SECTION 4. DEFINITIONS

.01 PUBLIC UTILITY COMPANY For purposes of this revenue procedure, the terms “public utility” or “utility” refer to a utility company that is subject to the regulatory authority of the State public utility commission or other appropriate State agency.

.02 TRANSITION LEGISLATION For purposes of this revenue procedure, transition legislation is legislation that:

(1) is enacted by a State to facilitate the conversion from a wholly regulated public utility regime to a competitive environment caused by restructuring of the public utility industry within the State;

2002–29 I.R.B. 172 July 22, 2002

Regulations or meets the requirements of § 422 or § 423.

For nonstatutory stock options that lack a readily ascertainable fair market value, the service provider generally recognizes income at the time of the exercise of the options, in an amount generally equal to the fair market value of the stock received (disregarding lapse restrictions) minus the amount paid for that stock. See § 83(a) and § 1.83–7. The time for recognizing this income and for determining the fair market value of the stock is the first day that the transferee’s rights in the stock are “substantially vested”, i.e., transferable or not subject to a substantial risk of forfeiture. Where the individual exercising such options is an employee, the taxable compensation income generated by § 83(a) constitutes wages for purposes of §§ 3121, 3306, and 3401.

For statutory stock options, if the individual receiving the statutory stock option satisfies the employment requirements of § 422(a) or § 423(a), the exercise of the stock option produces taxable income only when the stock acquired pursuant to the exercise of the option is sold or disposed of. If that stock is sold in a disqualifying disposition ( i.e., prior to the later of the date that is one year after the exercise of the option and two years after the grant of the option), certain amounts will be taxable compensation income under § 83(a). In addition, pursuant to § 423(c), where the holding periods are satisfied, and where the stock options under an employee stock purchase plan are offered at an exercise price below the fair market value of the stock at the date of grant, certain amounts may be included as compensation income at the time of disposition of the stock acquired at exercise of the option.

Notice 2002–47, 2002–28 I.R.B. 97, provides, in part, that until the Treasury Department and the Internal Revenue Service issue further guidance, in the case of a statutory stock option, the Service will not assess the Federal Insurance Contributions Act (FICA) tax or Federal Unemployment Tax Act (FUTA) tax, or apply federal income tax withholding obligations, upon either the exercise of the option or the disposition of the stock acquired by an employee pursuant to the exercise of the option.

the fixed amount of transition costs through the issuance of bonds, notes, certificates of participation or beneficial interest or other evidences of indebtedness issued pursuant to an indenture, contract or other agreement of an electric utility or a financing entity.

.03 TRANSITION COSTS For purposes of this revenue procedure, transition costs are the utility’s noneconomic costs caused by restructuring and the introduction of a competitive marketplace for electric services, and such other related costs that the State legislature may deem appropriate.

.04 QUALIFYING SECURITIZATION

For purposes of this revenue procedure, qualifying securitization is an issuance of any bonds, notes, certificates of participation or beneficial interests or other evidences of indebtedness—

(1) secured by the intangible property right to collect charges for the recovery of transition costs and such other assets, if any, of the financing entity;

(2) initially capitalized by the utility with at least 0.5 percent of the total principal amount of each series of evidences of indebtedness issued; and

(3) providing for self-amortizing level payments of interest and principal on a quarterly or semiannual basis.