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New Developments in Equity Compensation Reporting

Cost Basis, Section 6039, and Proxy Reporting

(Print Version)

by Elizabeth Dodge, Christine McCarthy, and Andrew Schwartz

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This issue brief addresses recent developments in equity compensation reporting. The first article discusses the factors to consider when designing processes for implementing and complying with the new cost basis reporting rules. The second article discusses the newly expanded reporting requirements under Internal Revenue Code Section 6039. The third and final article discusses the Dodd-Frank rules and relevant Institutional Shareholder Services policies and guidelines related to executive compensation, followed by some best-practices recommendations for companies to consider when drafting their proxy statements.

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Publication Details

Format: Photocopied, 48 pages
Publication date: May 2011
Status: In stock

Contents

Cost Basis: Not Just for Brokers Anymore
IRS Revisions to Section 6039: Much Ado About Much Too Much
Dodd-Frank, ISS, and Their Impact on Executive Compensation Disclosure

Excerpts

From "Cost Basis: Not Just for Brokers Anymore"

In an ISO cashless hold exercise, there are two transactions to record. One is the simultaneous sale of shares to cover option cost and withholding taxes. The other is the issuance of new shares subject to the ISO qualifying period.

Assume in our example that 40 shares were sold to cover the option cost of $2,000 and 60 shares were issued. The cost basis of the 40 shares sold is the exercise price plus the compensation income recognized, as this is a disqualifying disposition: (40 shares x ($20 + $30) = $2,000. The cost basis of the 60 shares issued is simply the option cost of $20 per share. If the 60 shares are held for the qualifying period, then the cost basis upon sale will remain $20, and any excess received upon sale will be capital gain. If, instead, the 60 shares are sold before the qualifying period is up, there will be a disqualifying disposition, possibly resulting in compensation income, which should be added to basis but is not required to be reported under the cost basis regulations.

A further complication is that ISO shares transferred to a broker separate from the administrator will no longer be tracked by the plan, which would normally verify disposition, and the broker will not have the facility to retain the information necessary to calculate the income on disqualifying dispositions. This will undoubtedly create confusion for employees who sell ISO shares before the qualifying period has elapsed, because the broker will record $20 as the basis on the Form 1099-B resulting from the sale, exclusive of the compensatory element.