Electronic Arts 2006 Annual Report Download - page 59

ADDITION, THE INTERNAL REVENUE SERVICE COULD, AT ANY TIME, TAKE A
POSITION CONTRARY TO THE INFORMATION DESCRIBED IN THE FOLLOWING SUM-
MARY. ANY TAX EFFECTS THAT ACCRUE TO FOREIGN PARTICIPANTS AS A RESULT
OF PARTICIPATING IN THE EQUITY PLAN ARE GOVERNED BY THE TAX LAWS OF THE
COUNTRIES IN WHICH SUCH PARTICIPANT RESIDES OR IS OTHERWISE SUBJECT.
EACH PARTICIPANT WILL BE ENCOURAGED TO SEEK THE ADVICE OF A QUALIFIED
TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN THE
EQUITY PLAN.
Incentive Stock Options
A participant will recognize no income upon grant of an incentive stock option and incur no tax on its
exercise, unless the participant is subject to the alternative minimum tax (""AMT''). If the participant
holds shares acquired upon exercise of an incentive stock option (the ""ISO Shares'') for more than one
year after the date the option was exercised and for more than two years after the date the option was
granted, the participant generally will realize capital gain or loss (rather than ordinary income) upon
disposition of the ISO Shares. This gain or loss will be equal to the diÅerence between the amount
realized upon such disposition and the amount paid for the ISO Shares. The rate of taxation that applies
to capital gain depends upon the amount of time the ISO Shares are held by the participant.
If the participant disposes of ISO Shares prior to the expiration of either required holding period (a
""disqualifying disposition''), the gain realized upon such disposition, up to the diÅerence between the fair
market value of the ISO Shares on the date of exercise (or, if less, the amount realized on a sale of such
shares) and the option exercise price, will be treated as ordinary income. Any additional gain will be
capital gain, taxed at a rate that depends upon the amount of time the ISO Shares were held by the
Proxy Statement
participant.
Alternative Minimum Tax
The diÅerence between the option exercise price and the fair market value of the ISO Shares on the date
of exercise of a vested ISO is an adjustment to income for purposes of the AMT. If a participant exercises
an ISO before it has fully vested, the participant may incur an AMT liability as the ISO Shares vest and
the Company's right to repurchase the ISO Shares at the original issue price lapses, unless the participant
makes a timely election under Section 83(b) of the U.S. Internal Revenue Code (an ""83(b) election'').
The AMT (imposed to the extent it exceeds the taxpayer's regular income tax) is 26% of an individual
taxpayer's alternative minimum taxable income (28% in the case of alternative minimum taxable income
in excess of $175,000 in the case of married individuals Ñling a joint return). Alternative minimum taxable
income is determined by adjusting regular taxable income for certain items, increasing that income by
certain tax preference items (including the diÅerence between the fair market value of the ISO Shares on
the date of exercise and the exercise price) and reducing this amount by the applicable exemption amount.
Under the Tax Increase Prevention and Reconciliation Act of 2005, the exemption amount for 2006 is
$62,550 in case of a joint return, subject to reduction under certain circumstances. If a disqualifying
disposition of the ISO Shares occurs in the same calendar year as exercise of the ISO, there is no AMT
adjustment with respect to those ISO Shares. Also, upon a sale of ISO Shares that is not a disqualifying
disposition, alternative minimum taxable income is reduced in the year of sale by the excess of the fair
market value of the ISO Shares at exercise over the amount paid for the ISO Shares.
NonqualiÑed Stock Options
A participant will not recognize any taxable income at the time a nonqualiÑed stock option (""NQSO'') is
granted or vests provided the exercise price is no less than the fair market value of the underlying shares
on the grant date. However, upon exercise of a vested NQSO, the participant must include in income as
compensation an amount equal to the diÅerence between the fair market value of the shares on the date of
exercise and the participant's exercise price. The included amount must be treated as ordinary income by
the participant and may be subject to withholding by the Company or its subsidiary (either by payment in
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