Section 2. Scope of Program

This Program addresses only the additional § 409A taxes for the employee’s 2006 tax year resulting from the exercise of an applicable stock right (discussed below), and the information reporting requirements related to such § 409A taxes. The Program does not address other consequences that may arise from the grant or exercise of a stock right with an exercise

is subject to certain additional taxes discussed below (referred to as § 409A taxes).

On December 20, 2004, the IRS issued Notice 2005–1, 2005–1 C.B. 274, setting forth initial guidance on the application of § 409A, and supplying transition guidance in accordance with the statutory provisions. A notice of proposed rulemaking (REG–158080–04, 2005–2 C.B. 786

[70 FR 57930]) was published in the Federal Register on October 4, 2005. The preamble to the proposed regulations clarified and extended certain provisions of the transition guidance provided in Notice 2005–1, generally through December 31, 2006. On October 4, 2006, the IRS issued Notice 2006–79, 2006–43 I.R.B. 763, which further clarified and extended certain provisions of the transition guidance through December 31, 2007.

Pursuant to Notice 2006–100, 2006–51 I.R.B. 1109, issued on November 30, 2006, service recipients generally are required to report amounts includible under § 409A for 2006 on a timely filed Form W–2 or 1099, as applicable. Service providers are required to report amounts includible under § 409A for the service provider’s 2006 tax year and to pay any taxes due in accordance with the requirements of Notice 2006–100.

B. Application of § 409A to Certain Discounted Stock Rights

The IRS has become aware of numerous instances in which stock options were issued with an exercise price less than the fair market value of the underlying stock on the date of grant or in which stock appreciation rights were issued under which the compensation payable upon exercise of such right was more than the excess of the fair market value of the stock subject to such right on the date of exercise over the fair market value of such stock on the date of grant of such right (collectively such options and rights are referred to as discounted stock rights). In many cases, the discount resulted from a discrepancy between the purported grant date and the actual grant date. In some cases, the employee exercised the stock right during 2006. Such discounted stock rights, to the extent they were issued or became earned and vested on or after January 1, 2005, are generally treated as providing non

qualified deferred compensation subject to § 409A. By contrast, a stock option granted with an exercise price that can never be less than the fair market value of the underlying stock on the date of grant, and that does not include any additional deferral feature, generally is not subject to § 409A, and the exercise of such stock option does not implicate § 409A. Similarly, a stock appreciation right that does not provide compensation in excess of the difference between the fair market value of the stock subject to such right on the date of exercise and the fair market value of such stock on the date of grant of such right, and that does not include any additional deferral feature, generally is not subject to § 409A, and the exercise of such stock right does not implicate § 409A.

C. Consequences Under § 409A of the Exercise of Certain Discounted Stock Rights in 2006

In the absence of affirmative steps taken before the exercise of a stock right to avoid a violation of § 409A, the exercise of a discounted stock right during 2006, where the term of the stock right otherwise extended beyond 2006, generally is treated as an impermissible payment of nonqualified deferred compensation under § 409A. Such an impermissible payment generally triggers adverse Federal income tax consequences under § 409A for the service provider, and reporting requirements for the service recipient, with respect to the stock rights that were exercised and with respect to any additional amounts that are treated as deferred under the same plan for purposes of § 409A under the applicable plan aggregation rules. Such tax consequences include immediate income inclusion; an additional 20% income tax (in accordance with § 409A(a)(1)(B)(i)(II)) on the amounts required to be so included (the 20% tax); and a second additional tax (in accordance with § 409A(a)(1)(B)(ii)) equal to the interest on unpaid taxes from the year of initial deferral (or if later, the first year the deferred amount was not subject to a substantial risk of forfeiture), calculated at the underpayment rate plus 1% (the interest tax).

Notice 2006–100 provides that where there is a required income inclusion under § 409A in the service provider’s tax year 2006, the plan aggregation rules ap

February 26, 2007 626 2007–9 I.R.B.

2007–18, Compliance Resolution Program for Employees Other than Corporate Insiders for Additional 2006 Taxes Arising Under § 409A due to the Exercise of Stock Rights);

(ii) the employer intends to provide further notice to the employee on or before July 15, 2007 certifying that the employer has made a further submission to the IRS that to the best of its information, knowledge, and belief, satisfies the requirements of this announcement, or certifying that the employer has not made such a further submission;

(iii) the employer’s participation in the Program may affect the employee’s Federal income tax obligations solely with respect to the additional taxes imposed under § 409A of the Internal Revenue Code due to the exercise of discounted stock options or stock appreciation rights, but does not affect the employee’s obligation to report on Form 1040 the compensation income arising from the exercise that is shown on the Form W–2 (or W–2c, if applicable) provided to the employee or to pay the applicable Federal taxes (other than the additional § 409A taxes).

The notice to affected employees may provide additional information that is not inconsistent with the required information. The notice must be provided directly to the individual employee, but may be provided electronically. If an employer provides such notices to employees that the employer reasonably anticipates may be affected by the employer’s participation in the Program, and subsequently determines that an exercise of a stock right by an additional employee is eligible to be included in this Program, the employer may include such additional employee and exercise in a further submission without providing the notices required by this Section 4.B, provided all other requirements of this announcement are met with respect to such additional employee.

ii. Second Notice to IRS

No later than 15 days after the employer submits the notice of intent to participate described in section 4.A of this announcement, the employer must provide a notice to the IRS stating the number of employees to whom the notices required by section 4.B.i of this announcement were provided.

price less than the fair market value of the underlying stock on the date of grant. Accordingly, the Program does not address the employer’s obligation to report the compensation income arising from the exercise of the stock right on the 2006 Form W–2, in Box 1, 3 and 5, as appropriate, and to apply the appropriate employment taxes to the payment of wages. The Program also does not address the employee’s obligation to report such compensation income on the Form 1040 and pay the applicable income tax (other than any additional § 409A taxes). The Program also does not address the non-§ 409A tax consequences, including employment tax and information reporting consequences, that may arise from a failure of a purported incentive stock option to meet the requirements of § 422, or the application of § 162(m) to an employer’s otherwise available deduction for compensation expense with respect to the exercise of a stock right.