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The Employee Ownership Update

Corey Rosen

July 19, 2001

(Corey Rosen)

IRS to Issue Sample Plan Amendments for New Tax Law

The IRS has promised to issue sample amendments to allow companies to change their retirement plans to conform to the Economic Growth and Tax Relief Reconciliation Act of 2001. Companies could just incorporate the language or use it as a model. By doing this, companies will be able to operate in "good faith" under the new law until their plans are formally amended and letters of determination sent to the IRS. The IRS is also modifying the determination letter process to reflect the changes needed under the new law.

Lieberman Introduces Bill to Eliminate AMT on Incentive Options

Senator Joseph Lieberman (D-Ct) has introduced SB 1142 to eliminate the spread on the exercise of incentive stock options from the Alternative Minimum Tax. The bill is parallel to one introduced by Zoe Lofgren (D-CA) in the House, HR 1487. Lofgren's bill, however, is retroactive to January 1, 200, and is unlikely to pass in its current form. While Lieberman's support for the change suggests gathering and bipartisan momentum on this issue, any tax bill will face tough obstacles in light of the costs of the tax cut legislation just passed and the plethora of other tax cut bills other members of Congress are pushing.

IRS Withholding Tax Memo on ESPPs and ISOs Getting Attention

The IRS's announced intention to reconsider its position on not requiring withholding tax on disqualifying dispositions of stock under Employee Stock Purchase Plans (ESPPs) and Incentive Stock Option plans (ISOs) is getting considerable attention. The New York Times' Gretchen Morgensen strongly criticized the idea in her front-page column in the newspaper's Sunday business section (7/15/01). The Knight-Ridder chain then picked up on the story in an article sent out for syndication July 19. Meanwhile, the American Payroll Association, an organization of large employers, has announced its opposition and told the IRS to expect any change in withholding rules to be challenged in court. Legislation to prohibit withholding is likely to be introduced soon.

Japan Seeks Indictment on Stock Options Tax Evasion

Japan's National Tax Administration is seeking a criminal indictment of a former Microsoft executive for failure to report option income. Under Japanese law, individuals working for foreign companies must pay income tax both when they acquire options and when they exercise. Employees of Japanese companies only need to pay income taxes on options whose purchase value is less than 10 million yen (about $80,000). Many Japanese employees are unfamiliar with how to report option income, partly because options were uncommon in Japan until recent changes in the law.

Massachusetts Court Rules Terminated Employee Can't Challenge Loss of Unvested Restricted Stock

In Harrison v. NetCentric Corp. (433 Mass 465, 2001), an employee and founder of NetCentric was forced to sell his unvested pre-IPO restricted stock back to the company when his employment was terminated. The company had a buy-back agreement for unvested restricted stock that specified the company would repurchase them for what the employee paid for them—in this case, one-tenth of one cent. Harrison claimed that the stock should have vested because it represented payment for services he had already rendered and that the buy-back provision was just a way to get around what would otherwise be an unlawful termination. He claimed the company fired him just so it would not have to deal with the costs of his stock. The company said unvested shares were payment for services to be provided in the future. Harrison was an "at will" employee and thus could be fired without cause. There was no resulting obligation to vest the stock or pay more than the buy-back amount. The court sided with NetCentric.

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