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This excerpt taken from the DVN DEF 14A filed Apr 24, 2009. U.S. Federal Tax
Treatment
Incentive Stock Option Grant/Exercise. A
participant who is granted an incentive stock option does not
realize any taxable income at the time of grant or at the time
of exercise (except for alternative minimum tax). Similarly, we
are not entitled to a deduction at the time of grant or at the
time of exercise. If the participant makes no disposition of the
shares acquired pursuant to an incentive stock option before the
later of two years from the date of grant of such option or one
year from the date of the exercise of such shares by the
participant, any gain or loss realized on a subsequent
disposition of the shares will be treated as a long-term capital
gain or loss. Under such circumstances, we will not be entitled
to any deduction for federal income tax purposes.
Nonqualified Stock Option and Stock Appreciation Right
Grant/Exercise. A participant who is granted a
nonqualified stock option or stock appreciation right does not
have taxable income at the time of grant. Taxable income occurs
at the time of exercise in an amount equal to the difference
between the exercise price of the shares and the market value of
the shares on the date of exercise. We are entitled to a
corresponding deduction for the same amount.
Restricted Stock Awards. A participant who has
been granted an award in the form of restricted stock will not
realize taxable income at the time of grant, and we will not be
entitled to a deduction at the time of grant, assuming that the
restrictions constitute a substantial risk of forfeiture for
U.S. income tax purposes. When such restrictions lapse, the
participant will receive taxable income (and have tax basis in
the shares) in an amount equal to the excess of the fair market
value of the shares at such time over the amount, if any, paid
for such shares, and we will be entitled to a corresponding
deduction. The participant may elect to include the value of his
restricted stock award as income at the time it is granted under
Section 83(b) of the Code, and we will take a corresponding
income tax deduction at such time.
Restricted Stock Units. A participant who has
been granted an award in the form of restricted stock units will
not realize taxable income at the time of grant, and we will not
be entitled to a deduction at the time of grant, assuming that
the restrictions constitute a substantial risk of forfeiture for
U.S. income tax purposes. When such restrictions lapse, the
participant will receive taxable income in an amount equal to
the fair market value of the shares at such time and we will be
entitled to a corresponding deduction.
Section 162(m) of the
Code. Section 162(m) of the Code precludes a
public corporation from taking a deduction for annual
compensation in excess of $1 million paid to its principal
executive officer and any of its three other most highly
compensated officers. However, compensation that qualifies under
Section 162(m) of the Code as “performance-based” is
specifically exempt from the deduction limit. Based on
Section 162(m) of the Code and the regulations thereunder,
the Company’s ability to deduct compensation expense
generated in connection with the exercise of stock options and
stock appreciation rights granted under the plan should not be
limited by Section 162(m) of the Code.
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