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This excerpt taken from the ROST DEF 14A filed Apr 14, 2008. Incentive Stock Options.
A participant recognizes no taxable
income for regular income tax purposes as a result of the grant or exercise of
an incentive stock option qualifying under Section 422 of the Code. Participants
who neither dispose of their shares within two years following the date the
option was granted nor within one year following the exercise of the option will
normally recognize a capital gain or loss upon the sale of the shares equal to
the difference, if any, between the sale price and the purchase price of the
shares. If a participant satisfies such holding periods upon a sale of the
shares, we will not be entitled to any deduction for federal income tax
purposes. If a participant disposes of shares within two years after the date of
grant or within one year after the date of exercise (a “disqualifying
disposition”), the difference between the fair market value of the shares on the
option exercise date and the exercise price (not to exceed the gain realized on
the sale if the disposition is a transaction with respect to which a loss, if
sustained, would be recognized) will be taxed as ordinary income at the time of
disposition. Any gain in excess of that amount will be a capital gain. If a loss
is recognized, there will be no ordinary income, and such loss will be a capital
loss. Any ordinary income recognized by the participant upon the disqualifying
disposition of the shares generally should be deductible by us for federal
income tax purposes, except to the extent such deduction is limited by
applicable provisions of the Code.
19 In general, the difference between the option exercise price and the fair market value of the shares on the date of exercise of an incentive stock option is treated as an adjustment in computing the participant’s alternative minimum taxable income and may be subject to an alternative minimum tax which is paid if such tax exceeds the regular tax for the year. Special rules may apply with respect to certain subsequent sales of the shares in a disqualifying disposition, certain basis adjustments for purposes of computing the alternative minimum taxable income on a subsequent sale of the shares and certain tax credits which may arise with respect to participants subject to the alternative minimum tax. |
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