AutoZone 2015 Annual Report Download - page 37

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the shares acquired on the date of exercise, less the exercise price paid for the shares. The optionee’s basis in the
common stock for purposes of determining gain or loss on a subsequent sale or disposition of such shares
generally will be the fair market value of our common stock on the date the optionee exercises such option. Any
subsequent gain or loss will be taxable as a long-term or short-term capital gain or loss, depending on the
duration for which the shares are held. We or our subsidiaries or affiliates generally should be entitled to a
federal income tax deduction at the time and for the same amount as the optionee recognizes ordinary income.
Incentive Stock Options. A participant receiving ISOs should not recognize taxable income upon grant.
Additionally, if applicable holding period requirements are met, the participant should not recognize taxable
income at the time of exercise. However, the excess of the fair market value of the shares of our common stock
received over the option exercise price is an item of tax preference income potentially subject to the alternative
minimum tax. If stock acquired upon exercise of an ISO is held for a minimum of two years from the date of the
ISO grant and one year from the date of exercise and otherwise satisfies the ISO requirements, the gain or loss
(in an amount equal to the difference between the fair market value on the date of disposition and the exercise
price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled
to any deduction. If the holding period requirements are not met, the ISO will be treated as one that does not
meet the requirements of the Internal Revenue Code for ISOs and the participant will recognize ordinary income
at the time of the disposition equal to the excess of the amount realized over the exercise price, but not more
than the excess of the fair market value of the shares on the date the ISO is exercised over the exercise price,
with any remaining gain or loss being treated as capital gain or capital loss. We are not entitled to a tax
deduction upon either the exercise of an ISO or upon disposition of the shares acquired pursuant to such
exercise, except to the extent that the participant recognizes ordinary income on disposition of the shares.
Other Awards. The current federal income tax consequences of other awards authorized under the
Amended 2011 Equity Plan generally follow certain basic patterns: SARs are taxed and deductible in
substantially the same manner as nonqualified stock options; nontransferable restricted stock subject to a
substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the
price paid, if any, at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the
date of grant); restricted stock units, stock-based performance awards and other types of awards are generally
subject to income tax at the time of share delivery or other payment based on the fair market value of the share
or other payment delivered on that date. Compensation that is effectively deferred will generally be subject to
income taxation when paid, but will typically be subject to employment taxes in any earlier year in which
vesting occurs. In each of the foregoing cases, we will generally have a corresponding deduction at the time the
participant recognizes income, subject to the limitations imposed by Section 162(m) with respect to covered
employees.
Section 162(m) of the Internal Revenue Code
Section 162(m) denies a deduction to any publicly held corporation for compensation paid to certain
“covered employees” in a taxable year to the extent that compensation to such covered employee exceeds
$1,000,000. It is possible that compensation attributable to awards under the Amended 2011 Equity Plan,
whether alone or combined with other types of compensation received by a covered employee from us, may
cause this limitation to be exceeded in any particular year.
The Section 162(m) deduction limitation does not apply to “qualified performance-based compensation.” In
order to qualify for the exemption for qualified performance-based compensation, Section 162(m) requires that:
(i) the compensation be paid solely upon account of the attainment of one or more pre-established objective
performance goals, (ii) the performance goals must be established by a compensation committee comprised of
two or more “outside directors”, (iii) the material terms of the performance goals under which the compensation
is to be paid must be disclosed to and approved by the stockholders and (iv) a compensation committee of
“outside directors” must certify that the performance goals have indeed been met prior to payment.
Section 162(m) contains a special rule for stock options and SARs which provides that stock options and
SARs will satisfy the “qualified performance-based compensation” exemption if (i) the awards are made by a
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