SanDisk 2012 Annual Report Download - page 45

Proxy Statement
Summary of Federal Income Tax Consequences
The U.S. federal income tax consequences of the 2013 Plan under current federal law, which is subject to
change, are summarized in the following discussion of the general tax principles applicable to the 2013 Plan.
This summary is not intended to be exhaustive and, among other considerations, does not describe the deferred
compensation provisions of Section 409A of the Code to the extent an award is subject to and does not satisfy
those rules, nor does it describe state, local, or international tax consequences.
Option Grants. Options granted under the Discretionary Grant Program may be either incentive stock options
which satisfy the requirements of Section 422 of the Code or non-statutory options which are not intended to meet
such requirements. The current Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the time of the option grant, and
no taxable income is recognized for regular tax purposes at the time the option is exercised, although taxable
income may arise at that time for alternative minimum tax purposes. The optionee will recognize taxable
income in the year in which the purchased shares are sold or otherwise made the subject of certain other
dispositions. For Federal tax purposes, dispositions are divided into two categories: (i) qualifying and
(ii) disqualifying. A qualifying disposition occurs if the sale or other disposition is made more than two
(2) years after the date the option for the shares involved in such sale or disposition is granted and more than
one (1) year after the date the option is exercised for those shares. If the sale or disposition occurs before
these two periods are satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize long-term capital gain in an amount equal to
the excess of (i) the amount realized upon the sale or other disposition of the purchased shares over (ii) the
exercise price paid for the shares. If there is a disqualifying disposition of the shares, then the excess of
(i) the fair market value of those shares on the exercise date or (if less) the amount realized upon such sale
or disposition over (ii) the exercise price paid for the shares will be taxable as ordinary income to the
optionee. Any additional gain recognized upon the disposition will be a capital gain.
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 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.
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