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State of California Franchise Tax Board

California Seeks to Satisfy Tax Obligation Stemming from Backdated Stock Options

Released: February 23, 2007

FTB to Follow IRS and Permit Employers to Pay Additional Tax on 2006 Stock Options

The Franchise Tax Board (FTB) today issued FTB Notice 2007-1, and announced that it will follow the IRS Compliance Resolution Program as outlined in IRS Announcement 2007-18, thus creating the California Compliance Resolution Program to correspond with the federal initiative.

The federal and state programs apply to rank-and-file employees who are not subject to federal Securities and Exchange disclosure requirements. It will not be available for backdated options exercised by most corporate executives or other insiders.

As described in the IRS announcement, companies will be allowed to step forward and pay the additional 20 percent tax and any interest tax that employees owe, under Internal Revenue Code (IRC) section 409A due to the exercise of certain discounted stock options and stock appreciation rights in 2006. Pursuant to Revenue and Taxation Code section 17501, IRC section 409A is applicable for California purposes.

The California Program requirements will parallel the IRS Program requirements. However, the interest tax component of section 409A will be calculated using California’s highest marginal tax rate in effect rate for 2005 (9.3%), and the interest rate applicable for underpayments under California law plus one percent (1%). Affected employees who have not previously taken corrective action on their own will remain liable for the additional tax and interest if their employers either do not participate in the program or fail to abide fully by its terms

Like the IRS Program, the California Program requires the employer to submit to the FTB a notice of the employer's intent to participate in the California Program. Employers choosing to participate in the California Program must file this notice of intent to participate by March 15, 2007. The IRS deadline is February 28, 2007.

More information about the FTB's requirements for employer participation in the California Program will be available at www.ftb.ca.gov soon.

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