FCC Press Release and Commissioner Statements on New Net Neutrality Rules

From FCC.gov

FCC Acts to Preserve Internet Freedom and Openness.
News Release: WordAcrobat
Genachowski Statement: WordAcrobat
Copps Statement: WordAcrobat
McDowell Statement: WordAcrobat
Clyburn Statement: WordAcrobat
Baker Statement: WordAcrobat

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FCC To Vote On “Open Internet” Order Tomorrow

From FCC.gov.


“The open Internet is a crucial American marketplace, and I believe that it is appropriate for the FCC to safeguard it by adopting an Order that will establish clear rules to protect consumers’ access.  The Commission has worked tirelessly to offer a set of guidelines that, while not as strong as they could be, will nonetheless protect consumers as they explore, learn, and innovate online.  As such, I plan to vote to approve in part and concur in part the Open Internet Order during the FCC’s open meeting tomorrow.

“I appreciate the hard work of my colleagues, and I am especially grateful for the commitment and dedication of Commissioner Copps, who has worked many years on behalf of consumers to ensure an open Internet.  I also want to thank the many stakeholders who have worked diligently on these issues and took the time to call, write, and visit me to convey their concerns.  I am also grateful to Chairman Genachowski, his staff, and the many others at the Commission who worked around-the-clock on this proceeding.

“As a Commissioner whose task is to safeguard consumers and the public interest, I will continue to watch the growth of the Internet and will applaud industry advances and milestones.  I will also seek out and facilitate any collaboration between myself, my colleagues, corporate stakeholders, and public interest representatives, as there can be no better path forward than that which is achieved through consensus.”

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What Type of Equity Incentive Should I Use?

Startups and emerging companies frequently have to answer this question: What type of equity incentives should they use to incentivize service providers? For C corporations and S corporations there are generally 4 possibilities:


NQOs are stock options that are not ISOs under the Internal Revenue Code. Gain on exercise is ordinary income and subject to income and employment tax withholding.

ISOs are stock options that qualify for certain special tax benefits under section 422 of the Internal Revenue Code (no ordinary income tax on exercise—but watch out for AMT (alternative minimum tax)—and capital gain on sale if certain restrictions and 2 holding periods are met). Among other restrictions, ISOs:

  1. can only be granted to employees, pursuant to a shareholder approved plan;
  2. must have a term not greater than 10 years (or 5 in certain circumstances);
  3. must have an exercise price not less than fair market value as of the grant date (or greater in certain circumstances); and
  4. not more than $100,000 in value can vest in any 1 year.

By restricted stock, I mean actual stock issuances, subject to repurchase rights at cost (or similar restrictions), which restrictions lapse over a vesting period. By RSUs I mean units which entitle an award recipient to receive shares upon vesting.

And by phantom equity I mean a wide range of contractual arrangements (such as stock appreciation rights) that are not actual shares of stock, but are designed to approximate the rewards of stock ownership.


The type of equity award a company should grant its employees depends in part on the stage of the company.For very early stage companies the tax consequences of restricted stock can be favorable (employee starts capital gains holding period) and bearable (meaning the tax owed upon grant, if there are no repurchase restrictions, or in connection with filing an election under Section 83(b), if there are restrictions, is not too painful). However, once a company’s value has gone up, such that issuing stock from a tax standpoint is too expensive or too uncomfortable, I usually recommend companies use NQOs for the following reasons:

  • The potential benefits of ISOs (no tax on exercise (as opposed to ordinary income on the exercise of an NQO), and nothing but capital gain on sale) are rarely in fact realized.Usually the holding periods to obtain these benefits aren’t met, and the employee then has ordinary income when the stock is sold in a liquidity event;
  • The AMT consequences to an employee upon an ISO exercise are frequently more significant than expected (and being surprised that you owe more in tax than you expected is never good);
  • The company gets a tax deduction on the exercise of an NQO;
  • NQOs are less complex (you don’t have to worry about AMT adjustments, the consequences of not meeting holding period requirements, etc.);
  • NQOs are more transparent from a tax reporting perspective because you calculate and have to make estimated tax payments up front at exercise (which reduces the likelihood of a surprise at tax return filing time);
  • Restricted stock and RSUs are not as favorable as options because employees lose control over the timing of the incidence of the tax (if no Section 83(b) election is made at grant, restricted stock is taxable upon vesting (when the value may be significantly greater than at grant, meaning much more tax is owed than might have been initially expected), as opposed to an option which is taxable when the employee decides to exercise). Having some control over the timing of the incidence of the tax is important; and
  • Phantom stock or similar arrangements tend to be complicated and employees view them as inferior to actual stock options.

The table below summarizes some of the key federal income tax consequences of each of these types of awards. It is a high level summary only. If you want more detail, please contact me.

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New Tax Act Extends 100% Tax Exclusion For 1 Year

Earlier this year Congress passed, and the President signed an act which provided a 100% exclusion from tax, including the alternative minimum tax, for gain on the sale of qualified small business stock held for more than 5 years. That benefit was set to expire at the end of this year.

However, now Congress and the President have extended this benefit to investments in qualified small business stock through the end of next year, 2011.

See Section 760 of the bill.

This is a welcome development for founders and investors in companies that qualify as qualified small businesses. Generally, these are:

  • C corporations
  • with less than $50M in gross assets
  • actively engaged
  • in a qualified trade or business (generally, not service businesses)

If you have any questions as to whether your venture could qualify for this benefit, do not hesitate to call Joe Wallin at 206 757 8184.

You can find Section 1202 of the Internal Revenue Code here.

From the summary of the bill:

Exclusion of small business capital gains. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years.

For more information, see here.

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Copy of Opinion Declaring Individual Mandate Unconstitutional

You can find a link to the opinion here: ED VA 10-188.

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