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IRS Reporting Requirements – 2018 Employee Stock Transactions

Now that 2019 has begun, corporations should be aware of IRS reporting requirements regarding certain 2018 stock transactions with their employees.

Section 6039 of the Internal Revenue Code of 1986, as amended (the “Code”), requires a corporation to report (i) the transfer by the corporation of its stock with respect to the exercise of an incentive stock option (“ISO”) and (ii) the initial transfer of legal title to the corporation’s stock acquired at a discount pursuant to an employee stock purchase plan (“ESPP”). Specifically, Section 6039(a) of the Code requires corporations to file information returns relating to such exercises and transfers with the Internal Revenue Service (the “IRS”), while Section 6039(b) of the Code requires corporations to furnish that information to each employee exercising an ISO or receiving legal title upon the initial transfer of the corporation’s stock acquired under an ESPP.

Reporting Exercises of ISOs
IRS Form 3921 is used to report exercises of ISOs. Copy A of Form 3921 is filed with the IRS, Copy B is furnished to the exercising employee and Copy C is retained by the corporation for its records. Click here to view Form 3921. Official versions of Copy A of Form 3921 for direct filing by the corporation (assuming electronic filing is not mandated) can be obtained only from the IRS. Corporations may use the fillable Copies B and C of Form 3921, which can be found online here. Alternatively, a corporation may utilize the services of a vendor (generally for a fee) that creates, files and furnishes all copies of Form 3921 on behalf of the corporation.

Corporations required to file 250 or more Copies A of Form 3921 in any calendar year must do so electronically through the IRS’s Filing Information Returns Electronically (“FIRE”) system. The deadline for electronic filing with the IRS is April 1, 2019. Corporations that elect to file Copies A of Form 3921 manually with the IRS must do so by February 28, 2019. An automatic 30-day extension for filing Copies A of Form 3921 with the IRS is available by filing Form 8809 (either on paper or through the FIRE system) with the IRS no later than the due date for filing such Copy A. Also, an additional 30-day extension beyond the automatic extension may be requested by filing a second Form 8809 no later than the expiration of the automatic 30-day extension, though the IRS retains discretion to reject such additional request. Note, however, that filing for an extension (whether the initial automatic extension or the second discretionary extension) with respect to Copies A of Form 3921 does not provide an extension for providing Copies B of Form 3921 to employees (or former employees).

The deadline for furnishing Copies B of Form 3921 to employees (or former employees) who exercised ISOs in 2018 is January 31, 2019. A maximum 30-day extension may be requested by the corporation via letter to the IRS postmarked no later than the due date for furnishing Copy B of Form 3921, though the IRS is under no obligation to grant such extension.

Reporting Transfers of Stock Acquired Under ESPPs
IRS Form 3922 is used to report initial transfers of stock acquired by an employee (or former employee) pursuant to the terms of an ESPP. Copy A of Form 3922 is filed with the IRS, Copy B is furnished to the employee and Copy C is retained by the corporation for its records. Click here to view Form 3922. Corporations may use the fillable Form 3922, which can be found online here or utilize the services of a vendor (generally for a fee) that creates, files and furnishes Form 3922.

Corporations required to file 250 or more copies of Form 3922 in any calendar year must do so electronically through the IRS’s FIRE system. (Note that the number of Forms 3921 and of Forms 3922 to be filed are considered separately for the purposes of the 250 threshold for electronic filing.) The deadline for electronic filing with the IRS is April 1, 2019. Corporations that elect to file the Form 3922 manually with the IRS must do so by February 28, 2019. The same extension rules as apply to Form 3921 as discussed above also apply to Form 3922.

The deadline for furnishing Copies B of Form 3922 to employees (or former employees) for legal title associated with initial transfers of stock in 2018 that were acquired pursuant to an ESPP is January 31, 2019. A maximum 30-day extension may be requested by the corporation via letter to the IRS postmarked no later than the due date for furnishing Copy B of Form 3922, though the IRS is under no obligation to grant such extension.

General Reporting Requirements
Copies B of Forms 3921 and 3922 furnished to employees (or former employees) must be delivered in person or mailed to the recipient’s last known address, or may be furnished electronically if the recipient affirmatively consents to such a means of delivery. Any consent by the recipient to electronic receipt must itself be made electronically and must demonstrate that the recipient can access the form in the electronic format in which it will be provided. Certain other requirements must be met before electronic distribution to recipients may be made, which requirements are available for review here.   

In order to satisfy the reporting requirements relating to ESPPs, the Code also requires that a corporation issuing stock under an ESPP identify the stock in a manner sufficient to enable the corporation to carry out its reporting obligation (e.g., by use of special serial numbers or codes, which, in practice, are typically determined by the transfer agent).

These reporting obligations are in addition to any reporting obligations that arise upon the disqualifying disposition of stock acquired under either an ISO or an ESPP. In particular, the IRS generally requires that the income from a disqualifying disposition be reported as “other compensation” on an employee’s Form W-2 in order for the corporation to be eligible to take a federal income tax deduction equal to the amount of income recognized as well as to satisfy the corporation’s reporting obligations.

Click here for more detailed instructions on filing requirements for Form 3921 and Form 3922.

Certain Penalties
In general, a corporation that unintentionally fails to timely make correct and complete filings (e.g., Copies A of Forms 3921 or 3922) with the IRS (or file correct and complete paper copies when electronic filing is required) may be subject to penalties from $50 to $270 per form (up to a maximum of $547,000 to $3,282,500 ($191,000 to $1,094,000 for small businesses)), based on the date of filing.  For these purposes, a corporation constitutes a “small business” if its annual gross receipts for the three most recent tax years (or for the period the corporation has been in existence, if shorter than three years) do not exceed $5 million.

If a corporation unintentionally fails to timely furnish correct and complete payee statements (e.g., Copies B of Forms 3921 or 3922) to employees (or former employees), a separate penalty may apply and is calculated in similar manner for similar amounts as the penalty for failure to timely file correct and complete information returns with the IRS as described immediately above.

Penalties are subject to increase (in some cases with no maximum) for a corporation’s intentional disregard of compliance with these reporting requirements.

It's Official! Final Public Approval Regulations Now Reflect the 21st Century

Treasury has released final regulations (the “Final Regulations”) relating to the public approval requirements for private activity bonds (aka the “TEFRA approval” process).  The Final Regulations effectively track the proposed regulations issued in 2017 (the “Proposed Regulations”), but make a few additional tweaks that provide some additional flexibility for issuers and conduit borrowers navigating the process.  The Final Regulations are effective for all private activity bonds issued pursuant to a public approval occurring on or after April 1, 2019.  Further, certain provisions regarding insubstantial deviations may also be applied in whole, but not in part, to a prior public approval.

As we previously reported, the IRS recognized that technological advances have made the existing public approval regulations outdated and that updates were required to address statutory changes, streamline the public approval process, and reduce administrative burdens.  While there are several adjustments to current law to address these objectives, the changes that issuers and conduits borrowers may view as the most impactful are as follows:

  • Electronic Posting of Notice of Public Hearing Permitted; Newspapers Still Allowed

Recognizing that the Internet is probably more than just a fad and that the public has increasingly relied on the Internet as its “go to” source for information, the Final Regulations permit the public notice requirement to be fulfilled by making an electronic posting on either (i) the approving governmental unit’s website or, for issuer approvals (as opposed to host approvals) only, (ii) in the case of an issuer that acts on behalf of a governmental unit, on the issuer’s public website.  To make the posting easy for residents to locate, such a posting must be on the entity’s primary public website in an area used to inform residents about events affecting residents.  The Final Regulations go on to clarify that issuers remain responsible for maintaining records showing that a public notice containing the requisite information was timely posted to an appropriate website.

For those that do not have a website or simply would prefer to continue past practices, notice may still be given by publication in a newspaper, radio or television broadcast, or by an alternative method permitted for public notices under state law.

The Final Regulations provided welcome response to comments on the Proposed Regulations.  The Proposed Regulations would have required electronic postings to be accompanied by another alternative method for those without Internet access, which would have severely undercut the benefits of administrative ease that come with the move to electronic posting.  No such requirement for an alternative method is included in the Final Regulations.  Further,  the Final Regulations clarify that notice may be posted on the issuers website, acknowledging the fact that some issuers do not have the authority to post content on the website of the approving governmental entity (e.g. a housing issuer seeking approval of the city in which the project will be located).

While allowing electronic posting is a step into the 21st century, the IRS was not yet ready to accept public comment suggesting that public hearings be held via teleconference or webinar due to the lack of reliability and public availability.  Maybe by mid-century…

  • Time for Posting Public Notice Reduced to Seven Days

Under the Final Regulations, public notice is presumed reasonable if it is published no fewer than seven days in advance of a public hearing.  Both current law and the Proposed Regulations included a 14-day period.  In making this change, the IRS agreed with public comment that the speed at which information spreads through the public and technological advance warrant a shorter notice period.

  • Integrated Operations on Non-Proximate Sites Can Constitute a Single Project

The Final Regulations require that the published public notice include a description of each “project” to be financed by the bonds.  A “project” includes projects and facilities that are located on the same, adjacent or proximate sites used for similar purposes, but may also include projects and facilities on non-proximate sites if they are used in an integrated operation, as might be the case with a large university or a health care system. 

The Proposed Regulations had sought to clarify that a single project might extend beyond a single or adjoining tracts of land and had abandoned the “integrated operation” standard in current law as being difficult to apply.  However, based on public comment, the Final Regulations both kept the clarifying “proximate site” language and retained the existing “integrated operation” standard for non-proximate sites.  What qualifies as an “integrated operation” continues to be a question of interpretation.

  • Maximum Principal Amount of Bonds Must Be Specified Separately for Each Project

The Final Regulations retain a new requirement introduced in the Proposed Regulations that the public notice and approval must specify separately the maximum stated principal amount of bonds to be issued to finance each separate project.  As a result, issuers and conduit borrowers may find themselves locked into projected allocations between projects financed by the issue earlier in the process than to which they have become accustomed to under current law. 

The good news is that the reintroduction of the “integrated operations” provision described above may lead to the conclusion that separate facilities constitute a single “project” – meaning that only a single maximum principal amount need be included in the notice.  The Final Regulations also provide for a 10% cushion to allow for “insubstantial deviations” in the noticed amount and the amount actually issued for a project.  Additionally, the Final Regulations provide that the maximum stated principal amount of bonds to be issued to finance a project may be determined on any reasonable basis and may take into account contingencies, without regard to whether the occurrence of any such contingency is reasonably expected at the time of the notice.  As a result, issuers and conduit borrowers have flexibility to account for uncertainties in determining the maximum principal amount of the bonds to be issued to finance a project.

If you have any questions regarding the foregoing or any other provision of the Final Regulations, or would like information as to their effect on a particular issue, please contact Todd GreenwaltVictoria Ozimek or Brian Teaff.

Note: this article was previously published by The Bond Buyer.

How Governments Can Help Put the "Opportunity" in Opportunity Zones

First introduced by the tax reform legislation signed into law in late 2017, Opportunity Zones present a new opportunity for taxpayers to defer and/or eliminate tax liability and, at the same time, spur much needed economic development in underserved communities. With opportunity knocking at the door, the key question that the leaders of governmental units (including cities, counties, special districts, states, and territories such as Puerto Rico) that include one or more Opportunity Zones must now ask themselves is: What steps can be taken by the public sector to induce investment in MY Opportunity Zone? As was the case with communities that sought to attract Amazon’s HQ2, coordinating policies, programs and creative approaches to deploy public sector resources, including economic development tools, could make all the difference.

Brief Summary of the Tax Incentive

In general, taxpayers who sell appreciated capital assets are required to pay the resulting capital gains tax in the year of the sale. Opportunity Zones provide a way to change this result by giving many taxpayers the ability to elect to defer, and potentially eliminate, the required tax payment if all or a portion of the capital gain is reinvested in an “Opportunity Fund” within 180 days from the date of the sale. The Opportunity Fund, in turn, must hold at least 90% of its assets in Qualified Opportunity Zone Property, which generally consists of investments (direct or indirect) in one or more Qualified Opportunity Zone Businesses (i.e., an active trade or business in which substantially all of its property is used in the Opportunity Zone). Except for golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, gambling facilities, or liquor stores, almost any type of business could qualify as a Qualified Opportunity Zone Business. For example, qualifying businesses would include grocery stores, multi-family housing, and manufacturing or other industries that could produce significant tax revenues and employment opportunities with the Opportunity Zone.

States with high populations, such as Texas, have as many as 628 census tracts designated by a state’s governor and certified by the Treasury Department as Opportunity Zones (a list of the tracts designated by the Treasury Department is available here). Although the Opportunity Zone provisions have been effective all year, the opportunity remained mostly untapped while Treasury drafted much needed regulations to clarify certain aspects of the new law. Fortunately, that wait is now over, as the IRS issued proposed regulations (which can be relied upon) on October 19, 2018, as well as a Revenue Ruling that provides additional guidance.

(Click here for a technical summary of Opportunity Zone provisions under the Internal Revenue Code and the recently released proposed Treasury Regulations).

How Can Governments Encourage Local Investment

Governmental units that have one or more Opportunity Zones located in their jurisdiction should consider what role they can play in attracting a portion of the predicted $100 billion of investments resulting from the new tax law, which likely will include the development of a strategy that leverages the efforts of a cross-disciplinary team of economic development, banking, finance and legal experts, and ultimately produces clear and unambiguous policies that the private sector may rely upon in determining investment opportunities in an Opportunity Zone.

For example, a successful strategy might include an inventory of key infrastructure elements, including streets, drainage, parks, schools, transportation and other existing attributes of the area that would be relevant to an investor and provide a detailed plan of enhancements that are planned in that area. Those enhancements could also be accelerated to the extent that investments are planned by the private sector. Additionally, this inventory would chronicle other data such as the existence of nearby educational institutions that produce an available workforce, a dependable public transportation system, favorable climate, affordable housing options and access to health care, and/or a strong economy in the area surrounding the Opportunity Zone. If any of these or other attributes are present, the governmental unit could advertise the benefits through an effective public relations campaign that utilizes multimodal avenues of communication, including reaching out directly to fund managers, advertising on local and national media outlets, and hosting discussions with business leaders. Further, the governmental unit could work in tandem with civic-minded local and regional business leaders to promote the investment in the Opportunity Zone.

In addition to considering the attractive features of the Opportunity Zones, investors will also be looking for other economic incentives that will make a project more likely to succeed financially. Thus, governmental units also should consider leveraging other incentives that make an investment in a particular Opportunity Fund more attractive to potential investors and businesses. For example, the governmental unit (or a related governmental entity, such as a management district or a tax increment reinvestment zone) could issue bonds to finance capital improvements to provide needed infrastructure such a utilities and roads to support a project in an Opportunity Zone. Likewise, governmental investment in public transportation would demonstrate the governmental unit’s commitment to supporting investments in the Opportunity Zones. Similarly, the governmental unit could consider whether property tax abatement programs could be offered as an incentive to entice businesses to expand or locate in the Opportunity Zone. Finally, multiple governmental units (e.g., a city, a county, and a transit authority) could work together to package incentives to promote and attract investment in their coterminous jurisdictional area. However accomplished, a key concept is identifying ways that the private sector can work to improve the chances that businesses investing in these areas will be successful.

Last Words

Opportunity Zones present a new platform for a public-private partnership between governmental units, investors, and businesses. Governmental units with Opportunity Zones need to develop their “story” regarding what sets them apart and why Opportunity Funds and Qualified Opportunity Zone Businesses should invest in their community. However that story is best told, now is the time for governmental units to act – given the national interest that this new tax incentive has garnered, there is sure to be fierce competition among governmental units to attract investors.

For more information or if you have specific questions regarding any of the above, please contact Brian Teaff, Victoria Ozimek, or Barron Wallace.


Tax Reform: Renewable Energy

Liam Donovan, of Bracewell’s Tax Group, tackles the topic of Renewable Energy Credits in this presentation. He will discuss the outlook for energy credits and changes in the business tax regime impacting the value of energy credits.

Focus on Finance

Michele Alexander and Ryan Davis, members of Bracewell’s Tax Group, discuss the topic of Financing Transactions, including: impact of the Interest Deduction Limit and international tax changes on the banking industry and financing transactions in this presentation.

Business Taxes

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Industry Developments

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The Tax Cuts and Job Acts: Its Impact on the Energy Industry Webinar

Learn about the TCJA provisions that are most relevant to the the energy industry, as well as how the reform affects business taxes, financing transactions and renewable energy credits. The Tax Cuts and Jobs Act - Its Impact on the Energy Industry webinar is hosted by Bracewell's Liz McGinley, Michele Alexander, Liam Donovan, Steven Lorch and Ryan Davis.

The Lobby Shop: Tax-Mas Hangover? What's Coming Up in 2018

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The Lobby Shop is also available on iTunes and Google Play.

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The Lobby Shop is also available on iTunes and Google Play.