TBSI » Topics » Federal Income Tax Consequences

This excerpt taken from the TBSI DEF 14A filed Oct 30, 2009.
Federal Income Tax Consequences
The following summary is intended only as a general guide to the U.S. federal income tax consequences under current law of incentive share options and nonqualified share options granted to U.S. taxpayers, which are authorized for grant under the Amended and Restated 2005 Plan. It does not attempt to describe all possible U.S. federal or other tax consequences of participation in the Amended and Restated 2005 Plan or tax consequences based on particular circumstances. The tax consequences may vary if options are granted outside the United States.
Incentive Share Options
An optionholder recognizes no taxable income for regular U.S. federal income tax purposes as a result of the grant or exercise of an incentive share option qualifying under Section 422 of the Code, although the optionholder will recognize alternative minimum taxable income upon exercise of such option. Optionholders 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 a sale of the shares equal to the difference, if any, between the sale price and the purchase price of the shares. If an optionholder satisfies such holding periods upon a sale or other disposition of the shares, neither the Company nor the employer will be entitled to any deduction for U.S. federal income tax purposes.
If an optionholder 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 exercise date and the option 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


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optionholder upon the disqualifying disposition of the shares generally will result in a deduction by the employer for U.S. federal income tax purposes if the employer is subject to U.S. taxation.
Nonqualified Share Options
Options not designated or qualifying as incentive share options will be nonqualified share options having no special tax status. An optionholder generally recognizes no taxable income as the result of the grant of such an option so long as the option exercise price is not lower than the fair market value of the underlying shares on the date of grant. Upon exercise of a nonqualified share option, the optionholder normally recognizes ordinary income in the amount of the difference between the option exercise price and the fair market value of the shares on the exercise date. If the optionholder is an employee, such ordinary income generally is subject to withholding of income and employment taxes.
Upon the sale of shares acquired by the exercise of a nonqualified share option, any gain or loss, based on the difference between the sale price and the fair market value on the exercise date, will be taxed as a capital gain or loss. No tax deduction is available to the Company with respect to the grant of a nonqualified share option or the sale of the shares acquired pursuant to such grant. The employer generally should be entitled to a deduction equal to the amount of ordinary income recognized by the optionholder as a result of the exercise of a nonqualified share option.
Other Considerations
The Code allows publicly held corporations to deduct compensation in excess of US$1,000,000 payable in any taxable year to the corporation’s chief executive officer and its three other most highly compensated executive officers (excluding, for this purpose, the chief financial officer) if the compensation payable is payable solely based on the attainment of one or more performance goals and certain statutory requirements are satisfied. We intend for compensation arising from grants of awards under the Amended and Restated 2005 Plan which are based on performance goals, and share options and share appreciation rights granted at fair market value, to be deductible by the Company as performance-based compensation not subject to the US$1,000,000 limitation on deductibility.
The Amended and Restated 2005 Plan and all awards granted under the plan are intended to comply with, or otherwise be exempt from, Section 409A of the Code which governs nonqualified deferred compensation. Consequently, we intend to administer, interpret, and construe the Amended and Restated 2005 Plan and all awards granted under the plan in a manner consistent with Section 409A of the Code to the extent necessary to avoid the imposition of additional taxes under that section.
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