We are concerned about the apparent shift in interpretations described above. Just as important, these changing positions highlight the fact that tax principles applicable to certain situations are being extended aggressively to other situations without a proper foundation. Taxpayers must clearly understand in advance the basis for liability not only as a means to order their business affairs but also as a matter of sound tax policy. Stock ownership programs, including ESPP's, provide a positive and powerful incentive to employees through wealth accumulation. Additional tax liabilities will weaken the motivation for implementing these important yet voluntary programs.
Withholding imposes a difficult burden on employers that administer the program.
Many employers do not have sufficient capability to monitor dispositions of shares granted under ESPP's. Further, if withholding is applied, employees will not retain shares after exercise of ISO or ESPP options, thereby frustrating the goals of such programs to enhance employee motivation and align employee and shareholder goals for the enterprise. Such programs have positive benefits for both individual employees and the economy as a whole and should be encouraged rather than discouraged. Guidance following such review should provide clear and prospective rules for tax treatment of ESPP's and other programs. Employers must have their employment tax obligations clearly defined before any liabilities and penalties are assessed.