MEMORANDUM
TO: Participants in the High Country Bancorp, Inc. (the
"Company") Management Recognition Plan
DATE: December 16, 1998
FROM: J. Mark Poerio, Esquire
RE: Taxation of MRP Awards
================================================================
* * * * * * * * * * * * * * * * * * * * * * * * * *
THIS DOCUMENT CONSTITUTES PART OF
A PROSPECTUS COVERING SECURITIES
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
* * * * * * * * * * * * * * * * * * * * * * * * * *
This memorandum concerns the taxation of the awards that
will automatically occur under the Company's Management
Recognition Plan (the "MRP") upon its receipt of stockholder
approval. To facilitate your review, the discussion below is
divided as follows:
Part I: General Tax Principles and Application
to the MRP
Part II: Accelerated Taxation under Section 83(b)
Please understand that this memorandum is merely designed
to summarize the tax rules generally applicable to MRP awards.
We could provide individual tax advice to the recipients of MRP
awards ("Recipients"), should anyone desire assistance.
The deadline for making a Section 83(b) election is 30
days after the award date.
Taxation of MRP Awards
December 16, 1998
Page 2
PART I:
GENERAL TAX PRINCIPLES
Section 83 -- Generally. Section 83 of the Internal
Revenue Code (the "Code") controls the federal income taxation
of property that is transferred in connection with the
performance of services. In the absence of the Section 83(b)
election described in Part II, the recipient of restricted
property (such as an MRP award) recognizes income not on the
date of the award but on the date that his or her interest
vests. The amount of the recipient's taxable income will equal
the fair market value of the restricted property when vesting
occurs. Subsequent gain or loss is treated as capital gain,
with the amount that is included in the recipient's ordinary
income determining his or her basis in the property.
Operation of the MRP. The Bank's MRP will generally work
as follows for Recipients who do not make Section 83(b)
elections:
Date Event
---- -----
Award Date The MRP should provide a "Notice of
MRP Award" to each Recipient. The
notice will specify the number of
shares subject to the award.
Recipients will not receive shares
of the Company's common stock, or
be subject to federal income
taxation as the result of receiving
an award.
Each Vesting Date The MRP trust will transfer to each
Recipient a number of unrestricted
shares equal to the number of
shares that have become vested,
plus any dividends attributable to
those shares (provided that the
Recipient has not previously
terminated service).
Vesting will accelerate to 100% upon a Recipient's
termination of service due to retirement at or after age 55 with
at least 15 years of service, death, disability, or upon a
change in control (or, if earlier, the execution of an agreement
to effect a change in control). Special rules apply if a
transfer of Common Stock would cause the Recipient to own in
excess of 10% of the Common Stock.
Tax Withholding. In the case of Recipients who are non-
employee directors, federal income tax withholding is not
required when their MRP awards give rise to taxable income. On
the other hand, Recipients who are employees must satisfy
federal income tax withholding not only
_____________
1 This contrasts with the financial accounting treatment for
MRP awards (i.e., expense recognition is determined by the]
fair market on the date of the award).
Taxation of MRP Awards
December 16, 1998
Page 3
at the time their MRP awards generate taxable income, but also
before they may receive shares of Common Stock from the MRP
trust.
IRS Reporting. In the case of an employee, the ordinary
income arising from the vesting of MRP awards and from the
payment of tax bonuses is reportable on Form W-2, in Box 11. In
the case of a non-employee director, such income is reportable
on Form 1099-MISC, in Box 7.
PART II:
ACCELERATED TAXATION UNDER SECTION 83(b)
Section 83(b) Generally. Within 30 days after receiving
an MRP Award, a Recipient may make a special, irrevocable
election under Code Section 83(b), and thereby accelerate
ordinary income taxation to the date that the property transfer
occurred. The amount of the Recipient's ordinary income will
equal the fair market value of the Common Stock subject to the
MRP award as of the date on which the award occurred.
Subsequent gain (or loss, if the award is forfeited or
depreciates) would be long- or short-term capital gain, not
ordinary income.
Procedural Requirements. Section 83(b) elections must
include the information set forth in the form of Section 83(b)
election that we have attached hereto. Further, Section 83(b)
elections must be filed with the IRS Service Center where the
Recipient files his or her return (both within 30 days after the
transfer occurs, and as an attachment to his or her tax return
for the year to which the Section 83(b) election relates). A
copy of the Section 83(b) election must also be filed with the
Company.
Tax Caveat. In several recent private letter rulings
(which, while not binding precedent, are indicative of current
IRS policy), the Internal Revenue Service has taken the position
that, for purposes of Section 83 of the Code, no "transfer" of
property occurs when an individual receives an interest in an
employer's grantor trust. Because the trust associated with the
MRP is a grantor trust (by design, in order to secure deferred
taxation of awards), these rulings suggest that the IRS could
question whether Section 83(b) elections may be made with
respect to MRP awards. While we do not believe that this
theoretical possibility involves a substantial tax risk for
Recipients, each Recipient should contact his or her personal
tax counsel for independent advice about this issue.
Tax Reporting and Withholding. The rules described in
Part I would apply, as though vesting occurred on the date of
the Recipient's Section 83(b) election.
CONCLUSION
Whether or not a Recipient should make a Section 83(b)
election depends on a variety of factors, including the
Recipient's expectations as to (i) the short-term and long-term
future value of the Common Stock, (ii) the length of time the
Recipient is likely to hold the Common Stock, (iii) future tax
rates -- as to both income and capital gain, (iv) the risk of
forfeiture, and (v) the Recipient's ability to pay the taxes
associated with the MRP award.
HIGH COUNTRY BANCORP, INC.
MANAGEMENT RECOGNITION PLAN
________________________________________
Election to Include Value of Restricted Stock in Gross Income
in Year of Transfer Under Code Section 83(B)
________________________________________
* * * * * * * * * * * * * * * * * * * * * * * * * *
THIS DOCUMENT CONSTITUTES PART OF
A PROSPECTUS COVERING SECURITIES
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
* * * * * * * * * * * * * * * * * * * * * * * * * *
The undersigned hereby makes the election permitted under
Section 83(b) of the Internal Revenue Code of 1986, as amended,
with respect to the property described below, and supplies the
following information in accordance with the regulations
promulgated thereunder:
1. The name, address, and taxpayer identification or social
security number of the undersigned are:
Name: ________________________________
Address: ________________________________
________________________________
I.D. No. ________________________________
2. Description of the property with respect to which the
election is being made:
____________________( ) shares of common stock,
par value $0.01 per share, of High Country Bancorp,
Inc. (hereinafter, the "Common Stock").
3. The date on which the Common Stock was transferred is
______________ ___, 19__. The taxable year to which this
election relates is calendar year 19__.
4. The nature of the restrictions to which the Common Stock
is subject is as follows:
The Common Stock is forfeitable until it is earned
in accordance with Article VII of the High Country
Bancorp, Inc. Management Recognition Plan (the
"Plan"). Generally, the Common Stock becomes earned
and nonforfeitable by the undersigned at the rate of
25% per year of service. For special rules
Section 83(b) Election
Page 2 of 2
regarding the vesting of the undersigned's interest
in the Common Stock, see Section 7.01 of the Plan.
The Common Stock is non-transferable until the
undersigned's interest therein becomes vested and
nonforfeitable, pursuant to Section 8.03 of the
Plan.
5. Fair market value:
The fair market value at the time of transfer
(determined without regard to any restrictions other
then restrictions which by their terms will never
lapse) of the stock with respect to which this
election is being made is $_____ per share.
6. Amount paid for Common Stock:
The amount paid by taxpayer for said Common Stock is
$0.00 per share.
7. Furnishing statement to employer:
A copy of this statement has been furnished to High
Country Bancorp, Inc.
8. Notice:
Nothing contained herein shall be held to alter,
vary or affect any of the terms, provisions or
conditions of the Plan, or the award made thereunder
to the undersigned.
Dated: ____________ __, 199__.
______________________________
Taxpayer/Plan Participant