SanDisk 2010 Annual Report Download - page 41

Proxy Statement
bring the 2005 Plan into compliance with applicable laws and regulations of any foreign jurisdictions in which
grants or awards are to be made or to obtain favorable tax treatment in those foreign jurisdictions for the
individuals to whom the grants or awards are made.
Federal Income Tax Consequences of Awards Under the 2005 Plan
The U.S. federal income tax consequences of the 2005 Plan under current federal law, which is subject to
change, are summarized in the following discussion of the general tax principles applicable to the 2005 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 U.S. Internal Revenue 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 Internal Revenue Code or non-statutory options which are
not intended to meet such requirements. The 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 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
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