This excerpt taken from the AN DEF 14A filed Mar 27, 2008.
Certain Federal Income Tax Consequences
The following discussion of certain relevant federal income tax effects applicable to stock options and other stock-based awards granted under the 2008 Plan is a summary only, and reference is made to the Code for a complete statement of all relevant federal tax provisions. Tax consequences for any particular individual may be different. This discussion only addresses the federal income tax effects applicable to stock options and other stock-based awards granted under the 2008 Plan, and does not address in any detail the effects of other federal taxes or taxes imposed under state, local or foreign tax laws.
With respect to non-qualified stock options (NSOs), the grantee will recognize no income upon grant of the option, and, upon exercise, will recognize ordinary income to the extent of the excess of the fair market value of the shares on the date of option exercise over the amount paid by the grantee for the shares. Upon a subsequent disposition of the shares received under the option, the grantee generally will recognize capital gain or loss to the extent of the difference between the fair market value of the shares at the time of exercise and the amount realized on the disposition.
In general, no taxable income is realized by a grantee upon the grant of an incentive stock option (ISO). If shares of common stock are issued to a grantee (option shares) pursuant to the exercise of an ISO granted under the 2008 Plan and the grantee does not dispose of the option shares within the two-year period after the date of grant or within one year after the receipt of such option shares by the grantee (a disqualifying disposition), then, generally (i) the grantee will not realize ordinary income upon exercise and (ii) upon sale of such option shares, any amount realized in excess of the exercise price paid for the option shares will be taxed to such grantee as long term capital gain (or loss). The amount by which the fair market value of the common stock on the exercise date of an ISO exceeds the purchase price generally will constitute an item which increases the grantees alternative minimum taxable income.
If option shares acquired upon the exercise of an ISO are disposed of in a disqualifying disposition, the grantee generally would include in ordinary income in the year of disposition an amount equal to the excess of the fair market value of the option shares at the time of exercise (or, if less, the amount realized on the disposition of the option shares), over the exercise price paid for the option shares.
Subject to certain exceptions, an option generally will not be treated as an ISO if it is exercised more than three months following termination of employment. If an ISO is exercised at a time when it no longer qualifies as an ISO, such option will be treated as an NSO as discussed above.
In general, the Company will receive an income tax deduction at the same time and in the same amount as the grantee recognizes ordinary income.
If incentive stock options or non-qualified stock options are held until death, federal estate and inheritance taxes would be imposed on the fair market value of the options at the time of death. If, however, the holder makes a lifetime gift of non-qualified stock options to permitted family members, trusts for their benefit, or other entities, federal gift taxes would be imposed on the fair market value of the non-qualified stock options at the time of the completed gift (generally, the time at which all service conditions to exercisability have been satisfied).
Stock Appreciation Rights
With respect to stock based stock appreciation rights (SARs), a grantee will not realize taxable income and the Company will not be entitled to a deduction with respect to such grant on the date of such grant. Upon the exercise of an SAR, the grantee will realize ordinary income equal to the fair market value of any shares received at the time of exercise. In general, the Company will receive an income tax deduction at the same time and in the same amount as the grantee recognizes ordinary income.
A grantee who receives a grant of restricted stock will not recognize any taxable income at the time of the award, provided the shares are subject to restrictions (that is, they are nontransferable and subject to a substantial risk of forfeiture). A grantees rights in restricted stock awarded under the 2008 Plan are subject to a substantial risk of forfeiture if the rights to full enjoyment of the shares are conditioned, directly or indirectly, upon the future performance of substantial services by the grantee. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the shares on the date of the award, determined without regard to the restrictions. If the grantee does not make a Section 83(b) election within 30 days of receipt of the restricted shares, the fair market value of the shares on the date the restrictions lapse, less any amount paid by the grantee for such shares, will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse. The Company generally will be entitled to a compensation deduction for the amount of compensation income the grantee recognizes.
Restricted Stock Units
A grantee will not have taxable income upon grant of restricted stock units. Instead, the grantee will recognize ordinary income equal to (i) the amount of cash paid and/or (ii) the fair market value of the shares of common stock or other property on their respective payment dates when such cash, shares of common stock, and/or other property are delivered or paid to the grantee in accordance with the terms of the restricted stock unit award. The grantee will also recognize ordinary income to the extent he or she receives current payments of dividend equivalents in respect of his or her restricted stock unit award. In general, the Company will receive an income tax deduction at the same time and in the same amount as the grantee recognizes ordinary income.
Other Types of Awards
Other types of awards under the 2008 Plan generally would result in taxable ordinary income to the grantee, the amount and timing of which would depend upon the terms and conditions of the particular award. In general, the Company will receive an income tax deduction at the same time and in the same amount as the grantee recognizes ordinary income.
Tax Consequences of Change in Control
The accelerated vesting of awards under the 2008 Plan in connection with a Change in Control could cause award holders to be subject to the federal excise tax on excess parachute payments and cause a corresponding loss of deduction on the part of the Company. In addition, options that otherwise qualified as ISOs could be treated as NSOs as a result of such accelerated vesting.