Section 2. The Parties and Eligibility

Requirements

A typical Notice 2003–47 transaction (Transaction) involves an officer, director or employee (Executive) to whom a

compensatory non-statutory stock option or restricted stock ¹ is granted in connection with the performance of services for a corporation (Corporation). The Executive transfers the stock option to an entity (Related Person), which is typically a limited partnership substantially owned by the Executive and immediate family members. The Related Person typically pays for the stock option by giving the Executive a deferred payment obligation such as a long-term, unsecured note with principal payments deferred until maturity, or an annuity.

This initiative is open to (1) the Executive and the Related Person and (2) the Corporation, if:

a. The Executive transferred the option to the Related Person before July 2, 2003; and

b. The person electing to participate is not a party in a court proceeding to determine the tax treatment of the Transaction. ²

The Corporation may participate in this settlement initiative without the Executive or Related Party and the Executive may participate without the Corporation. However, the Executive must participate with the Related Person. ³

1 The term “restricted stock” refers to a grant to an Executive of stock that is not substantially vested at the time of grant, as defined in Treas. Reg. § 1.83–3(b). Unless otherwise noted, references to stock options also include restricted stock.

2 For an electing Executive, neither the Executive nor the Related Person may be a party to such a court proceeding. This exception also applies to a person who is a party to a court proceeding in that person’s capacity as partner in an entity subject to the unified partnership audit and litigation provisions of §§ 6221 through 6234, as enacted by the Tax Equity and Fiscal Responsibility Act of 1982.

3 If the Related Person is a pass-through entity, all members of the pass-through entity must agree to participate in the settlement initiative.

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(iii) December 31 of the year in which the Executive recognized the compensation; or (iv) December 31, 2004.

2. FICA Tax. The Corporation must pay the employer’s share of FICA tax on the compensation income determined under Section 3(a)(1) for the calendar year ending during the taxable year in which the Corporation claims the deduction under Section 3(b)(1). In addition, for the same taxable year, the Corporation must pay the employee’s share of FICA tax for each Executive that participated in a Transaction but does not settle under this settlement initiative (Non-participating Executive). The payment of both the employer’s and employee’s shares of FICA tax is made without interest. In addition, the Corporation must issue a Form W–2c, Corrected Wage and Tax Statement, as specified in the closing agreement.

3. Transaction Costs. The Service will not challenge the capitalization, deduction, or amortization of Transaction Costs paid by the Corporation to investigate, pursue, and consummate the Transaction. To the extent the Corporation has not claimed a deduction on a previously filed U.S. federal income tax return for those Transaction Costs paid by the Corporation, it may claim the deduction in the same taxable year in which the compensation deduction is claimed under Section 3(b)(1).

4. Penalties. No penalties will be imposed on the Corporation for its participation in the Transaction.

5. Withholding for Supplemental Wages. If the Corporation participates in this settlement initiative and one or more of its Executives do not, then for each Non-participating Executive, the Corporation must satisfy its withholding liability by paying an amount equal to the applicable flat supplemental withholding rate times the Executive’s compensation income as determined under Section 3(a)(1) for the taxable year in which the Corporation claims the deduction under Section 3(b)(1). The payment is made without interest; however, the Corporation must issue a Form W–2c as specified in the closing agreement.

c. Special Terms Where Option Not Exercised. If the stock option has not

the Related Person for the option (that is, the amount of the deferred payment obligation ⁴ and any cash or property other than a deferred payment obligation) exceeds the amount recognized as compensation income under Section 3(a)(1). Gain not yet recognized and attributable to (i) the deferred payment obligation that would be recognized on receipt of the deferred payment obligation under the relevant provisions of the Internal Revenue Code and Income Tax Regulations and (ii) cash or property other than a deferred payment obligation, must be recognized in the taxable year that the Related Person disposed of the stock or, if not yet disposed of, in the taxable year that includes December 31, 2004. The Executive may not recognize any loss.

3. Interest on Deferred Payments. The Executive must recognize interest income on the deferred payment obligation when the interest is paid or accrued, whichever is applicable under the relevant provisions of the Code and regulations for interest (for example, § 1272). The Related Person may be entitled to an interest expense deduction as determined under § 163 and other applicable Code provisions.

4. Annuities. Section 72 governs annuity payments received by the Executive. For purposes of calculating the excludable amount, the amount of compensation determined under Section 3(a)(1), plus any gain attributable to the annuity that has been recognized by the Executive at the time the closing agreement is executed, is treated as the investment in the contract. The portion of each annuity payment not excluded must be included in the Executive’s income.

5. Transaction Costs. The Service will not challenge the capitalization, deduction, or amortization of costs paid by the Executive or Related Person to investigate, pursue, and, consummate the Transaction, including promoter fees and fees for accounting, appraisal, and legal services (Transaction Costs). To the extent the Executive or Related Person that paid those costs has not claimed a deduction on a previously filed U.S. federal income tax return for those Transaction Costs, that person may claim the deduction in the tax

able year that includes the taxable year in which the Executive recognizes the compensation income under Section 3(a)(1).

6. Federal Insurance Contributions Act (FICA) Tax. The Executive must pay the employee’s share of FICA tax on the compensation income recognized under Section 3(a)(1) in accordance with the timing rules under Section 3(a)(1).

7. Penalty. The Executive must pay an accuracy related penalty under § 6662 equal to ten percent of the amount of any underpayment (as defined in § 1.6664–2(a) of the Income Tax Regulations) attributable to the Transaction unless the Executive filed a valid disclosure under Announcement 2002–2, 2002–1 C.B. 304. For the taxable year that includes December 31, 2004, the amount of the underpayment attributable to the Transaction is equal to the increased tax resulting from the income recognized under Sections 3(a)(1) and (2) (as applicable) in that taxable year. An Executive that filed a qualified amended return is eligible to participate in this settlement initiative.

8. Related Person’s Stock Basis. The Related Person’s basis in the stock is equal to the sum of (i) the income and gain recognized under Sections 3(a)(1) and (2), (ii) the exercise price paid for the stock, and (iii) the amount, if any, paid for the option or restricted stock by the Executive. The acquisition date is deemed to be the date on which the option was exercised.

b. For the Corporation, except as provided in Section 3(c)(2), the terms of the closing agreement entered into pursuant to this announcement must include the following

1. Compensation Deduction. The Corporation may claim a compensation deduction (if otherwise allowable in the year of transfer, exercise, or vesting) no greater than the total compensation determined under Section 3(a)(1). To the extent the corporation has not already claimed the compensation deduction, it may claim the deduction in a taxable year that includes any of the following: (i) the date the Executive transferred the stock option to the Related Person; (ii) the date the option was exercised (or the stock vested);

4 For example, if the deferred payment obligation is a note, the amount of the note would be the stated principal amount of the note received if the note provides for interest at a rate at least equal to the applicable Federal rate. For purposes of this initiative, the amount of an annuity is the present value of the annuity determined on the transfer date using the same actuarial assumptions and interest rate used to formulate the annuity if such assumptions were reasonable; otherwise the valuation must be determined using reasonable actuarial assumptions and interest rate.

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which the Corporation claims the deduction under Section 3(c)(2)(i).

d. Corporation Must Participate for All of its Executives. The closing agreement must apply with respect to all of the officers, directors, and employees of the Corporation that participated in the Transaction with respect to which there was a transfer of the stock option before July 2, 2003. e. Estate and Gift Taxes. Execution of a closing agreement under this settlement initiative does not affect the application of gift, estate and generation-skipping transfer taxes which may result from the Transactions covered by this settlement initiative.

f. Related Person. Execution of a closing agreement under this settlement initiative does not preclude the Service from pursuing with the Executive or the Related Person (and its members) additional adjustments related to the activities of the Related Person (other than as specified in Section 3(a)(8)).

g. Other Matters. Execution of a closing agreement under this settlement initiative does not preclude the Service from investigating any associated criminal conduct or recommending prosecution for violation of any criminal statute.