Pottery Barn 2010 Annual Report Download - page 136

What are the federal tax consequences to participants as a result of receiving an award under the plan?
The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers
resulting from awards granted under the plan. Tax consequences for any particular individual may be different.
Nonqualified Stock Options
No taxable income generally is reportable when a nonqualified stock option is granted to a participant. Upon
exercise, the participant generally will recognize ordinary income in an amount equal to the difference between
the fair market value of the purchased shares on the exercise date and the exercise price of the option. 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 of the Internal Revenue Code, or Section 409A, however, nonqualified stock options
granted with an exercise price below the fair market value of the underlying stock may be taxable to participants
before exercise of an award, and may be subject to additional taxes under Section 409A and comparable state
laws.
Incentive Stock Options
No taxable income is reportable when an incentive stock option is granted or exercised, unless the alternative
minimum tax, or AMT, rules apply, in which case AMT taxation will occur in the year of exercise. If the
participant exercises the option and then later sells or otherwise disposes of the shares more than two years after
the grant date and more than one year after the exercise date, the difference between the sale price and the
exercise price will be taxed as a capital gain or loss. If the participant exercises the option and then later sells or
otherwise disposes of the shares before the end of the two or one year holding periods described above, the
participant generally will have ordinary income at the time of the sale equal to the difference between the fair
market value of the shares on the exercise date, or the sale price, if less, and the exercise price of the option. Any
additional gain or loss generally will be taxable at long-term or short-term capital gain rates, depending on
whether the participant has held the shares for more than one year.
Restricted Stock
A participant will not recognize taxable income upon the grant of restricted stock unless the participant elects to
be taxed at that time. Instead, a participant generally will recognize ordinary income at the time of vesting equal
to the difference between the fair market value of the shares on the vesting date and the amount, if any, paid for
the shares. However, the recipient of a restricted stock award may elect, through a filing with the Internal
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.
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