 91 RS had 265/60 15's on the factory rally wheels when we bought it. Never any rubbing issues in the back. The front didn't rub till we put that great big WS6 sway bar on it. Ended up with 235/60's up front to eliminate the rubbing in a sharp turn

This might not be very helpful, but your 15X7 wheels are going to be a problem if you want a good contemporary performance tire, especially for handling. Even a set of stocker IROC or Z 16X8 wheels would make things easier for you.

As for availability, go to tirerack. com, do a 'search by tire size', and it'll show you just about every tire on the planet in your size. Then pick a tire and click 'specs' to get tons of info on other sizes.

sí. i buy all my tires from tire rack. yep, i have 15x7 rims, so it seems im limited to that tire, nothing else ive found in a search will fit on a 7" rim. i have centerline convo pros.

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Welcome to All Weather

All Weather Architectural Aluminum is a leader in manufacturing quality commercial windows and doors. Whether it's for a highrise city building or a custom home in the hills, we offer aesthetically pleasing and innovative product lines to meet your project’s scope and budget.

Esperamos con interés trabajar con usted.

Enhancing How You Experience Your World

All Weather is dedicated to making memories. Your memories. Memories of afternoon vistas that capture your daydreams. Memories of family & friends coming, and going, and gathering. This is why we do what we do. We understand we are not merely manufacturing windows and doors. We are creating unique and exquisite openings through which you live your life and experience your world.

As a young architect, I often have basic questions and can feel intimidated asking them. Jeff Morris at All Weather took the time to work through all my questions was more than helpful. He was quick to respond, courteous, and very knowledgeable. I'm looking forward to seeing the windows installed.

Lauren Daley Architect Van Meter Williams Pollack LLP

I have had a 30-year relationship with All-Weather Architectural Aluminum, following them when they moved their headquarters from Oakland to Vacaville. I am pleased to see that they are still expanding their product line with new window and door options. The projects I supply often call for a range of special requirements, many of which All-Weather can meet. I look at All-Weather as having "big company" capabilities while giving me "small company" attention. Over the years I have supplied dozens of projects through All-Weather from multi-family housing to schools, office buildings etc. and look forward to many more successful projects and satisfied customers.

Scott Meredith President P&M Window Co. Inc.

We are All Weather dealers and really appreciate the thoroughness with which All Weather conducts business. One of the owners met us at the plant on Saturday in order to show a prospective client a “real” door. She was great, informative and we sold the job. Our outside rep Jeff Morris has met us on site when needed in order to clarify some install questions. All in all, I feel very confident in selling All Weather.

Betty Nichols Nichols Window Systems

PPG is proud to have All Weather as a member of our CCWF program. They are dedicated to processing our high performance products at their state of the art manufacturing facility. All Weather's dedication to the continuous quality improvement process for their customers is second to none.

Chuck McMullen Architectural Manager PPG Industries

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Prevent Unauthorized Transactions in your demat / trading account --> Update your Mobile Number/ email Id with your stock broker / Depository Participant. Receive information of your transactions directly from Exchanges on your mobile / email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL/ CDSL on the same day." - Issued in the interest of investors. KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. No es necesario emitir cheques por parte de los inversores al suscribirse a la OPI. Sólo tiene que escribir el número de cuenta bancaria y firmar en el formulario de solicitud para autorizar a su banco para hacer el pago en caso de asignación. No worries for refund as the money remains in investor's account.

Prevent Unauthorized Transactions in your demat / trading account --> Update your Mobile Number/ email Id with your stock broker / Depository Participant. Receive information of your transactions directly from Exchanges on your mobile / email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL/ CDSL on the same day." - Issued in the interest of investors. KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. No es necesario emitir cheques por parte de los inversores al suscribirse a la OPI. Sólo tiene que escribir el número de cuenta bancaria y firmar en el formulario de solicitud para autorizar a su banco para hacer el pago en caso de asignación. No worries for refund as the money remains in investor's account.

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The following is a free Sample Warehouse Worker Resume that you can use for your needs. Feel free to copy, past and personalize this resume template. Check out our Grocery Store Clerk resume samples for tips on how to improve your and functionality of stocked shelves back warehouse and loading dock. Maintained structural fitness and safety of all displays, shelves, warehouse equipment and. Crafting a Grocery Clerk resume that catches the attention of hiring. Apr 8, 2015 . The trickiest thing about writing a warehouse selector resume is knowing what and where to. Bagged groceries and retrieved shopping cartsJan 18, 2015 . This page contains a good resume sample for grocery clerk or cashier position. Redner's Warehouse Market – Nesquehoning, PA Grocery . Apr 30, 2015 . Order Selectors are usually employed by warehouses and food pallets of dry groceries and related products as recognized on order forms. Nov 8, 2015 . Your resume for order picker position is a written snapshot of your background and skills in a warehouse setting. It support your career goals. Find here a grocery store clerk resume example that guides you on drafting an effective resume . Feel free. They fill mail orders from warehouse stock. Grocery . … 7-Days a Week. Top Jobs Resume . Home > Resume Examples By Industry > Maintenance & Janitorial Resumes > Warehouse Associate Resume Sample. Stock clerks work in factories, warehouses and stores where they keep track on the. For example, a stock clerk working in a grocery store will have other duties.

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Start your job search at Job. com and find jobs and employment opportunities with top companies. Stop writing resumes and CV's the hard way. Use the Amazing Resume Creator instead!

October 20, 2015, 05:32 Grocery warehouse resume Just three simple steps. Select a resume from our library of professional designs; Browse our industry-specific resumes; Download your resume . print it out and get it. 562 Warehouse Jobs available in Jacksonville, FL on Indeed. com. one search. all jobs. 800 Grocery Jobs available in Seattle, WA on Indeed. com. one search. all jobs. Stop writing resumes and CV's the hard way. Use the Amazing Resume Creator instead! Warehouse Jobs. com - Finally an Online Job Board Dedicated to the Warehousing Industry! Warehouse Jobs. com! Tampa FL Jobs & Tampa Florida Employment guide provides information on finding jobs, posting resumes & researching careers in Tampa Florida & employer tools for. Resume Copy and Paste Help. You can copy your cover letter and resume from your existing word processor using the following general procedure. Start your job search at Job. com and find jobs and employment opportunities with top companies.

Tampa FL Jobs & Tampa Florida Employment guide provides information on finding jobs, posting resumes & researching careers in Tampa Florida & employer tools for. 800 Grocery Jobs available in Seattle, WA on Indeed. com. one search. all jobs.

Stop writing resumes and CV's the hard way. Use the Amazing Resume Creator instead!

Resume Copy and Paste Help. You can copy your cover letter and resume from your existing word processor using the following general procedure. Just three simple steps. Select a resume from our library of professional designs; Browse our industry-specific resumes; Download your resume . print it out and get it. Start your job search at Job. com and find jobs and employment opportunities with top companies. 562 Warehouse Jobs available in Jacksonville, FL on Indeed. com. one search. all jobs. Tampa FL Jobs & Tampa Florida Employment guide provides information on finding jobs, posting resumes & researching careers in Tampa Florida & employer tools for. 800 Grocery Jobs available in Seattle, WA on Indeed. com. one search. all jobs. Stop writing resumes and CV's the hard way. Use the Amazing Resume Creator instead! Warehouse Jobs. com - Finally an Online Job Board Dedicated to the Warehousing Industry! Warehouse Jobs. com.

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Relevant Stories October 21, 2015, 09:56 | US 800 Grocery Jobs available in Seattle, WA on Indeed. com. one search. all jobs. Tampa FL Jobs & Tampa Florida Employment guide provides information on finding jobs, posting resumes & researching careers in Tampa Florida & employer tools for. Warehouse Jobs. com - Finally an Online Job Board Dedicated to the Warehousing Industry! Warehouse Jobs. com! Resume Copy and Paste Help. You can copy your cover letter and resume from your existing word processor using the following general procedure. Stop writing resumes and CV's the hard way. Use the Amazing Resume Creator instead! 562 Warehouse Jobs available in Jacksonville, FL on Indeed. com. one search. all jobs.

The following is a free Sample Warehouse Worker Resume that you can use for your needs. Feel free to copy, past and personalize this resume template. Check out our Grocery Store Clerk resume samples for tips on how to improve your and functionality of stocked shelves back warehouse and loading dock. Maintained structural fitness and safety of all displays, shelves, warehouse equipment and. Crafting a Grocery Clerk resume that catches the attention of hiring. Apr 8, 2015 . The trickiest thing about writing a warehouse selector resume is knowing what and where to. Bagged groceries and retrieved shopping cartsJan 18, 2015 . This page contains a good resume sample for grocery clerk or cashier position. Redner's Warehouse Market – Nesquehoning, PA Grocery . Apr 30, 2015 . Order Selectors are usually employed by warehouses and food pallets of dry groceries and related products as recognized on order forms. Nov 8, 2015 . Your resume for order picker position is a written snapshot of your background and skills in a warehouse setting. It support your career goals. Find here a grocery store clerk resume example that guides you on drafting an effective resume . Feel free. They fill mail orders from warehouse stock. Grocery . … 7-Days a Week. Top Jobs Resume . Home > Resume Examples By Industry > Maintenance & Janitorial Resumes > Warehouse Associate Resume Sample. Stock clerks work in factories, warehouses and stores where they keep track on the. For example, a stock clerk working in a grocery store will have other duties.

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Stop writing resumes and CV's the hard way. Use the Amazing Resume Creator instead! Tampa FL Jobs & Tampa Florida Employment guide provides information on finding jobs, posting resumes & researching careers in Tampa Florida & employer tools for.