Pier 1 2015 Annual Report Download - page 109

FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
Non-qualified Options
No federal income tax is imposed on the optionee upon the grant of a non-qualified option. Upon exercise of a non-qualified
option, the optionee will be treated as receiving compensation which is taxable as ordinary income in the year of exercise. The
amount recognized as ordinary income upon such exercise is the excess of the fair market value of the shares of common stock
at the time of exercise over the exercise price paid for such common stock. Upon disposition of the common stock received
from the exercise of the option, any difference between the fair market value of the shares of common stock at the time of
exercise and the amount realized on the disposition would be treated as capital gain or loss. The gain, if any, realized upon such
a disposition will be treated as long-term or short-term capital gain, depending on the holding period of the shares of common
stock. Any loss realized upon such a disposition will be treated as a long-term or short-term capital loss, depending on the
holding period of the shares of common stock.
Upon the optionee’s exercise of a non-qualified option, and subject to the application of Section 162(m) of the Internal Revenue
Code of 1986 as discussed below, Pier 1 Imports may claim a tax deduction for the compensation at the same time and in the
same amount as compensation is treated as being received by the optionee, assuming Pier 1 Imports satisfies the federal
income tax reporting requirements with respect to such compensation. Pier 1 Imports is not entitled to any tax deduction in
connection with a subsequent disposition by the optionee of the shares of common stock.
If the shares of common stock received upon the exercise of a non-qualified option are transferred to the optionee subject to
certain restrictions, then the taxable income realized by the optionee, unless the optionee elects otherwise, and Pier 1 Imports’
tax deduction (assuming federal income tax reporting requirements are satisfied) should be deferred and should be measured at
the fair market value of the shares at the time the restrictions lapse. The insider trading restriction imposed on officers, directors
and 10% shareholders by Section 16(b) of the Securities Exchange Act of 1934 is such a restriction during the period prescribed
thereby if other shares have been purchased by such an individual within six months of the exercise of a non-qualified option.
Incentive Stock Options
No federal income tax is imposed on the optionee upon the grant of an incentive stock option. The optionee will not recognize
taxable income upon exercise of an incentive stock option if the optionee (a) does not dispose of the shares of common stock
acquired pursuant to the exercise of an incentive stock option within two years from the date the option was granted or within
one year after the shares of common stock were transferred to the optionee (the “Holding Period”) and (b) is an employee of
either (i) the company granting the option, (ii) a subsidiary of such company or (iii) a company which has assumed such option of
another company as a result of a corporate reorganization, merger or similar transaction. The optionee’s employment must
continue for the entire time from the date the option was granted until three months before the date of exercise, or 12 months
before the date of exercise if employment ceases due to permanent and total disability. If common stock received upon exercise
of an incentive stock option is disposed of after completion of the Holding Period, any difference between the exercise price paid
for such common stock and the amount realized on the disposition would be treated as a capital gain or loss. The gain, if any,
realized upon such a disposition will be treated as a long-term capital gain. Any loss realized upon such a disposition will be
treated as a long-term capital loss. Pier 1 Imports would not be entitled to any deduction in connection with the grant or exercise
of the option or the disposition of the shares of common stock so acquired.
If, however, an optionee disposes of shares of common stock acquired pursuant to exercise of an incentive stock option before
the Holding Period has expired, the optionee would be treated as having received, at the time of disposition, compensation
taxable as ordinary income. In such event, subject to the application of Section 162(m) of the Internal Revenue Code of 1986 as
discussed below, Pier 1 Imports may claim a deduction for compensation paid at the same time and in the same amount as
compensation is treated as being received by the optionee. The amount treated as compensation is the lesser of (i) the excess of
the fair market value of the common stock at the time of exercise over the exercise price or (ii) the excess of the amount realized
on disposition over the exercise price. The balance of the gain, if any, realized upon such a disposition will be treated as long-
term or short-term capital gain depending on the holding period. If the amount realized at the time of the disposition is less than
the exercise price, the optionee will not be required to treat any amount as ordinary income, provided that the disposition is of a
type that would give rise to a recognizable loss. In such event, the loss will be treated as a long-term or short-term capital loss
depending upon the holding period. A disposition generally includes a sale, exchange or gift, but does not include certain other
transfers, such as by reason of death or a pledge or exchange of shares described in Section 424(c) of the Internal Revenue
Code of 1986.
PIER 1 IMPORTS, INC. 2015 Proxy Statement 27