SanDisk 2005 Annual Report Download - page 31

If the optionee makes a disqualifying disposition of the purchased shares, then the Company will be
entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal to the
amount of ordinary income recognized by the optionee as a result of the disposition. The Company will
not be entitled to any income tax deduction if the optionee makes a qualifying disposition of the shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon the grant of a non-
statutory option. The optionee will in general recognize ordinary income, in the year in which the option is
exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over
the exercise price paid for the shares, and the Company will be required to collect the withholding taxes
applicable to such income from the optionee.
If the shares acquired upon exercise of the non-statutory option are unvested and subject to
repurchase by the Company in the event of the optionee's termination of service prior to vesting in those
shares, then the optionee will not recognize any taxable income at the time of exercise but will have to
report as ordinary income, as and when the Company's repurchase right lapses, an amount equal to the
excess of (i) the fair market value of the shares on the date the repurchase right lapses over (ii) the
exercise price paid for the shares. The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income in the year of exercise of the option an amount equal to the
excess of (i) the fair market value of the purchased shares on the exercise date over (ii) the exercise
price paid for such shares. If the Section 83(b) election is made, the optionee will not recognize any
additional income as and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the optionee with respect to the exercised non-statutory option. The deduction will in
general be allowed for the Company's taxable year in which such ordinary income is recognized by the
optionee.
Stock Appreciation Rights. No taxable income is recognized upon receipt of a stock appreciation right.
The holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an
amount equal to the excess of the fair market value of the underlying shares of Common Stock on the exercise
date over the base price in effect for the exercised right, and the Company will be required to collect the
withholding taxes applicable to such income from the holder.
The Company will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder in connection with the exercise of the stock appreciation right. The deduction will be
allowed for the taxable year in which such ordinary income is recognized.
Direct Stock Issuances. The tax principles applicable to direct stock issuances under the 2005 Plan will
be substantially the same as those summarized above for the exercise of non-statutory option grants.
Restricted Stock Units. No taxable income is recognized upon receipt of a restricted stock unit. The
holder will recognize ordinary income in the year in which the shares subject to that unit are actually issued to
the holder. The amount of that income will be equal to the fair market value of the shares on the date of
issuance, and the Company will be required to collect the withholding taxes applicable to such income from
the holder. The Company will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder at the time the shares are issued. The deduction will be allowed for the taxable year
in which such ordinary income is recognized.
Deductibility of Executive Compensation. The Company anticipates that any compensation deemed
paid by the Company in connection with the disqualifying disposition of incentive stock option shares or the
exercise of non-statutory options or stock appreciation rights will qualify as performance-based compensation
for purposes of Internal Revenue Code Section 162(m) and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to
certain of the Company's executive officers. Accordingly, the compensation deemed paid with respect to
options and stock appreciation rights granted under the 2005 Plan will remain deductible by the Company
without limitation under Section 162(m). However, any compensation deemed paid by the Company in
connection with shares issued under the stock issuance program will be subject to the $1 million limitation,
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