Level 2 Taxation

Question 1

Evergreen Provision

Answer 1

A replinishment feature in a stock plan that automatically inreases at regular intervals the number of shares reserved under the plan.

Keeping the plan always “green”.

Question 2

Evergreen Provision

ISO and 423 ESPP plans must

Answer 2

State the maximum number of allowed for issuance. To keep preferential tax treatment, evergreen provisions are limited (e.g., exact number of shares to add at specific date points).

Question 3

Evergreen Provision

Evergreen Provision effect on IRC Section 162(m)

Answer 3

Requires shareholder approval of plan reserve increases but allows up until the fourth calendar year following the calendar year of the IPO.

Question 4

Evergreen Provision

Evergreen Provision effect on taxation

Answer 4

Affect tax qualified awards under IRC 422 and 423, and the Section 162(m) deduction limit after a company goes public.

Question 5

Evergreen Provision

ISOs and 423 plans complication with Evergreen Provisions

Answer 5

For ISO and 423 plans the maximum number of shares issuable under the plan must be specifically defined in the Plan at the time of adoption.

Therefore, a provision adding a set number of shares per year is fine (1m over the life of the plan, 100k per year) **would be in compliance.

Formula based plans such as “10% of what was previously exercised in the prior year”, are imposible to be in compliance because there’s no way to know at adoption of the plan the maximum number of issuable shares.

Question 6

IRC Section 162(m)

IRC Section 162(m) Genreal Rule

Answer 6

Amount included in compensation income on W-2/1099-MISC is deductible in same year recognized. Exeptions are:

• ESPP Qualified Dispositions which are reportable but not deductible.
• Income less than $600 in the year with no taxes withheld does not require reporting but is still deductible.

Question 7

IRC Section 162(m)

IRC Section 162(m) Limitation on deduction

Answer 7

Disallows deductions for publicly traded companies that pay over $1 million in compensation to its “covered employees”—CEO, CFO and the next three most highly compensated officers.

Question 8

IRC Section 162(m)

IRC Section 162(m) – Public Company Definition

Answer 8

A corporation is considered to be “publicly held” if a class of its common equity securites is required to be registered under Section 12 of the 33’ Exchange Act as of the last day of the company’s taxable year.

This means that 162(m) does not apply to voluntarily registered companies.

Question 9

IRC Section 162(m) – Private Company Transition

What would trigger Section 162(m) before the 12th month anniversery of IPO?

Answer 9

The earliest of

(1) the expiration or material modification of the plan
(2) the issuance of all the securities issuable under the plan as it existed at the time the company went public
(3) the first meeting of shareholders where directors are elected after the close of the third calendar year following the IPO year. Most people refer to this as the “IPO grace period”

Question 10

IRC Section 162(m) – Private Company Transition

How long must a company be publicly held for before the deduction limit of Section 162(m) applies?

Answer 10

Must be publicly held for a minimum of 12 months

Question 11

IRC Section 162(m) – Private Company Transition

In 2015, the IRS issued final regulations under 162(m) to clearify which securites are elegible

Answer 11

only options, SARS and RSAs qualify for this special rule

RSUs issued after the final regs were published in March 2015 must actually pay out within the grace period to be exempt

Question 12

IRC Section 409A - General

The American Jobs Creation act, in the context of equity compensation.

Answer 12

The ability to delay or defer the taxation of certain types of equity compensation awards which are normally taxable at the time of vesting, such as restricted stock, stock appreciation rights and phantom stock awards, until the time that the vested award is actually received or paid out.

Question 13

IRC Section 409A - General

IRS respons to the The American Jobs Creation act, in the context of equity compensation.

Answer 13

The IRS implemented Internal Revenue Code section 409A.

Question 14

IRC Section 409A - General

Because of Section 409A, if you do issue a discounted non-qualified stock option

Answer 14

It is deemed to be deferred compensation, resulting in negative consequences. As you know, IRC Section 422 prevents you from issuing a discounted ISO.

Question 15

IRC Section 409A - Exclusions

IRC 409A DOES NOT APPLY TO

Answer 15

• Qualified benefit plans (e.g., ESOPs, 401(k) plans)
• Leave benefits (e.g., maternity, death, disability, sick leave)
• Statutory stock options (i.e., ISOs and ESPPs)
• NSOs granted at fair market value (subject to certain limitations and requirements)
• Restricted stock awards taxed under IRC Section 83
• Non-discounted SARs (subject to certain limitations and requirements)

Question 16

IRC Section 409A - Exemptions

For awards where 409A applies, then to be exempt from 409A:

Answer 16

Must pay out in “Service Recipient Stock”
Service Recipient
* Employer company
* 50% subsidiary, 20% subsidiary (with conditions)
Stock
* Must be common stock
* Public companies: Must be readily tradable
* Private companies: Must be class having greatest aggregate value of all classes of outstanding common stock

Question 17

IRC Section 409A - Exemptions

Service Recipient stock

Answer 17

1. The company receiving the compensable services by the individual can be either the issuer itself as employer, or a 50% subsidiary of the employer company, or a 20% subsidiary if certain conditions are met.
2. Must be common stock
3. Award must be granted at the grant date fair market value

Question 18

IRC Section 409A - Exempt or Compliant?

Section 422 ISOs

Answer 18

Exempt

Question 19

IRC Section 409A - Exempt or Compliant?

Section 423 ESPPs

Answer 19

Exempt

Question 20

IRC Section 409A - Exempt or Compliant?

Nonqualified ESPPs:

Answer 20

Are not exempt if the purchase price is discounted, BUT, they can be compliant, even with a discount, if the exercise/purchase date is set in advance.

Question 21

IRC Section 409A - Exempt or Compliant?

Restricted stock awards:

Answer 21

Exempt if no deferral of receipt of payment after vesting.

Taxation can be accelerated by filing an 83(b) election before the award vests, but it cannot be deferred.

Question 22

IRC Section 409A - Exempt or Compliant?

RSUs

Answer 22

Always within the scope of Section 409A and must be either compliant or exempt. The initial deferral election must be made before the start of the “performance period” which is usually the grant date.

However, short-term deferrals of a payment that is no later than 2 ½ months into the year after the year in which payment was to be made are exempt from 409A.

Question 23

IRC Section 409A - Exempt or Compliant?

NSOs

Answer 23

Exempt if granted at fair market value and there are no deferral features other than the right of the recipient to elect when to exercise.

The requirement that the exercise price be no lower than grant date FMV includes a view that offering dividends on unexercised options constitutes a discount. So paying dividends on unvested options, SARs or RSUs causes the awards to violate 409A.

Question 24

IRC Section 409A - Exempt or Compliant?

SARs

Answer 24

Exempt if:
* They’re granted at FMV
* Have no deferral feature
* The employee controls exercise

Question 25

# ISOs – Modifications/Amendments Changes in terms which gives optionee additional benefits:

Answer 25

* Extending exercise period * Providing additional benefit upon exercise * Offering to change the terms of a grant (if such an offer is accepted or remains outstanding for more than 30 days)

Question 26

# ISOs – Modifications/Amendments If an ISO is amended, then...

Answer 26

**The exercise price must be adjusted to the fair market value on the date of amendment in order to maintain the ISO status of the award.** If the exercise price is not adjusted, then the award will be treated as an NSO. there is still no withholding required at the time of exercise, as if the award were still an ISO.

Question 27

# ISOs – Modifications/Amendments Effect of modifications on the Issue date

Answer 27

when a statutory award is modified, the date of modification becomes the new grant date for the purposes of calculating ISO holding periods.

Question 28

# ISOs – Modifications/Amendments If an ISO is disqualified and treated as an NSO

Answer 28

There is still no withholding required at the time of exercise, as if the award were still an ISO

Question 29

# ISOs – Modifications/Amendments Acceleration of vesting on an ISO if that acceleration was a provision laid out in the grant agreement

Answer 29

Is **not** considered a modification

Question 30

# ISOs – Modifications/Amendments Acceleration of vesting on an ISO does occur that was outside of the terms of the original grant agreement

Answer 30

**Is** considered a modification

Question 31

# ISOs – Modifications/Amendments Effect of an ISO that is early exercisable at the time of grant effect on the $100k rule

Answer 31

the entire award will be included in the $100k limit in the year of grant.

Question 32

# ISOs – Modifications/Amendments effect of an ISO that is early exercisable at the time of grant effect on the $100k rule

Answer 32

then the entire value of the unvested shares at the time of the amendment will be included in the $100k limit in the year of the amendment.

Question 33

# ISOs – Modifications/Amendments Not modifications

Answer 33

* Stock splits and dividends * Changes due to corporate transactions * Acceleration of time within which option may be exercised (whether by vesting or early exercise)

Question 34

# Early Exercise – ISOs and NSOs Taxation event on NSOs that are early exercised

Answer 34

There are no taxes due and the taxation event does not occur until the shares are vested. Until then the stock is still subject to a substantial risk of forfeiture

Question 35

# Taxation Upon Early Exercise You “early exercise” a stock option before vest date, no 83(b) election

Answer 35

The ordinary income will equal the spread on the vest date (FMV on vest date – exercise price).

Question 36

# Taxation Upon Early Exercise You “early exercise” a stock option before vest date and make an 83(b) election within 30 days of the exercise date.

Answer 36

The ordinary income will equal the spread on exercisedate. (FMV on exercise date – exercise price)

Question 37

# early exercise of tax qualified stock options If an ISO is early exercisable on the grant date

Answer 37

the entire award will be included in that $100,000 limit calculation in the year of grant, whether or not it’s actually exercised before vesting.

Question 38

# early exercise of tax qualified stock options If the ISO is actually early exercised

Answer 38

The one year post-exercise part of the holding period begins at exercise, but they’ll still have to complete the two years from Grant Date holding period

Question 39

# IRC 422 – ISO Disqualifying Dispositions In a disqualified disposition, you lose the ability to convert the bargain element to long term capital gain, however...

Answer 39

you still get the benefit of not being taxed until the date of sale (versus NSOs which are taxed at exercise

Question 40

# IRC 422 – ISO Disqualifying Dispositions Special rule under section 422(c)(2)

Answer 40

Limits the amount of ordinary income on a disqualified disposition of ISO shares to the shareholder’s **actual gain, and that’s especially important if the stock’s price declines from the exercise date.**

Question 41

# ISO Disqualified Disposition Scenerio If share price doesn’t drop and sale price is greater than FMV at exercise date Sales Price > FMV at exercise, then:

Answer 41

Compensation income = (FMV at exercise – Exercise Price) * Compensation income (Ordinary Income) is the same as non-qualified option spread * Capital Gain = (Sales Price – FMV at exercise)

Question 42

# ISO Disqualified Disposition Scenerio If share price drops between exercise date and sale date, but still exceeds exercise price If Sales Price < FMV on exercise but Sales Price > Exercise Price, then:

Answer 42

Compensation income = (Sales Price – Exercise Price) * Compensation income (Ordinary Income) only * No capital gain or loss

Question 43

# ISO Disqualified Disposition Scenerio If share price drops below exercise price if Sales Price < Exercise Price, then:

Answer 43

Capital loss = (Sales Price – Exercise Price) * No compensation income (Ordinary Income) * Capital loss only

Question 44

# Early Exercised ISOs 83(b) elections filed for stock obtained in an ISO early exercise only applies to the:

Answer 44

Calculation of AMT tax liability in the year of exercise (unless the stock is sold in the year of exercise)

Question 44

For an ESPP question you need to know four pieces of information to do the taxes properly:

Answer 44

1. The fair market value at the beginning of the offering period. The exam sometimes refers to this as the enrollment date FMV 2. The discount percentage 3. The FMV on the purchase date 4. And the sale price If you know those four things you can figure out any ESPP tax question.

Question 45

ESPP stock that is sold after meeting the holding requirements of 2 years after grant AND 1 year after purchase, the ordinary income to be reported is the lesser of:

Answer 45

* the grant date discount or * the actual gain on the sale That means if the stock declines in value after the date of purchase, the ordinary income will be the sale price less the purchase price, if that amount is less than the grant date discount.

Question 46

When ESPP shares are sold in a disqualified disposition, how is ordinary income is calculated?

Answer 46

Purchase Price FMV - Exercise FMV = Ordinary income difference between the exercise date (or purchase date) fair market value and the exercise price (or purchase price)

Question 47

# Taxation Rules for Dispositions of Tax-Qualified Awards For Section 422 ISOs with qualifying dispositions of ISO stock

Answer 47

there’s no ordinary income, only capital gain or loss (but don’t forget the AMT calculation).

Question 48

# Taxation Rules for Dispositions of Tax-Qualified Awards For Section 422 ISOs with regular disqualifying dispositions

Answer 48

The “lesser of” rule of section 422(c)(2) that limits the ordinary income on a disqualifying disposition to the (sales price – exercise price), as long as the shares are disposed of in an arms-length transaction (not a non-recognition event like a wash sale or gift).

Question 49

# Taxation Rules for Dispositions of Tax-Qualified Awards For Section 422 ISOs disqualifying dispositions that were early exercised

Answer 49

We have the “vest date gain” calculation which calculates ordinary income as the difference between the exercise price and the fair market value on each original vest date. Ordinary Income = Exercise Price - FMV on Each Origional Vest Date

Question 50

# Taxation Rules for Dispositions of Tax-Qualified Awards For Section 423 ESPP qualifying dispositions

Answer 50

we have the **“lesser of”** test which calculates ordinary income as the lesser of the grant date discount or the actual gain on the sale (sales price – purchase price).

Question 51

# Taxation Rules for Dispositions of Tax-Qualified Awards For Section 423 ESPP disqualifying dispositions

Answer 51

The ordinary income is the exercise or purchase date spread, regardless of the selling price.

Question 52

# 423 ESPP – International Considerations Separate Offerings

Answer 52

Frequently used for non-US employees to permit variances in terms that could otherwise risk disqualifying the entire offering. * Lump sum payments * Different participation for part-time employees * Define country-specific compensation components * Subsidiary vs branch office

Question 53

# 423 ESPP – International Considerations Employee Exclusions

Answer 53

Citizens or residents of non-US jurisdiction if grant or participation is prohibited under local law or compliance with local law would violate IRC 423 requirements

Question 54

# 423 ESPP – International Considerations Equal Rights & Privileges

Answer 54

* Less favorable terms may be offered to citizens/residents of non-US jurisdiction if required under local law * if local law requires additional benefits to the nonUS employees, then those same benefits must be offered to US participants, again, unless that would cause the plan to violate Section 423 requirements.

Question 55

# IRC Section 6039 - Reporting requirements Company Reporting Timelines for providing Forms 3921 for ISOs and 3922 for ESPPs to the shareholder

Answer 55

by January 31 of the year following the calendar year of the transaction, and to the IRS based upon whether the company is filing paper returns, which must be provided to the IRS by February 28 of the following calendar year, or electronic returns, which must be transmitted to the IRS on their FIRE system by March 31st.

Question 56

# IRC Section 6039 - Reporting requirements Company Reporting Timelines for providing IRS reporting – paper filing

Answer 56

(for fewer than 250 reports). Must be filed by February 28 of following calendar year.

Question 57

# IRC Section 6039 - Reporting requirements Company Reporting Timelines for providing IRS reporting - electronic filing

Answer 57

(for 250 or more reports). Must be filed by March 31 of following calendar year.

Question 58

# IRC Section 6039 - Penalties Penalties for non-compliance: < 30 days overdue.

Answer 58

$50 per return within 30 days of original due date (maximum $565K/year or $197.5K/year for small businesses)

Question 59

# IRC Section 6039 - Penalties Penalties for non-compliance: > 30 days overdue

Answer 59

$110 per return if filed over 30 days overdue but before August 1st (maximum $1,669,500/year or $565K for small businesses)

Question 60

# IRC Section 6039 - Penalties Penalties for non-compliance: After August 1

Answer 60

$280 per return if filed after August 1 or not at all (maximum $3,392,000/year or $1,130,500/year for small businesses)

Question 61

# IRC Section 6039 - Penalties Penalties for willful disregard

Answer 61

Minimum $560 per return, with no maximum penalty

Question 62

# Loans & Promissory Notes Recourse Note

Answer 62

A note which allows the lender to take action against the borrower personally, including liquidation of the borrower’s assets.

Question 63

# Loans & Promissory Notes Full-recourse Note

Answer 63

A recourse note which does not limit the assets that can be liquidated by the note holder to repay the bborrower’s debt.

Question 64

# Loans & Promissory Notes Limited Recourse Note

Answer 64

A recourse note which gives the lender the right to retain a limited amount of the borrower’s assets in the event of default.

Question 65

# Loans & Promissory Notes Nonrecourse Note

Answer 65

A loan in which the borrower is not held personally liable in the case of default.

Question 66

# Employer Loans & Promissory Notes for Exercise Costs Using loans and promissory notes to pay for exercise cost

Answer 66

The Sarbanes-Oxley Act of 2002 prohibits executive insiders to pay for exercise cost using loans and promissory notes. For other award recipients who are not executive insiders, loans and promissory notes are acceptable forms of payment under strict conditions.

Question 67

# Employer Loans & Promissory Notes for Exercise Costs For the exercise of an option to be respected when the company loans the optionee the exercise price, the optionee must be

Answer 67

Personally liable for the loan (at least in part) and must bear the risk of loss for the shares.

Question 68

# Employer Loans & Promissory Notes for Exercise Costs If the loan to exercise is secured only by the underlying shares then...

Answer 68

It’s essentially treated as a non-recourse loan, and generally will not be respected as a valid exercise, since the optionee has no personal liability and no risk of loss. The IRS may argue that the loan is a mere extension of the option, and that, for tax purposes, there has been no exercise.

Question 69

# Employer Loans & Promissory Notes for Exercise Costs If the loan and exercise are respected, when does the holding period under Rule 144 start?

Answer 69

Starets once the shares are fully paid or collateralized with security other than the underlying stock.

Question 70

# Employer Loans & Promissory Notes Adequate interest must be charged to avoid

Answer 70

having a below market loan and possible penalty taxes under 409A

Question 71

# Employer Loans & Promissory Notes What happens if an employee fails to pay back the loan or any portion of it? IRS regulations under section 83

Answer 71

If a loan is used to exercise compensatory options (and the loan and exercise are respected by the IRS); then any subsequent forgiveness, cancellation or reduction of the loan principal must be treated as compensation, whether the loan is recourse or non-recourse.

Question 72

# NSOs - Gifting and Transferability Arm’s-length transaction

Answer 72

A transaction between "adverse" parties who have conflicting economic interests in the outcome.

Question 73

# NSOs - Gifting and Transferability If a transfer is considered an "arm’s-length transaction"

Answer 73

* Then the difference between the fair market value of the stock and the exercise price on the transfer date is considered to be income to the optionee-gift giver on the day of transfer * Income is taxed to and paid by the optionee, even if the option hasn’t been exercised.

Question 74

# NSOs - Gifting and Transferability If a transaction is not considered an "arm’s-length transaction"

Answer 74

The calculation of the gain is postponed until the actual exercise of the award, but is **still taxed to and paid by the original optionee**, even though the optionee no longer holds the award.

Question 75

# NSOs - Gifting and Transferability IRS's stance on divorce situations

Answer 75

IRS has ruled that the **arm’s-length rules do NOT apply** and, instead, takes the position that the non-employee former spouse “steps into the shoes” of the employee spouse for taxation purposes. NEFS recognizes gain as income upon exercise in 1099-MISC.

Question 76

# Performance Award Plans If performace award payout is within 2 ½ months of termination it is considered a:

Answer 76

short-term deferral which is 409A exempt.

Question 77

# Performance Award Plans If performace award payout beyond 2 ½ months of termination it is considered a:

Answer 77

It can be considered deferred compensation, which means 409A regulations would kick in.

Question 78

# Restricted Stock - Dividends and DEUs If the dividend is deferred until a future release of the underlying shares, and continues to be subject to forfeiture, then

Answer 78

both the income taxes and the FICA taxes are due on the release date.

Question 79

# Restricted Stock - Dividends and DEUs If the dividend is deferred until a future release of the underlying shares, but is notsubject to forfeiture, then

Answer 79

the FICA taxes are due on the dividend payable date but the income taxes aren’t due until the release date (remember retirement eligibility award rules, it’s the same thing).

Question 80

# Restricted Stock - Dividends and DEUs If an 83(b) election has not been filed

Answer 80

Dividends are reported as compensation on form W-2 or 1099-MISC and the company is entitled to a tax deduction.

Question 81

# Restricted Stock - Dividends and DEUs If an 83(b) election has been filed

Answer 81

Dividends are reported on Form 1099-DIV and there is no corporate tax deduction because they are not considered compensation because they are treated as a regular share owner even though the stock will be forfeited if the employee leaves the company.

Question 82

# Restricted Stock - Dividends and DEUs Taxation of Dividend Equivalent Units

Answer 82

Taxable as compensation income when paid and reportable either on Form W-2 or 1099-MISC, with a corresponding tax deduction to the company. May trigger 409A consequences if not properly structured.

Question 83

# Restricted Stock - Dividends and DEUs Dividend Equivalent Units

Answer 83

When the stock underlying an award, like an RSU, is not issued until vest but the company wants the award holder to receive dividends during the time before stock issuance.

Question 84

# Restricted Stock - Retirement When an employee is retirement eligible

Answer 84

The plan administrator will have to look at the award and the Plan to determine if there is a clause which accelerates vesting when the employee becomes retirement eligible or states that vesting will continue even after retirement. If such a provision is present, then the award is no longer subject to a substantial risk of forfeiture and becomes immediately taxable.

Question 85

# Restricted Stock - Retirement Three taxation possibilities for RSAs granted to recipients that are eligable for retirment:

Answer 85

* taxation on the grant date if an 83(b) election is filed * taxation on the retirement eligibility date if that’s what the company’s Plan says * taxation on the vesting date whichever of those dates comes first.

Question 86

# Restricted Stock - Retirement If the restricted stock is purchased – meaning either the employee paid cash or gave other consideration for the stock (like an award for past services rendered, or for the value of intellectual property rights surrendered)

Answer 86

then the taxable amount on the vest date will be the vest date stock fair market value less the value of the consideration paid or received for the stock.

Question 87

# Restricted Stock - Retirement If the restricted stock is a direct grant with no purchase price to the recipient, then

Answer 87

the taxable amount on the vest date will be the full vest date fair market value of the stock.

Question 88

# Restricted Stock - Retirement If it’s a grant that requires payment of a purchase price equal to the stock’s grant date fair market value (again, it can be paid for services rendered or for rights surrendered)

Answer 88

Then there will be $0 taxable income, because the stock’s fair market value and the consideration paid are the same – so no difference.

Question 89

# Restricted Stock - Retirement If substantial risk of forfeiture is lost due to retirement eligibility (e.g. guarantee to accelerate upon reaching a goal like age/years of service)

Answer 89

Income is realized when the retirement goal is met instead of the later release or actual acceleration upon termination. Both Income and FICA/FUTA taxes are recognized whether award is vested or not.

Question 90

# Restricted Stock - Retirement Reporting “rule of administrative convenience.”

Answer 90

Employment taxes are also due on the same date as income taxes, however, the Internal Revenue Code allows the company to delay reporting and collection of employment taxes until any date within the same calendar year, up to and including December 31st

Question 91

# Stock Appreciation Rights If you are setting a SAR in stock and there is a rounding situatioin

Answer 91

aggregate appreciation and divide that by the exercise date fair market value and **round down** because you don’t want to issue shares worth more than the actual appreciation. That means there could be a slight residual in cash that the employee would be due.

Question 92

# Stock Appreciation Rights Taxation for SAR exercised for stock

Answer 92

Income tax for the employee is triggered at the time of exercise and the taxation is under Internal Revenue Code section 83.

Question 93

# Stock Appreciation Rights Taxation for SAR exercised for cash

Answer 93

Income tax for the employee is triggered at the time of exercise and the taxation is under if exercised for cash, taxation is under Section 451.

Question 94

# Stock Appreciation Rights Duties of the employer for taxation on SARs

Answer 94

The employer company is required to withhold taxes upon the exercise of the SAR and is entitled to a compensation deduction in the year of exercise by the employee as long as the employer reports the income to the employee on their W-2 (or on a 1099-MISC if the exercise is by a non-employee).

Question 95

# Section 423 ESPP shares purchased before death For the employee the ordinary income in the year of death is

Answer 95

Ordinary income reported on the employee’s final tax return for the year of death equal to lesser of: * Offering date discount * Difference between the stock’s fair market value at date of death and the original purchase price

Question 96

# Section 423 ESPP shares purchased by optionee before death Tax basis for the Estate after Death

Answer 96

Tax basis is stock’s fair market value on date of death * Sale of shares is always a long term capital gain or loss * A sale by the estate is always a qualifying disposition * There is never ordinary income to the estate because that was recognized at the date of death (see above)

Question 97

# Special Circumstances - Divorce Income taxes in the event of a divorce

Answer 97

* Income taxes incur to Non-Employee Former Spouse and must be withheld by the company from the proceeds to the NEFS. * Company reports income and income taxes to NEFS on Form 1099 * Reports employment taxes to employee on Form W-2

Question 98

# Special Circumstances - Divorce ISOs/ESPPs Unexercised:

Answer 98

* Transfer disqualifies the options * Held and taxed as NSOs * Pre-exercise agreement to transfer post-exercise shares does not violate the non-transferability requirement and will remain taxqualified ISOs

Question 99

# Special Circumstances - Divorce ISOs/ESPPs Exercised:

Answer 99

* Transfer does not disqualify options from preferential tax treatment * Taxed as ISOs

Question 100

# Special Circumstances - Divorce Non-qualified Options:

Answer 100

* NEFS steps into optionee’s shoes * Tax reporting and FICA/FUTA taxes still weird tho

Question 101

# Technical Issues Cost Basis Reporting:

Answer 101

* Cost basis reporting is on Form 1099-B. * Can conflict with taxable income that must be reported by stockholder

Question 102

# Technical Issues Withholding with Stock

Answer 102

* Supplemental rate OR a rate based on participant’s W-4 instructions (minimum statutory vs maximum statutory)

Question 103

When must a company deposit taxes withled?

Answer 103

Once it reached $100k when they reach an aggregate of $100,000. The deposit deadline is by the next business day. Only exception is withholding on a same-day-sale exercise which allows the deposit to be made 1 business day after the company receives the settlement from the broker