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This excerpt taken from the WDC DEF 14A filed Sep 28, 2009. Federal
Income Tax Consequences of Awards under the 2004 Performance
Incentive Plan
The U.S. federal income tax consequences of the 2004
Performance Incentive Plan under current federal law, which is
subject to change, are summarized in the following discussion of
the general tax principles applicable to the 2004 Performance
Incentive Plan. This summary is not intended to be exhaustive
and, among other considerations, does not describe state, local,
or international tax consequences.
With respect to nonqualified stock options, we are generally
entitled to deduct and the participant recognizes taxable income
in an amount equal to the difference between the option exercise
price and the fair market value of the shares at the time of
exercise. With respect to incentive stock options, we are
generally not entitled to a deduction nor does the participant
recognize income at the time of exercise, although the
participant may be subject to the U.S. federal alternative
minimum tax.
The current federal income tax consequences of other awards
authorized under the 2004 Performance Incentive Plan generally
follow certain basic patterns: stock appreciation rights are
taxed and deductible in substantially the same manner as
nonqualified stock options; nontransferable restricted stock
subject to a substantial risk of forfeiture results in income
recognition equal to the excess of the fair market value over
the price paid (if any) only at the time the restrictions lapse
(unless the recipient elects to accelerate recognition as of the
date of grant); bonuses, cash and stock-based performance
awards, dividend equivalents, stock units, and other types of
awards are generally subject to tax at the time of payment; and
compensation otherwise
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effectively deferred is taxed when paid. In each of the
foregoing cases, we will generally have a corresponding
deduction at the time the participant recognizes income.
If an award is accelerated under the 2004 Performance Incentive
Plan in connection with a “change in control” (as this
term is used under the U.S. Internal Revenue Code), we may
not be permitted to deduct the portion of the compensation
attributable to the acceleration (“parachute
payments”) if it exceeds certain threshold limits under the
U.S. Internal Revenue Code (and certain related excise
taxes may be triggered). Furthermore, the aggregate compensation
in excess of $1,000,000 attributable to awards that are not
“performance-based” within the meaning of
Section 162(m) of the U.S. Internal Revenue Code may
not be permitted to be deducted by us in certain circumstances.
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