Pottery Barn 2009 Annual Report Download - page 119

Revenue Service, to recognize income at the time he or she receives the award in an amount equal to the fair
market value of the shares underlying the award (less any cash paid for the shares) on the date the award is
granted.
Restricted Stock Units
A participant generally will not recognize taxable income upon grant of restricted stock units. Instead, the
participant generally will recognize ordinary income at the time of vesting equal to the fair market value of the
shares on the vesting date less the amount, if any, paid for the shares.
Stock Appreciation Rights
A participant generally will not recognize taxable income upon the grant of a stock appreciation right. Upon
exercise, the participant generally will recognize ordinary income in an amount equal to the fair market value of
any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be a
capital gain or loss. As a result of Section 409A, however, stock appreciation rights granted with an exercise
price below the fair market value of the underlying stock may be taxable to the participant before exercise of an
award, and may be subject to additional taxes under Section 409A and comparable state laws.
Dividend Equivalents
A participant generally will recognize ordinary income each time a dividend is paid pursuant to the dividend
equivalent in an amount equal to the fair market value of the dividend received. If the dividends are deferred,
additional requirements must be met to ensure that the dividend is taxable upon actual delivery of the shares,
instead of the grant of the dividend.
Deferred Stock Awards
A participant generally will not have taxable income upon the grant of a deferred stock award. Instead, a
participant generally will recognize ordinary income at the time of the receipt of the shares subject to the award
equal to the difference between the fair market value of the shares at the time of receipt and the amount, if any,
paid for the shares. However, an employee participant will be subject to employment taxes (FICA and, where
applicable, state disability insurance taxes) at the time a deferred stock award vests, even if the participant has
not yet received the shares subject to the award. We do not guarantee the federal or state income tax treatment of
the deferred amounts. If the Internal Revenue Service successfully asserts that the deferral was ineffective, the
recipient could be liable for taxes, interest and penalties. In addition, the recipient could be liable for additional
taxes, penalties and interest as a result of Section 409A and/or comparable state laws.
What are the tax effects to us as a result of grants of awards under the plan?
We generally will be entitled to a tax deduction in connection with an award under the plan in an amount equal to
the ordinary income realized by a participant at the time the participant recognizes such income, such as when a
participant exercises a nonqualified stock option. Special rules limit the deductibility of compensation paid to our
Chief Executive Officer and to each of our next three most highly compensated executive officers. Under
Section 162(m), the annual compensation paid to any of these specified executives will be deductible only to the
extent that it does not exceed $1,000,000. However, we can preserve the deductibility of certain compensation in
excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include: (i) shareholder
approval of the material terms of the plan; (ii) setting limits on the number of awards that any individual may
receive; and (iii) for awards other than certain stock options and stock appreciation rights, establishing
performance criteria that must be met before the award actually will vest or be paid. The plan has been designed
to permit the committee to grant awards that qualify as performance-based for purposes of satisfying the
conditions of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in
connection with such awards.
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