Electronic Arts 2007 Annual Report Download - page 64

United States Federal Income Tax Information
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND PARTIC-
IPANTS UNDER THE EQUITY PLAN. THE FEDERAL TAX LAWS MAY CHANGE AND THE FED-
ERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON
HIS OR HER INDIVIDUAL CIRCUMSTANCES. IN ADDITION, THE INTERNAL REVENUE SERVICE
COULD, AT ANY TIME, TAKE A POSITION CONTRARY TO THE INFORMATION DESCRIBED IN
THE FOLLOWING SUMMARY. 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 or vesting of an incentive stock option and will generally
not incur tax on its exercise. Unless the participant is subject to the alternative minimum tax (“AMT”), the
participant will recognize income only when the shares acquired upon the exercise of an incentive stock option
(the “ISO Shares”) are sold or otherwise disposed of. If the participant holds 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 will realize a long-term capital gain or loss (rather than ordinary income) upon disposition of
the ISO Shares. This long-term capital gain or loss will be equal to the difference between the amount realized
upon such disposition and the amount paid for the ISO Shares.
If the participant disposes of ISO Shares prior to the expiration of either the one-year or two-year required
holding period (a “disqualifying disposition”), the gain realized upon such disposition, up to the difference
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
participant.
Alternative Minimum Tax
The Alternative Minimum Tax (“AMT”) is a separately computed tax which was devised to ensure that at
least a minimum amount of income tax is paid. AMT is imposed only if and to the extent that a participant
would pay more tax if his or her income tax were calculated pursuant to the AMT rules than if calculated in
the regular manner. The difference between the option exercise price and the fair market value of the ISO
Shares on the date of exercise is includable as income for purposes of calculating the AMT for both a (i) a
vested ISO and (ii) an unvested ISO for which the participant makes a timely election under Section 83(b) of
the U.S. Internal Revenue Code (an “83(b) election”). If a participant exercises an ISO before it has fully
vested but does not make an 83(b) election, as the ISO Shares vest and the Company’s right to repurchase the
ISO Shares at the original issue price lapses, the participant will incur an AMT liability on the difference
between the option exercise price and the fair market value of the ISO Shares at vesting.
Alternative minimum taxable income is determined by adjusting regular taxable income for certain items,
increasing that income by certain tax preference items (including the difference 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. The exemption amount for 2007 is $45,000 in the case of a joint return, subject to
reduction under certain circumstances. 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 filing a joint
return). If a disqualifying disposition of the ISO Shares occurs in the same calendar year as the exercise of an
incentive stock option, those ISO Shares are not included in the AMT calculation.
Proxy Statement
A-5