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This excerpt taken from the MFE DEF 14A filed Mar 25, 2009. Federal
Tax Consequences
The federal income tax consequences of awards under the
Incentive Plan are summarized as follows:
Options. For ISOs, no taxable income is
reportable when an ISO is granted or exercised (except for
purposes of the alternative minimum tax, in which case taxation
is the same as for nonstatutory stock options). If the
participant exercises the option and then later sells or
otherwise disposes of the shares more than two years after the
grant date and more than one year after the exercise date, the
difference between the sale price and the exercise price will be
taxed as capital gain or loss. If the participant exercises the
option and then later sells or otherwise disposes of the shares
before the end of the two- or one-year holding periods described
above, he or she generally will have ordinary income at the time
of the sale equal to the fair market value of the shares on the
exercise date (or the sale price, if less) minus the exercise
price of the option.
For NSOs, no taxable income is reportable when an NSO with an
exercise price equal to the fair market value of the underlying
stock on the date of grant is granted to a participant. Upon
exercise, the participant will recognize ordinary income in an
amount equal to the excess of the fair market value (on the
exercise date) of the shares purchased over the exercise price
of the option. Any taxable income recognized in connection with
an option exercise by an employee of the company is subject to
tax withholding by the company. Any additional gain or loss
recognized upon any later disposition of the shares would be
capital gain or loss.
Restricted Shares. For restricted shares,
unless the purchaser elects to be taxed at the time of issuance,
these shares generally will be taxed in the same way as NSOs.
However, due to the company’s right to repurchase the
shares when the purchaser stops providing services to the
company, the holder does not recognize ordinary income at the
time of the sale, but at the time at which the company’s
right to repurchase the shares stops. Ordinary income is
measured as the difference between the purchase price and the
fair market value of the shares on the date that the
company’s right to repurchase the shares stops.
Stock Appreciation Rights. For SARs, no income
is recognized at the time of the grant. When the right is
exercised, the recipient will recognize taxable income equal to
the amount of the cash received and the fair market value of any
common stock received. For a recipient who is also an employee,
the income recognized will be subject to withholding and the
company will be able to take a deduction equal to the same
amount of that income. For common stock received upon exercise
of an SAR, the subsequent sale will be treated in the same way
as the gain or loss on an NSO.
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Stock Units. The grant of a stock unit award
results in no federal income tax consequences for the
participant or the company. A participant is subject to
employment tax obligations when a stock units vests. The payment
of a stock unit award results in taxable income to the
participant when the stock unit is settled equal to the amount
of the payment received. The value is based on the fair market
value of the common stock on the date of the payment. The
company will be able to take a deduction equal to the same
amount.
Tax Effect for the Company. The company
generally will be entitled to a tax deduction in connection with
an award under the Incentive Plan in an amount equal to the
ordinary income realized by a participant and at the time the
participant recognizes such income (for example, the exercise of
an NSO). Special rules limit the deductibility of compensation
paid to the company’s Chief Executive Officer and to each
of its four most highly compensated executive officers. Under
Section 162(m) of the Code, the annual compensation paid to
any of these specified executives will be deductible only to the
extent that it does not exceed $1,000,000. However, the company
can preserve the deductibility of certain compensation in excess
of $1,000,000 if the conditions of Section 162(m) are met.
These conditions include stockholder approval of the Incentive
Plan, setting limits on the number of Awards that any individual
may receive and for awards other than certain stock options,
establishing performance criteria that must be met before the
award actually will vest or be paid. The Incentive Plan has been
designed to permit the compensation committee to grant awards
that qualify as performance-based for purposes of satisfying the
conditions of Section 162(m), thereby permitting the
company to continue to receive a federal income tax deduction in
connection with such awards.
Section 409A. Section 409A of the
Code, which was added by the American Jobs Creation Act of 2004,
provides certain new requirements on non-qualified deferred
compensation arrangements. These include new requirements with
respect to an individual’s election to defer compensation
and the individual’s selection of the timing and form of
distribution of the deferred compensation. Section 409A
also generally provides that distributions must be made on or
following the occurrence of certain events (e.g., the
individual’s separation from service, a predetermined date,
or the individual’s death). Section 409A imposes
restrictions on an individual’s ability to change his or
her distribution timing or form after the compensation has been
deferred. For certain individuals who are officers,
Section 409A requires that such individual’s
distribution commence no earlier than six months after such
officer’s separation from service.
Awards granted under the Incentive Plan with a deferral feature
will be subject to the requirements of Section 409A. If an
award is subject to and fails to satisfy the requirements of
Section 409A, the recipient of that award will recognize
ordinary income on the amounts deferred under the award, to the
extent vested, which may be prior to when the compensation is
actually or constructively received. Also, if an Award that is
subject to Section 409A fails to comply with
Section 409A’s provisions, Section 409A imposes
an additional 20% federal income tax on compensation recognized
as ordinary income, as well as possible interest charges and
penalties. Certain states have enacted laws similar to
Section 409A which impose additional taxes, interest and
penalties on non-qualified deferred compensation arrangements.
The company will also have withholding and reporting
requirements with respect to such amounts.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME
TAXATION UPON PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE
GRANT AND EXERCISE OF AWARDS UNDER THE INCENTIVE PLAN. IT DOES
NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF
THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN
COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
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