Allstate 2008 Annual Report Download - page 34

income, Social Security, and Medicare taxes. If an employee disposes of shares of our common stock acquired
upon exercise of a nonqualified stock option in a taxable transaction, the employee will recognize capital gain or
loss in an amount equal to the difference between the employee’s basis in the shares sold and the total amount
realized upon disposition.
Incentive Stock Options.
Generally an employee does not recognize taxable income on the grant or exercise of an incentive stock
option and no federal income, Social Security, or Medicare taxes will be withheld upon such grant or exercise.
However, the excess of the fair market value on the date of exercise over the option exercise price is included in
alternative minimum taxable income and thus may trigger alternative minimum tax.
Upon the disposition of shares of common stock acquired on exercise of an incentive stock option more than
one year after the date of exercise, and more than two years after the date of grant, the employee will normally
recognize a capital gain or loss, as the case may be. This gain or loss is measured by the difference between the
common stock’s sale price and the exercise price. We will not be entitled to a tax deduction on the grant or
exercise of an incentive stock option or on the disposition of common stock acquired upon the exercise of an
incentive stock option.
If, however, an employee disposes of the shares of common stock acquired upon the exercise of an incentive
stock option either before the one year period after exercise, or before the two year period after the date of grant,
the difference between the exercise price of such shares and the lesser of (i) the fair market value of the shares
on the date of exercise or (ii) the sale price will constitute compensation taxable to the employee as ordinary
income. We are generally allowed a corresponding tax deduction equal to the amount of the compensation
taxable to the employee. If the sale price of common stock exceeds the fair market value on the date of exercise,
the excess will be taxable to the employee as capital gain. We are not allowed a deduction with respect to any
such capital gain recognized by the employee.
Use of Common Stock to Pay Option Exercise Price of Nonqualified Option.
If an employee delivers previously acquired common stock in payment of all or part of the option exercise
price of a nonqualified stock option, there will be no recognition of taxable income or loss of any appreciation or
depreciation in value of the tendered common stock. The employee’s tax basis in, and capital gain holding period
for, the tendered stock carries over to an equal number of the option shares received. The fair market value of the
shares received in excess of the tendered shares constitutes compensation taxable to the employee as ordinary
income. We may be entitled to a tax deduction equal to the compensation income recognized by the employee.
Use of Common Stock to Pay Option Exercise Price of Incentive Stock Option.
If an employee delivers previously acquired common stock in payment of all or part of the incentive stock
option exercise price (other than stock acquired on exercise and not held for the required holding periods), the
employee will not recognize as taxable income or loss any appreciation or depreciation in the value of the
tendered stock after its acquisition date. The employee’s tax basis in, and capital gain holding period for, the
tendered stock carries over to an equal number of the option shares received. Shares received in excess of the
tendered shares have a tax basis equal to the amount paid, if any, in excess of the tendered shares and such
shares’ holding period will begin on the date of exercise.
If an employee delivers previously acquired common stock that was acquired upon the exercise of an
incentive stock option that was not held for the required holding periods, ordinary income will be recognized by
the employee and we will generally be entitled to a corresponding compensation deduction. The employee’s basis
in the shares received in exchange for the tendered shares will be increased by the amount of ordinary income
recognized.
Stock Appreciation Rights.
An employee will not have any taxable income on the grant of stock appreciation rights. Upon the exercise of
stock appreciation rights, the employee recognizes ordinary income equal to the fair market value of the shares
and cash received. We will be entitled to a corresponding compensation deduction. Any such ordinary income is
also considered wages and, as such, is subject to income, Social Security, and Medicare taxes. If stock
appreciation rights are settled in shares of our common stock, then upon a subsequent disposition of such shares
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