CA compliance resolution program results
For 409A taxes
FTB has collected nearly $31 million from 46 employers who agreed to pay their employees' Internal Revenue Code (IRC) Section 409A taxes. The taxes paid on behalf of their employees were incurred last year through the exercise of discounted stock options and stock appreciation rights. Backdating and certain practices used to grant options resulted in higher taxes for employees who exercised those options in 2006. We administered a resolution program this year that allowed companies who employed these practices to voluntarily pay the taxes on their employees' behalf.
New legislation in 2004 changed the tax consequences of certain discounted stock options and stock appreciation rights, including improperly backdated stock options. Under tax rules for nonqualified deferred compensation, improperly priced options may trigger a 20 percent surtax and additional interest on top of the ordinary income tax.
A backdated stock option refers to the practice of granting an option that is dated prior to the date the company actually granted it. Options generally give an employee a future right to buy an employer's shares of stock at a specified price. If the stock price rises, the employee may exercise the stock option and purchase the stock at the lower specified price. If the company inappropriately backdated an option to a period when the stock price was lower than the day it was actually granted, the employee may have a greater financial gain.
Earlier this year, the IRS issued IRS Announcement 2007-18, creating a Compliance Resolution Program where employers could pay the taxes arising under IRC Section 409A that were incurred by their employees because of this practice. The program applied to the exercise of certain discounted stock options and stock appreciation rights in 2006.
FTB followed the IRS and issued FTB Notice 2007-1 in February. The California program followed the federal program by allowing companies to step forward and pay the added 20 percent tax and any interest tax that employees owed due to exercising these options.
Some employees exercised options last year that were priced incorrectly and now owe added tax. The federal and state programs apply to rank-and-file employees who are not subject to specific federal Securities Exchange Act disclosure requirements. The programs were not available for most corporate executives or other insiders that exercised discounted stock options.
The California program was available to employers who notified FTB by March 15, 2007, of their intention to participate. Final payments were due by June 30, 2007.