2. 2
Disclaimer
The following presentation and the views expressed by the presenter are not
intended to provide legal, tax, accounting or other professional advice. The
information contained in this presentation is general in nature and based on
authorities that are subject to change. Applicability to specific situations
should be determined through consultation with your legal and/or tax advisor.
4. SEC Update
› Significant enforcement effort – Sept 2014
- Section 16 required filings (Form 3, 4, and Form 5 failures)
- Item 405 of Regulation S-K (company disclosure of late filings)
› 13 officers and directors found liable
- $25K - $100K penalties
› Six public companies found liable
- $75K - $150K penalties
Source: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678
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5. SEC Update
› Starwood Chief Accounting Officer
- Defined as Section 16 since 2005
- No form filings until 2012
› 24 Forms 4 not filed
› 84 transactions
› Sales of stock totalling $5.2 million
› Grants and exercises of stock options
- No Form 5 filings either
- Starwood failure to inform officer of status
› But he was in a position specifically defined under 16a-1(f)
› Insider ultimately responsible
- Fined $25,000
Starwood Officer
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6. SEC Update
› Corporation also held liable
- Failure to report delinquent filings on 10-K (Item 405)
- Failures charged for 2010 and 2011
- Disclosed failures on 2012 10-K
- Not responsible for
› Failure to tell insider
› Failure to complete Form 4
- Fined $75,000
Starwood (Corporate)
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7. SEC Update
› Multiple officers did not file Forms 4
› CFO, General Counsel, President
› Included 10b5-1 plans, receipt of restricted stock
› Cannot blame company for missed filings
› $25,000 fine
› CEO missed 71 filings
› Relied on company to file
› Also a 5% owner – 13D filings missed
› $75,000 fine
Willis Lease Finance
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8. SEC Update
› Item 405 disclosure failures 2011-2012
› More than 75 Form 4 failures that company told officers it was making
› Had timely notification from brokers of lot and price details
› $150,000 fine
Willis Lease Finance (Corporate)
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9. SEC Update
› CEO
› Half of 2011-2012 transactions required on Form 4 reported late
- Stock sales, option grants, restricted stock grants
› Additional Form 5 transaction reporting failure
› Reliance on company insufficient
- Insider responsible
- Must verify and follow up on filing
› $60,375 fine
Universal Electronics
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10. SEC Update
› Failure to file Form 4 and 5
› Reasons:
- Lack of staffing
- Change in processing
- Email server malfunction
- Late receipt of sale information
› Voluntarily took on responsibility of filing Form 4
› …then acted negligently
- 75 late filings 2011-2013 – SOP and RS grants
- 10 late filings 2010-2013 – stock sales where they had information
› But did make Item 405 disclosures
› $75,000 fine
Universal Electronics (Corporate)
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11. SEC Update
› “Reporting requirements…are not mere suggestions”—SEC Director
› SEC using “quantitative analytics” to identify repeated late filings
› Don’t rely on issuer to file
› Inadvertent late filings are no excuse
› Disclose failures promptly
However…occasional late reports should not give rise to fines
What did we learn?
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12. SEC Update
› Institute pre-clearance protocol
› Assign responsible people to file Forms 3, 4, 5 & Item 405 disclosure
› Audit form filings
› Have training program for insiders
› Include all plan admin personnel
- Equity compensation plans
- Retirement plans
- Dividend reinvestment plans
› Coordinate with brokers/use dedicated brokers
› Have insiders sign statement that all reports filed on time
Source: SEC Update, Hogan Lovells, September 17, 2014
Best practices
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T+2 Settlement
› DTC, SIFMA, ICI, AII, Assn of Global Custodians all favor shortened cycle
› Europe already moved to T+2 in October 2014
› Eventual goal T+1
› Reduces capital required by brokers
› Faster release of proceeds
› Substantial system development and process changes will be required
› No decision yet but working groups in progress – decision by April 2015
Source: http://www.dtcc.com/news/2014/april/23/t2-settlement.aspx
http://www.ust2.com/
14. SEC Update
› Unresponsive payees
- Effective January 23, 2014
- Checks open >180 days (or next payment) and >$25
- Notice required within 7 months
- Computershare will include listing of all uncashed payments >$25 from
trigger date
- No effect on state escheatment laws
Source: http://www.sec.gov/rules/final/2013/34-68668.pdf
Sec Rule 17Ad-17
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15. Accounting Update
› One global standard is unrealistic
- SEC Chief hopes to incorporate IFRS at some point
- Sen. Cox, former IFRS supporter, says no longer possible
› FASB and IASB working on limited convergence of standards
- Ending soon
- Significant “share-based payments” differences
› Accounting experts
- Global standard is ideal
- Future work
› Focus on improving quality
› Assure that FASB and IFRS standards are as close as possible
Source: PwC IFRS and US GAAP: similarities and differences - 2014 edition
http://www.pwc.com/us/en/cfodirect/issues/ifrs-adoption-convergence/index.jhtml
IFRS – FASB Convergence
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16. Accounting Update
› Proposed changes to ASC 718 – Accounting for Share-Based Payments
› Share withholding
- Considered “cash-settlement” of part of the award
- Current: Only permitted up to statutory minimum rates, otherwise liability
accounting (mark-to-market)
› Includes executives withheld at 39.6%
- Proposed:
› Alternative A: Any share withholding for taxes OK
› Alternative B: Share withholding reasonably consistent with minimum rates
› Alternative C: Share withholding at maximum marginal rate or less
› Alternative C looks promising
› Does not address rounding up to next whole share – presumably OK
Source: http://www.sos-team.com/pdfs/Morning_General_Workshop.pdf
FASB Updates
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17. Accounting Update
› Forfeiture rates
- What is a forfeiture?
› When employees leave company before vesting
› Expense previously taken is reversed
- Current: Companies have to estimate forfeitures and then true-up to actual
experience
- Proposed alternatives:
› A: Account for forfeitures as they occur
› B: Companies can elect to estimate or account for forfeitures as they occur
- Results
› Alternative B likely
› No more estimating or applying forfeiture rates
› Simply true-up expense as forfeitures occur
› Returns to rule pre-FAS123R
FASB Updates
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18. Accounting Update
› Accounting for Income Taxes
- Current: Companies have to estimate and allocate income tax effects between
income statement and equity (“additional paid-in capital”)
- 10,000 options @ $12 grant price, $8 Fair value
- $80,000 of Comp Expense
X 40% corporate tax rate = $32,000 of expected “tax benefit” due to deduction
…but not realized until exercise
- DR. Deferred Tax Asset (as award vests) $32,000
CR. Tax Expense $32,000
- Then…if exercised when spread is $10/share vs. $8 fair value ($100K x 40%)
- DR. Taxes Payable $40,000 (a reduction)
CR. Deferred Tax Asset $ 32,000 (a reversal)
CR. Add’l Paid In Capital $ 8,000 (a plug)
FASB Updates
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19. Accounting Update
› Accounting for Income Taxes
- Current: Companies have to estimate and allocate income tax effects between
income statement and equity (“additional paid-in capital”)
- Proposed alternatives:
› A: Apply actual tax differences to income statement (tax expense)
› B: Apply actual tax differences to equity (add’l paid in capital)
- Results
› Alternative A likely
› “APIC Pool” becomes obsolete
› No further effect on “deferred tax asset” balance
› Would not converge with IFRS in any case – but closer
FASB Updates
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20. Tax Update
› Track, adjust, transfer, report cost basis (IRC §6045)
- Covered vs. noncovered securities
› Shareholders included
- Any shareholder who would receive a 1099-B upon sale of stock
› Transfer statements (IRC § 6045A)
- Corporate issuers are “applicable persons”
- Any entity that has custody of securities
- Through CBRS (Cost Basis Reporting Service – DTCC product)
› Corporate action reporting (IRC § 6045B)
- Issuer requirement to advise shareholders of required basis adjustments due to
corporate actions (e.g. stock splits, spin-offs, mergers)
› IRS fines for non-compliance
- $200 per 1099-B ($100 failure to mail, $100 failure to file)
- $3 million maximum per payor
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Cost Basis
Tax Update
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What is Cost Basis?
› Definition: All costs incurred in purchasing a capital asset
› Example:
- Purchase 100 shares of ABC at $30 per share, on April 1, 2014
- Pay $25 in fees to purchase the shares
- Cost basis = (100 * $30) = $3,000 + $25 = $3,025
› Since 2011, transfer agents and brokers have been obligated to:
- Retain cost basis amounts
- Record the purchase date
- Adjust shares and cost basis due to corporate actions
- Transfer the information to a successor broker
- Report the basis on Form 1099-B when the shares are sold
Tax Update
Cost Basis
22. Employee Plans
› For all employee awards:
- Total cost basis = Purchase price + compensatory income
- For covered employee awards
› Covered = paid cash to receive award
› As of 2014, agents required to report only the purchase price
› Will create shareholder confusion, likely overpayment of taxes
› Share transfers from administration system will sever links to data required for cost basis
calculations
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Tax Update
Cost Basis
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Cost Basis - 2014
Tax Update
› No cost basis will be reported for noncovered securities
- Vesting restricted stock
- Vesting restricted stock units
- Exercises of stock-settled appreciation rights
- Stock swap exercises of stock options
- Net-settled exercises of stock options
› Part of the cost basis will be reported for:
- ESPP purchases = Purchase price only
- Cashless stock option exercises = Exercise price only
- Will require participants to know and add compensatory portion to cost basis on
Form 8949
24. Restricted Stock Vesting & Sale
Vesting Date: December 14, 2014
Quantity: 100 shares ABC Co.
FMV on vesting date $37/share
Sale Date/Price: December 15, 2014
Sale Price $40
Fees & commissions: $50
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25. 2014 Tax Reporting
› W-2
- $3,700 Federal Earnings (100*$37)
- Withholding
- Social Security/Medicare
- Possible state tax consequences
› 1099-B
- $3,950 net sale proceeds
- Noncovered security
- No reported cost basis ($3,700 actual cost basis)
- $250 capital gain ($3,950 - $3,700)
Restricted Stock Vesting & Sale
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27. 2014 1099-B Instructions
Box 1e. Shows the cost or other basis of securities sold. If the securities
were acquired through the exercise of a non-compensatory option granted
or acquired on or after January 1, 2014, the basis has been adjusted to
reflect your option premium. If the securities were acquired through the
exercise of a non-compensatory option granted or acquired before January
1, 2014, your broker is permitted, but not required, to adjust the basis to
reflect your option premium.
If box 5 is checked, box 1e may be blank. See the Instructions
for Form 8949, Instructions for Schedule D, or Pub. 550 for details.
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28. Participant tax reporting
› Capital gains/losses
- Sales reported on Form 8949
- Six varieties of Form 8949
› ST/LT
› CB reported/not reported
› 1099-B (Y/N)
- 1099-B information requires adjustment
- Transfer information to Schedule D
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31. Disqualified §423 Sale Example
Purchase Date: February 15, 2014
Quantity: 100 shares ABC Co.
FMV on purchase date $37/share
Purchase Price: $30/share
Sale Date/Price: December 15, 2014
Sale Price $40
Fees & commissions: $50
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32. 2014 Tax Reporting
› Form 3922
› W-2
- $700 Federal Earnings 100*($37 - $30)
- No Fed/Soc Sec/Medicare withholding
- Possible state tax consequences
› 1099-B
- $3,950 net sale proceeds
- $3,000 reported cost basis ($3,700 actual cost basis)
- $250 capital gain ($3,950 - $3,700)
› Covered vs. non-covered sales…for every single lot sold
Disqualified §423 Sale Example
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Average Cost
Cost Basis Update
› President’s 2015 budget proposal from April 2014 (“Greenbook”)
› Long way from enactment
› Would require average cost calculation for:
- Multiple lot purchases after 2014
- Across accounts at same agent
- Held more than one year
› How would this affect ESPP?
› Many open questions remain
Source: Page 176, http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf
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Section 83 regulations
Tax Update
› Stock is taxable when no longer subject to a “substantial risk of forfeiture”
› Otherwise, tax deferred while there is still a “risk”
› What is NOT a “substantial risk of forfeiture”?
- Conditions unlikely to occur
- Conditions unlikely to be enforced
› Examples
- Buyout /non-compete clauses
- Performance criteria almost certain to be achieved
› “Stock forfeited if gross revenue dropped 90% over three years”
- Forfeiture/penalties if stock transferred without permission
- Lockup agreement
- Insider trading rules
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Section 83 regulations
Tax Update
› What IS a valid “risk”?
- Service condition (vesting period)
- Performance conditions that have a good chance of not being reached
- 16(b) limits forbidding sale of stock
› For more information, search for TD 9659
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FATCA – Tax Certification
Tax Update
Tax Certification Revisions
- Forms
› W-8BEN released February 2014
› W-9 released December 2014
- New FATCA updates
› Temporary reg allows PDF or fax copies of W-8
› US indicia could invalidate W-8 (phone number)
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Withholding rates on Equity Awards
Tax Update
› Federal: 25%
- 39.6% if over $1 million in supplemental compensation
› Social Security 6.2%
- 2015 earnings threshold $118,500 up from $117,000 in 2014
› Medicare 1.45%
- 2.35% once earnings reach $200,000
› State withholding
› Backup withholding – 28%
› Treaty rate withholding – dividends
- Non-US taxpayers
- Rates vary – see IRS Publication 515
