Y & T

The interests of the bonds are payable annually as from October 13, and the bonds will be quoted for trading as from October 17. The commission rate of the issue is 0.05 percent of the nominal value.

Higher natural gas liquid (NGL) margins at Wamsutter, Four Corners and Discovery were the key drivers of the improved earnings during the second- quarter and year-to-date periods.

Higher operational and maintenance expenses at Four Corners and Conway partially offset these benefits in the second quarter. For the year-to-date period, higher operational and maintenance expenses at Four Corners, lower first-quarter 2008 gathering and processing volumes and higher interest expense due to the Wamsutter acquisition partially offset these benefits.

In second-quarter 2008, the key measure of distributable cash flow per weighted-average limited partner unit was $0.95, compared with $0.73 for second-quarter 2007 -- an increase of 30 percent. Total distributable cash flow in second-quarter 2008 for limited-partner unitholders was $50 million, compared with $28.6 million for second-quarter 2007.

Year-to-date through June 30, distributable cash flow per weighted-average limited partner unit was $1.69, compared with $1.24 for the same time period in 2007 -- an increase of 36 percent. Total distributable cash flow for limited-partner unitholders for the first half of 2008 was $88.8 million, compared with $48.5 million for the first half of 2007.

The significant increase in distributable cash flow during second-quarter and year-to-date 2008 periods is due to the partnership's increased cash distributions from its Wamsutter and Discovery investments and improved results at Four Corners.

For the second quarter, the partnership raised its regular cash distribution to unitholders to $0.625 per unit, making its cash distribution coverage ratio 1.5 for the second quarter. Regular cash distributions to unitholders for the first half of 2008 have totaled $1.225 per unit, making the coverage ratio for the first half of the year 1.4. Maintaining a strong cash distribution coverage ratio helps insulate the partnership's distributions from volatile movements in commodity prices.

Second-quarter and year-to-date 2007 results throughout this release have been recast to reflect the partnership's 2007 acquisitions of an additional 20 percent of Discovery and a membership interest in the Wamsutter system. Because the acquisitions closed in the last half of 2007, those assets' first- and second-quarter 2007 net income was allocated to the general partner as pre-partnership income. As result, a higher portion of the partnership's total net income was allocated to the limited partners in the first six months of 2008, compared with the first six months of 2007.

Chief Operating Officer Perspective

"Williams Partners had an extremely successful second quarter, building on our track record of delivering solid results for our unitholders," said Alan Armstrong, chief operating officer of the general partner of Williams Partners. "We achieved robust growth in both earnings per unit and our key measure of distributable cash flow per unit.

"Our gathering and processing businesses are performing well, particularly in the West, where volumes have recovered following several challenges in the first quarter," Armstrong said. "The return to normal volumes enables us to fully benefit from the continued strong NGL margins."

Business Segment Performance

Business segment performance includes results for the partnership's three business segments: Gathering and Processing -- West, which includes Four Corners and the Wamsutter investment; Gathering and Processing -- Gulf, which includes the Discovery investment; and NGL Services, which includes the Conway fractionation and storage complex.

    Consolidated Segment Profit               2Q                    YTD
    Amounts in thousands                2008      2007       2008       2007

    Gathering and Processing - West   $86,778   $59,181   $137,183   $101,785
    Gathering and Processing - Gulf     8,446     3,670     21,957      7,308
    NGL Services                        3,414     5,606      8,955      5,659

    Consolidated Segment
    Profit                            $98,638   $68,457   $168,095   $114,752

    Recurring Consolidated Segment
     Profit*
    Amounts in thousands

    Gathering and Processing - West   $83,512   $59,181   $130,852   $102,066
    Gathering and Processing - Gulf     8,446     3,670     21,957      7,308
    NGL Services                        3,414     5,606      8,955      7,096

    Recurring Consolidated Segment
     Profit*                          $95,372   $68,457   $161,764   $116,470


    * A schedule reconciling segment profit to recurring segment profit is
      attached to this press release.

Higher NGL margins were the primary drivers of the second-quarter and year-to-date improvement in the Gathering & Processing -- West segment. Higher net product imbalance losses and slightly lower gathering and processing volumes at Four Corners during the first quarter partially offset these benefits in the year-to-date period. Both the lower volumes and higher net product imbalance losses were impacted by severe winter weather conditions and the shutdown of the Ignacio gas processing plant following the Nov. 28, 2007, fire. The Ignacio plant returned to service on Jan. 18.

Higher gross processing margins at Discovery drove the improvement for Gathering and Processing - Gulf in both the second-quarter and year-to-date periods.

The decline in recurring segment profit for NGL Services during the second quarter was due to higher net product imbalance losses at Conway. Gains and losses from product imbalances are an unpredictable component of operating costs. Higher fractionation and storage revenues and lower operating costs drove the improved results for the year-to-date period.

Reconciliations of the partnership's distributable cash flow for limited-partner unitholders to net income, as well as recurring segment profit to segment profit, are available on Williams Partners' web site at http://www.williamslp.com and as an attachment to this document.

Distributable Cash Flow and Recurring Segment Profit Definitions

Distributable cash flow per weighted average limited-partner unit is a key measure of the partnership's financial performance and available cash flows to unitholders.

Williams Partners defines distributable cash flow per limited-partner unit as distributable cash flow, as defined in the following paragraph, attributable to partnership operations plus the cash distributed by Wamsutter and Discovery. The total distributable cash flow attributable to partnership operations is then allocated among the general partner and the limited partners in accordance with the cash-distribution provisions of our partnership agreement. The resulting distributable cash flow attributable to partnership operations and to its limited partners is then divided by the weighted average limited partner-units outstanding to arrive at distributable cash flow per limited-partner unit.

Williams Partners defines distributable cash flow as net income plus depreciation, amortization and accretion, and the amortization of a natural gas purchase contract, less its equity earnings in Wamsutter and Discovery, as well as adjustments for certain non-cash, non-recurring items, plus reimbursements from Williams under an omnibus agreement and less maintenance capital expenditures.

Williams Partners defines recurring segment profit as segment profit excluding items of income or loss that it characterizes as unrepresentative of its ongoing operations. Schedules presenting Williams Partners' consolidated statements of income, segment profit and operating information are available on Williams Partners' web site at http://www.williamslp.com and as an attachment to this document.

Today's Analyst Call

Williams Partners' management will discuss the partnership's second-quarter 2008 financial results during an analyst presentation to be webcast live beginning at 11 a.m. EDT today.

Participants are encouraged to access the webcast at http://www.williamslp.com. Slides are available for viewing, downloading and printing.

A limited number of phone lines also will be available at (877) 558-9190. International callers should dial (706) 902-3248. Replays of the second- quarter webcast, in both streaming and downloadable podcast formats, will be available for two weeks at http://www.williamslp.com following the event.

Form 10-Q

The partnership will file its Form 10-Q with the Securities and Exchange Commission today. The document will be available on both the SEC and Williams Partners web sites.

About Williams Partners L.P. (NYSE: WPZ)

Williams Partners L.P. is a publicly traded master limited partnership that owns natural gas gathering, transportation, processing and treating assets serving regions where producers require large scale and highly reliable services, including the Gulf of Mexico, the San Juan Basin in New Mexico and Colorado, and the Washakie Basin in Wyoming. The partnership also serves the natural gas liquids (NGL) market through its NGL fractionating and storage assets. The general partner is Williams Partners GP LLC. More information about the partnership is available at http://www.williamslp.com. Go to http://www.b2i.us/irpass.asp?BzID=1296&to=ea&s=0 to join our e-mail list.

Williams Partners' reports, filings and other public announcements might contain or incorporate by reference forward-looking statements -- statements that do not directly or exclusively relate to historical facts. You typically can identify forward-looking statements by the use of forward-looking words, such as "anticipate," believe," "could," "continue," "estimate," "expect," "forecast," "may," "plan," "potential," "project," "schedule," "will" and other similar words. These statements are based on our intentions, beliefs and assumptions about future events and are subject to risks, uncertainties and other factors. Actual results could differ materially from those contemplated by the forward-looking statements. In addition to any assumptions, risks, uncertainties and other factors referred to specifically in connection with such statements, other factors could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements. Those risks, uncertainties and factors include, among others: Williams Partners may not have sufficient cash from operations to enable it to pay the minimum distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner; because of the natural decline in production from existing wells and competitive factors, the success of Williams Partners' gathering and transportation businesses depends on its ability to connect new sources of natural gas supply, which is dependent on factors beyond its control; any decrease in supplies of natural gas could adversely affect Williams Partners' business and operating results; lower natural gas and oil prices could adversely affect Williams Partners' fractionation and storage businesses; Williams Partners' processing, fractionation and storage businesses could be affected by any decrease in natural gas liquids (NGL) prices or a change in NGL prices relative to the price of natural gas; Williams Partners depends on certain key customers and producers for a significant portion of its revenues and supply of natural gas and NGLs and the loss of any of these key customers or producers could result in a decline in its revenues and cash available to pay distributions; if third-party pipelines and other facilities interconnected to Williams Partners' pipelines and facilities become unavailable to transport natural gas and NGLs or to treat natural gas, Williams Partners' revenues and cash available to pay distributions could be adversely affected; Williams Partners does not own all of the interests in Wamsutter LLC (Wamsutter), the Conway fractionator or Discovery Producer Services LLC (Discovery), which could adversely affect Williams Partners' ability to operate and control these assets in a manner beneficial to it; Williams Partners' results of storage and fractionation operations are dependent upon the demand for propane and other NGLs and a substantial decrease in this demand could adversely affect Williams Partners' business and operation results; Discovery and Wamsutter may reduce their cash distributions to Williams Partners in some situations; Discovery's interstate tariff rates and terms and conditions are subject to review and possible adjustment by federal regulators and are subject to changes in policy by federal regulators, which could have a material adverse effect on Williams Partner's business and operating results; Williams Partners' operations are subject to operational hazards and unforeseen interruptions for which it may not be adequately insured; Williams Partners does not operate all of its assets and its reliance on others to operate its assets and to provide other services could adversely affect Williams Partners' business and operating results. Williams Partners' partnership agreement limits its general partner's fiduciary duties to unitholders and restricts the remedies available to unitholders for actions taken by its general partner that might otherwise constitute breaches of fiduciary duty; The Williams Companies, Inc.'s (Williams) public indentures and Williams Partners' credit facility contain financial and operating restrictions that may limit its access to credit; in addition, Williams Partners' ability to obtain credit in the future will be affected by Williams' credit ratings; Williams Partners' future financial and operating flexibility may be adversely affected by restrictions in Williams Partners' debt agreements and by its leverage; Williams Partners may not be able to grow or effectively manage growth; Williams Partners has a holding company structure in which its subsidiaries conduct its operations and own its operating assets, which may affect Williams Partners' ability to make payments on its debt obligations and distributions on its common units; common units held by Williams eligible for future sale may have adverse effects on the price of Williams Partners' common units; Williams controls Williams Partners' general partner, which has sole responsibility for conducting Williams Partners' business and managing its operations; Williams Partners' general partner and its affiliates have conflicts of interests with Williams Partners and limited fiduciary duties, and they may favor their own interests to the detriment of Williams Partners' unitholders; even if unitholders are dissatisfied, they currently have little ability to remove Williams Partners' general partner without its consent. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investors are urged to closely consider the disclosures and risk factors in Williams Partners' reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission available from Williams Partners' offices or from Williams Partners' website at http://www.williamslp.com.

     Contact:          Jeff Pounds
                       Williams (media relations)
                       (918) 573-3332

                       Sharna Reingold
                       Williams (investor relations)
                       (918) 573-2078


    Reconciliation of Non-GAAP Measures
    (UNAUDITED)

This press release includes certain financial measures, Recurring Segment Profit, Distributable Cash Flow and Distributable Cash Flow per Limited Partner Unit that are non-GAAP financial measures as defined under the rules of the Securities and Exchange Commission.

For Williams Partners L.P., Recurring Segment Profit excludes items of income or loss that we characterize as unrepresentative of our ongoing operations. Management believes Recurring Segment Profit provides investors meaningful insight into Williams Partners L.P.'s results from ongoing operations.

For Williams Partners L.P. we define Distributable Cash Flow as net income (loss) plus depreciation, amortization and accretion, and the amortization of a natural gas purchase contract, less our earnings from equity investments, as well as adjustments for certain non-cash, non-recurring items, plus reimbursements from Williams under an omnibus agreement and less maintenance capital expenditures. For our equity investments, Wamsutter and Discovery, we define Distributable Cash Flow as net income (loss) plus depreciation, amortization and accretion and less maintenance capital expenditures. We also adjust for certain non-cash, non-recurring items. Our equity share of Wamsutter's Distributable Cash Flow is based on the distribution provisions of the Wamsutter LLC Agreement. Our equity share of Discovery's Distributable Cash Flow is 60%.

For Williams Partners L.P. we define Distributable Cash Flow per Limited Partner Unit as Distributable Cash Flow, as defined in the preceding paragraph, attributable to partnership operations plus the actual cash distributed by Wamsutter and Discovery. The total Distributable Cash Flow attributable to partnership operations is then allocated between the general partner and the limited partners in accordance with the cash distribution provisions of our partnership agreement. The resulting Distributable Cash Flow attributable to partnership operations and to its limited partners is then divided by the weighted average limited partner units outstanding to arrive at Distributable Cash Flow per Limited Partner Unit.

This press release is accompanied by a reconciliation of these non-GAAP financial measures to their nearest GAAP financial measures. Management uses these financial measures because they are accepted financial indicators used by investors to compare company performance. In addition, management believes that these measures provide investors an enhanced perspective of the operating performance of the Partnership's assets and the cash that the business is generating. Neither Recurring Segment Profit nor Distributable Cash Flow are intended to represent cash flows for the period, nor are they presented as an alternative to net income (loss) or cash flow from operations. Distributable Cash Flow per Limited Partner is not presented as an alternative to net income per unit. They should not be considered in isolation or as substitutes for a measure of performance prepared in accordance with United States generally accepted accounting principles.

    (Thousands, except           2007*                        2008
     per-unit amounts) 1st Qtr  2nd Qtr   Y-T-D     1st Qtr  2nd Qtr   Y-T-D

    Williams Partners L.P.
    Reconciliation of Non-GAAP
    "Recurring Segment Profit"
    to GAAP "Segment Profit"


    Gathering and
     Processing - West $42,604  $59,181  $101,785  $50,405  $86,778  $137,183
    Gathering and
     Processing - Gulf   3,638    3,670     7,308   13,511    8,446    21,957
    NGL Services            53    5,606     5,659    5,541    3,414     8,955

    Segment Profit      46,295   68,457   114,752   69,457   98,638   168,095
     Non-recurring
      Items:
      Gathering and
       Processing -
       West
       Involuntary
        conversion
        gain resulting
        from Ignacio
        fire                 -        -         -        -   (3,266)   (3,266)
       Wamsutter
        customer
        contract
        adjustment
        included in
        equity earnings      -        -         -   (3,065)       -    (3,065)
       2005-2006
        retroactive
        charges for
        customer
        contract          (848)       -      (848)       -        -         -
       Adjust
        right-of-way
        prepaid expense  1,243        -     1,243        -        -         -
       Adjust 2006
        incentive
        compensation
        accrual           (899)       -      (899)       -        -         -
       Adjust asset
        retirement
        obligation         785        -       785        -        -         -
      NGL Services
       Product imbalance
        valuation
        adjustment       1,437        -     1,437        -        -         -
    Recurring Segment
     Profit            $48,013  $68,457  $116,470  $66,392  $95,372  $161,764


    * Because Wamsutter and the additional 20% interest in Discovery were
      affiliates of Williams at the time of these acquisitions, the
      transactions were between entities under common control, and have been
      accounted for at historical cost.  Accordingly, these tables have been
      recast to reflect the Equity Earnings in Wamsutter and Discovery
      throughout the periods presented.



    (Thousands, except                                      2007*
     per-unit amounts)                        1st Qtr     2nd Qtr      Y-T-D

    Williams Partners L.P.
    Reconciliation of Non-GAAP
     "Distributable Cash Flow  per Limited
     Partner Unit" GAAP "Net income"


    Net income                                $25,137     $46,742     $71,879
    Depreciation, amortization and
     accretion                                 13,178      11,234      24,412
    Amortization of natural gas purchase
     contract                                   1,188       1,189       2,377
    Non-cash amortization of debt issuance
     costs included in interest expense           404         403         807
    Involuntary conversion gain resulting
     from Ignacio fire                              -           -           -
    Equity earnings                           (15,259)    (24,433)    (39,692)
    Reimbursements from Williams under
     omnibus agreement                            842         825       1,667
    Maintenance capital expenditures (a)       (7,621)     (8,665)    (16,286)

    Distributable Cash Flow Excluding
     Equity Investments                       $17,869     $27,295     $45,164

    Plus: Wamsutter cash distributions to
     Williams Partners L.P.                         -           -           -
    Plus: Discovery's cash distributions
     to Williams Partners L.P.                  3,600      10,869      14,469

    Distributable cash flow attributable
     to partnership operations                 21,469      38,164      59,633

    Distributable Cash Flow attributable
     to partnership operations allocable
     to general partner                         1,487       9,607      11,094
    Distributable Cash Flow attributable
     to limited partnership operations
     allocable to limited partners            $19,982     $28,557     $48,539

    Weighted average number of units
     outstanding:                          39,358,798  39,358,798  39,358,798

    Distributable Cash Flow attributable
     to partnership operations per limited
     partner unit:                              $0.51       $0.73       $1.24

    (a) Maintenance capital expenditures
     includes certain well connection
     capital.

    Wamsutter
    Reconciliation of Non-GAAP
     "Distributable Cash Flow" to GAAP
     "Net income"

    Net income                                $11,328     $20,558     $31,886
    Depreciation, amortization and
     accretion                                  4,258       4,440       8,698
    Maintenance capital expenditures           (4,535)     (5,763)    (10,298)

    Distributable Cash Flow - 100%            $11,051     $19,235     $30,286

    Discovery Producer Services
    Reconciliation of Non-GAAP
     "Distributable Cash Flow" to GAAP
     "Net income"

    Net income                                 $6,551      $6,460      13,011
    Depreciation, amortization and
     accretion                                  6,483       6,508      12,991
    Maintenance capital expenditures             (429)       (595)     (1,024)

    Distributable Cash Flow - 100%            $12,605     $12,373     $24,978

    Distributable Cash Flow - our 60%
     interest                                  $7,563      $7,424     $14,987



    (Thousands, except                                      2008
     per-unit amounts)                        1st Qtr     2nd Qtr      Y-T-D

    Williams Partners L.P.
    Reconciliation of Non-GAAP
     "Distributable Cash Flow  per Limited
     Partner Unit "GAAP "Net income"


    Net income                                $43,629     $71,822    $115,451
    Depreciation, amortization and
     accretion                                 11,226      11,002      22,228
    Amortization of natural gas purchase
     contract                                       -           -           -
    Non-cash amortization of debt issuance
     costs included in interest expense           489         459         948
    Involuntary conversion gain resulting
     from Ignacio fire                              -      (3,266)     (3,266)
    Equity earnings                           (34,815)    (46,050)    (80,865)
    Reimbursements from Williams under
     omnibus agreement                            771         865       1,636
    Maintenance capital expenditures (a)       (8,534)     (2,497)    (11,031)

    Distributable Cash Flow Excluding
     Equity Investments                       $12,766     $32,335     $45,101

    Plus: Wamsutter cash distributions to
     Williams Partners L.P.                    22,704      26,603      49,307
    Plus: Discovery's cash distributions
     to Williams Partners L.P.                 16,800      15,600      32,400

    Distributable cash flow attributable
     to partnership operations                 52,270      74,538     126,808

    Distributable Cash Flow attributable
     to partnership operations allocable
     to general partner                        13,431      24,565      37,996
    Distributable Cash Flow attributable
     to limited partnership operations
     allocable to limited partners            $38,839     $49,973     $88,812

    Weighted average number of units
     outstanding:                          52,774,728  52,774,728  52,774,728

    Distributable Cash Flow attributable
     to partnership operations per limited
     partner unit:                              $0.74       $0.95       $1.69

    (a) Maintenance capital expenditures
     includes certain well connection
     capital.

    Wamsutter
    Reconciliation of Non-GAAP
     "Distributable Cash Flow" to GAAP
     "Net income"

    Net income                                $21,194     $37,480     $58,674
    Depreciation, amortization and
     accretion                                  5,228       5,213      10,441
    Maintenance capital expenditures           (3,245)     (6,258)     (9,503)

    Distributable Cash Flow - 100%            $23,177     $36,435     $59,612

    Discovery Producer Services
    Reconciliation of Non-GAAP
     "Distributable Cash Flow" to GAAP
     "Net income"

    Net income                                $22,701     $14,282      36,983
    Depreciation, amortization and
     accretion                                  6,983       6,802      13,785
    Maintenance capital expenditures             (187)       (285)       (472)

    Distributable Cash Flow - 100%            $29,497     $20,799     $50,296

    Distributable Cash Flow - our 60%
     interest                                 $17,698     $12,479     $30,178

    * Because Wamsutter and the additional 20% interest in Discovery were
      affiliates of Williams at the time of these acquisitions, the
      transactions were between entities under common control, and have been
      accounted for at historical cost.  Accordingly, these tables have been
      recast to reflect the Equity Earnings in Wamsutter and Discovery
      throughout the periods presented.



    Consolidated Statements of Income
    (UNAUDITED)
                                                           2007*
    (Thousands, except per-unit amounts)      1st Qtr     2nd Qtr      Y-T-D

    Revenues:
         Product sales:
              Affiliate                       $56,552     $62,119    $118,671
              Third-party                       6,313       5,070      11,383
         Gathering and processing:
              Affiliate                         9,491       8,743      18,234
              Third-party                      51,103      51,422     102,525
         Storage                                6,410       6,818      13,228
         Fractionation                          1,917       2,616       4,533
         Other                                  2,029       2,481       4,510

    Total revenues                            133,815     139,269     273,084

    Cost and expenses:
         Product cost and shrink replacement:
              Affiliate                        21,725      18,520      40,245
              Third-party                      20,470      26,157      46,627
         Operating and maintenance expense:
              Affiliate                        14,328      10,484      24,812
              Third-party                      28,185      23,759      51,944
         Depreciation, amortization and
          accretion                            13,178      11,234      24,412
         General and administrative expense:
              Affiliate                         9,406       9,644      19,050
              Third-party                         664       1,189       1,853
         Taxes other than income                2,114       2,626       4,740
         Other, net                               460         198         658

    Total costs and expenses                  110,530     103,811     214,341

    Operating income                           23,285      35,458      58,743

    Equity earnings - Wamsutter                11,328      20,558      31,886
    Equity earnings - Discovery                 3,931       3,875       7,806
    Interest expense:
         Affiliate                                (15)        (15)        (30)
         Third-party                          (14,355)    (14,359)    (28,714)
    Interest income                               963       1,225       2,188

    Net income                                $25,137     $46,742     $71,879

    Allocation of net income*
       Net income                             $25,137     $46,742     $71,879
       Allocation of net income to general
        partner                                12,912      22,417      35,329
       Allocation of net income to limited
        partners                               12,225      24,325      36,550

       Net income, per common and
        subordinated unit                       $0.31       $0.48       $0.79
       Weighted average number of units
        outstanding                        39,358,798  39,358,798  39,358,798



                                                            2008
    (Thousands, except per-unit amounts)      1st Qtr     2nd Qtr      Y-T-D

    Revenues:
         Product sales:
              Affiliate                       $78,122     $94,134    $172,256
              Third-party                       4,221       9,741      13,962
         Gathering and processing:
              Affiliate                         8,790       9,847      18,637
              Third-party                      46,210      49,548      95,758
         Storage                                7,333       7,102      14,435
         Fractionation                          3,292       4,804       8,096
         Other                                  2,394       3,069       5,463

    Total revenues                            150,362     178,245     328,607

    Cost and expenses:
         Product cost and shrink replacement:
              Affiliate                        22,033      27,686      49,719
              Third-party                      30,065      38,323      68,388
         Operating and maintenance expense:
              Affiliate                        23,133      16,548      39,681
              Third-party                      23,951      29,984      53,935
         Depreciation, amortization and
          accretion                            11,226      11,002      22,228
         General and administrative expense:
              Affiliate                         9,876      12,385      22,261
              Third-party                         928         749       1,677
         Taxes other than income                2,505       2,167       4,672
         Other, net                               333      (2,811)     (2,478)

    Total costs and expenses                  124,050     136,033     260,083

    Operating income                           26,312      42,212      68,524

    Equity earnings - Wamsutter                21,194      37,480      58,674
    Equity earnings - Discovery                13,621       8,570      22,191
    Interest expense:
         Affiliate                                (25)        (15)        (40)
         Third-party                          (17,648)    (16,668)    (34,316)
    Interest income                               175         243         418

    Net income                                $43,629     $71,822    $115,451

    Allocation of net income*
       Net income                             $43,629     $71,822    $115,451
       Allocation of net income to general
        partner                                 8,911      23,008      31,919
       Allocation of net income to limited
        partners                               34,718      48,814      83,532

       Net income, per common and
        subordinated unit                       $0.66       $0.92       $1.58
       Weighted average number of units
        outstanding                        52,774,728  52,774,728  52,774,728


    * Because Wamsutter and the additional 20% interest in Discovery were
      affiliates of Williams at the time of these acquisitions, the
      transactions were between entities under common control, and have been
      accounted for at historical cost.  Accordingly, these tables have been
      recast to reflect the  Equity Earnings in Wamsutter and Discovery
      throughout the periods presented.  Net income applicable to periods
      before the acquisitions of these businesses is fully allocated to our
      general partner, which results in no impact to net income per limited
      partner unit.



    Segment Profit & Operating Statistics
    (UNAUDITED)

                                  2007*                      2008
    (Thousands)         1st Qtr  2nd Qtr   Y-T-D   1st Qtr  2nd Qtr   Y-T-D

    Gathering and
     Processing - West
    Segment revenues   $120,428 $125,047 $245,475 $132,333 $158,563 $290,896
    Product cost and
     shrink replacement  39,675   42,313   81,988   47,446   61,144  108,590
    Operating and
     maintenance expense 33,097   29,487   62,584   40,893   36,677   77,570
    Depreciation,
     amortization and
     accretion           12,175   10,203   22,378   10,299   10,136   20,435
    Direct general and
     administrative
     expenses             1,821    1,797    3,618    1,930    2,058    3,988
    Other, net            2,384    2,624    5,008    2,554     (750)   1,804

    Segment operating
     income              31,276   38,623   69,899   29,211   49,298   78,509
    Equity earnings      11,328   20,558   31,886   21,194   37,480   58,674

    Segment profit      $42,604  $59,181 $101,785  $50,405  $86,778 $137,183

    Gathering and
     Processing - Gulf
    Segment revenues       $561     $459   $1,020     $567     $546   $1,113
    Operating and
     maintenance expense    550      361      911      524      519    1,043
    Depreciation and
     accretion              304      303      607      153      151      304
    Direct general and
     administrative
     expenses                 -        -        -        -        -        -
    Other, net                -        -        -        -        -        -

    Segment operating
     loss                  (293)    (205)    (498)    (110)    (124)    (234)
    Equity earnings       3,931    3,875    7,806   13,621    8,570   22,191

    Segment profit       $3,638   $3,670   $7,308  $13,511   $8,446  $21,957

    NGL Services
    Segment revenues    $12,826  $13,763  $26,589  $17,462  $19,136  $36,598
    Product cost          2,520    2,364    4,884    4,652    4,865    9,517
    Operating and
     maintenance expense  8,866    4,395   13,261    5,667    9,336   15,003
    Depreciation and
     accretion              699      728    1,427      774      715    1,489
    Direct general and
     administrative
     expenses               498      470      968      544      700    1,244
    Other, net              190      200      390      284      106      390

    Segment profit          $53   $5,606   $5,659   $5,541   $3,414   $8,955


    * Because Wamsutter  and the additional 20% interest in Discovery were
      affiliates of Williams at the time of these acquisitions, the
      transactions were between entities under common control, and have been
      accounted for at historical cost.  Accordingly, these tables have been
      recast to reflect the Equity Earnings in Wamsutter and Discovery
      throughout the periods presented.


    Williams Partners:
     Conway storage
      revenues            $6,410    $6,818 $13,228    $7,333  $7,102 $14,435
     Conway fractionation
      volumes (bpd) -
      our 50%             31,316    36,220  33,781    33,103  38,173  35,638
     Carbonate Trend
      gathering volumes
      (BBtu/d)                25        19      22        24      23      23
    Williams Four
     Corners:
     Gathering volumes
      (BBtu/d)             1,453     1,462   1,457     1,316   1,410   1,363
     Fee-based processing
      volumes (BBtu/d)       866       872     869       796     896     846
      NGL equity sales
       (million gallons)      46        39      85        36      43      79
      NGL margin
       ($/gallon)          $0.41     $0.53   $0.46     $0.74   $0.78   $0.76
      NGL production
       (million gallons)     140       137     277       112     140     252
    Wamsutter - 100%:
     Gathering volumes
     (BBtu/d)                510       522     516       434     521     477
     Fee-based processing
      volumes (BBtu/d)       302       312     307       252     312     282
      NGL equity sales
       (million gallons)      28        27      55        41      36      77
      NGL margin
       ($/gallon)          $0.27     $0.40   $0.33     $0.58   $0.63   $0.60
      NGL production
       (million gallons)     101       103     204       106     114     220
    Discovery Producer
     Services - 100%
     Plant inlet volumes
      (BBtu/d)               548       616     582       627     614     621
     Gross processing
      margin ($/MMBtu)     $0.23     $0.24   $0.24     $0.45   $0.36   $0.41
      NGL equity sales
       (million gallons)      18        25      43        37      23      60
      NGL production
       (million gallons)      56        66     122        70      58     128

SOURCE Williams Partners L.P.

http://www.williamslp.com

The following illustrates the funds' losses:

                                                  Y-T-D Return
 Ticker   Bond Fund                               as of 12/31/07
 ------   ---------                               --------------
 RMH      RMK High Income Fund                         -65.53%
 RHY      RMK Multi-Sector High Income Fund            -65.09%
 RMA      RMK Advantage Income Fund                    -66.68%
 RSF      RMK Strategic Income Fund                    -66.92%

According to attorney Vincent J. Imbesi, who is a member of PIABA, a bar association for attorneys who limit their practice to representing investors in FINRA arbitration, "Representatives employed by Morgan Keegan marketed the funds to investors as an alternative to money market funds. Investors thought they were purchasing safe, conservative funds. They received the opposite."

Investors can obtain a free legal consultation by contacting Mr. Imbesi at 1-(888) 529-4669, regardless of the amount of money lost (most law firms require a minimum loss of $50,000.)

The law firm of Napoli Bern Ripka has recovered over one billion dollars ($1,000,000,000) for its clients. The firms' attorneys have represented hundreds of investors in FINRA arbitrations. Napoli Bern Ripka, LLP ("NBR") is a nationally known plaintiff's law firm specializing in a wide variety of litigation areas, with offices in New York City, Long Island, New Jersey, Philadelphia and Oklahoma. In addition to Stock Fraud claims, the firm represents clients in personal injury matters, medical and other professional malpractice, and pharmaceutical products liability (diet drugs, Rezulin, Trasylol, Factor 8) as well as toxic tort and other environmental claims. The firm has more than 60 years of combined litigation experience in trial and appellate courts. Since its establishment 10 years ago, the firm has settled and/or recovered more than $2 billion for its clients. Senior Partners Marc Jay Bern and Paul J. Napoli have been chosen for inclusion in New York Super Lawyers(r) for 2007 and both are members of the prestigious Litigation Counsel of America. Both Bern and Napoli are also long-time members of the invitation-only Million Dollar Advocates Forum.

No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers.

This news release was distributed by GlobeNewswire, www.globenewswire.com

SOURCE: Napoli Bern Ripka LLP

Napoli Bern Ripka, LLP
          Vincent J. Imbesi
          1-(888) 529-4669
          vimbesi@napolibern.com
          www.napolibern.com

transfer of stock pursuant to the exercise of options granted under an employee stock purchase plan. These proposed regulations provide guidance to assist taxpayers in complying with section 423 in addition to clarifying certain rules regarding options granted under an employee stock purchase plan. This document also contains proposed regulations under sections 421 and 422 of the Code.

EFFECTIVE DATE: Written or electronic comments must be received by October 27, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106251-08), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-106251-08), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov/ (IRS REG-106251-08).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, Thomas Scholz at (202) 622-6030; concerning submissions of comments, and/or to request a hearing, Oluwafunmilayo Taylor, at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: This document contains proposed amendments to 26 CFR part 1 under section 423 of the Code. This document also contains minor proposed amendments to 26 CFR part 1 under sections 421 and 422 of the Code.

Section 423 was added to the Code by section 221(a) of the Revenue Act of 1964, Public Law 88-272 (78 Stat. 63 (1964)). Changes to the applicable law concerning section 423 were made by sections 1402(b)(1)(C) and 1402(b)(2) of the Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1731 and 1732-1733 (1976)); section 1001(b)(5) of the Deficit Reduction Act of 1984, Public Law 98-369 (98 Stat. 1011 (1984)); section 1114 of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2451 (1986)); and sections 11801(c)(9)(D)(i)-(ii) and 11801(c)(9)(E) of the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508 (104 Stat. 1388-525 (1990)).

Regulations under section 423 were published in the Federal Register on June 23, 1966 (TD 6887). These regulations were amended on September 27, 1979 (TD 7645), October 31, 1980 (TD 7728), and December 1, 1988 (TD 8235). In Notice 2004-55, 2004-34 IRB 319 (August 23, 2004), (see [Section] 601.601(d)(2)(ii)(b)), the IRS and the Treasury Department requested comments concerning whether the existing regulations under section 423 should be amended, and if so, what issues should be addressed. Two comment letters were submitted in response to Notice 2005-55 and the suggestions in those letters are addressed in this preamble.

In general, the income tax treatment of the grant of an option to purchase stock in connection with the performance of services and of the transfer of stock pursuant to the exercise of the option is determined under section 83 and the regulations thereunder. However, section 421 provides special rules for determining the income tax treatment of the transfer of shares of stock pursuant to the exercise of an option if the requirements of sections 422(a) or 423(a), as applicable, are met. Section 422 applies to incentive stock options and section 423 applies to options granted under an employee stock purchase plan (collectively, statutory options).

Under section 421, if a share of stock is transferred to an individual pursuant to the exercise of a statutory option, there is no income at the time of exercise of the option with respect to the transfer and no deduction under section 162 is allowed to the employer corporation with respect to the transfer.

Section 423(a) provides that section 421 applies to the transfer of stock to an individual pursuant to the exercise of an option granted under an employee stock purchase plan if: (i) no disposition of the stock is made within two years from the date of grant of the option or within one year from the date of transfer of the share, and (ii) at all times during the period beginning on the date of grant and ending on the day three months before the exercise of the option, the individual is an employee of either the corporation granting the option or a parent or subsidiary of such corporation, or a corporation (or a parent or subsidiary of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) applies. Section 423(b) sets forth several requirements that must be met for a plan to qualify as an employee stock purchase plan. Section 423(c) provides a special rule that is applicable where the option exercise price is between 85 and 100 percent of the fair market value of the stock at the time the option was granted.

Section 424 provides special rules applicable to statutory options, including rules concerning the modification of statutory options and the substitution or assumption of an option by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation. Section 424 also contains definitions of certain terms, including disposition, parent corporation, and subsidiary corporation. Finally, section 424 provides special rules related to attribution of stock ownership and the effect of stockholder approval on the date of grant of a statutory option.

Explanation of Provisions

These proposed regulations would provide a comprehensive set of rules governing stock options issued under an employee stock purchase plan and would incorporate substantially all of the rules contained in the existing regulations under section 423. These proposed regulations are comprised of two sections: Section 1.423-1, applicability of section 421(a); and [Section] 1.423-2, employee stock purchase plan defined. These proposed regulations would amend the existing regulations under section 423 in several ways. First, these proposed regulations would update the existing regulations to incorporate statutory changes and to make them consistent, where appropriate, with the regulations under section 422 related to incentive stock options. The regulations under section 422 were last updated in 2004. See TD 9144, 2004-26 IRB 413. Second, these proposed regulations would update the existing regulations to provide additional guidance in certain areas as discussed below. Finally, these proposed regulations would also update the existing regulations to remove obsolete rules.

1. General Requirements

Under [Section] 1.423-2(a)(1) of these proposed regulations, an employee stock purchase plan must meet the requirements of paragraphs (i) through (ix) of [Section] 1.423-2(a)(2). The terms of the plan, or an offering under the plan, must satisfy the requirements of paragraphs (iii) through (ix) of [Section] 1.423-2(a)(2). Consistent with [Section] 1.422-2(b)(1), [Section] 1.423-2(a)(1) of these proposed regulations would provide that the plan and the terms of an offering must be in writing or electronic form, provided that such writing or electronic form is adequate to establish the terms of the plan or offering.

Section 1.423-2(a)(2) of these proposed regulations lists the requirements that must be met for qualification as an employee stock purchase plan and provides cross references to the specific section of

[Page Number 43877]

these regulations that addresses each requirement.

Under [Section] 1.423-2(a)(3) of these proposed regulations, if the terms of an option are inconsistent with the terms of the employee stock purchase plan or an offering under the plan, then the option will not be treated as granted under an employee stock purchase plan. (Section 1.423-2(a)(2) of the existing regulations has been re-numbered as [Section] 1.423-2(a)(3) of these proposed regulations.) If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, then the offering will not meet the requirements of [Section] 1.423-2(e) of these proposed regulations, which generally requires that options be granted to all employees of any corporation whose employees are granted options under an employee stock purchase plan. As a result, none of the options granted under the offering will be eligible for the special tax treatment of section 421. Example 1 in [Section] 1.423-2(a)(4) illustrates this principle. Section 1.423-2(a)(4) of these proposed regulations contains additional examples to illustrate the principles of [Section] 1.423-2(a)(3).

If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an individual who is not entitled to the grant of an option under the terms of the plan or offering, then the option will not be treated as an option granted under an employee stock purchase plan, and the grant of the option will not disqualify the options granted under the offering. Examples 2 and 3 in [Section] 1.423-2(a)(4) of these proposed regulations illustrate this principle. Example 2 also appears in [Section] 1.423-2(a)(2) of the existing regulations.

If, at the time of grant, an option qualifies as an option granted under an employee stock purchase plan, but the terms of the option are not satisfied, then the option will not be treated as granted under an employee stock purchase plan. However, this failure to comply with the terms of the option will not disqualify the options granted under the plan or offering. Example 4 in [Section] 1.423-2(a)(4) of these proposed regulations illustrates this principle.

2. Stockholder Approval of the Employee Stock Purchase Plan

To qualify as an employee stock purchase plan, section 423(b)(2) requires that the plan be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted. These proposed regulations would provide the same basic requirements for stockholder approval as those included in the existing regulations. Consistent with [Section] 1.422-2(b)(2), these proposed regulations would provide additional guidance concerning the circumstances under which stockholder approval is required.

These proposed regulations, like the existing regulations, would require stockholder approval if there is a change in the aggregate number of shares or in the employees eligible to be granted options under the plan. The standard for determining when stockholder approval is required under these proposed regulations generally is the same as under the existing regulations. These proposed regulations would clarify the requirements for stockholder approval and would provide a more comprehensive list of situations that require new stockholder approval of the plan. In particular, these proposed regulations would clarify that new stockholder approval is required if there is a change in the shares with respect to which options are issued or a change in the granting corporation.

For example, assume that S, a wholly owned subsidiary of P, adopts an employee stock option plan under which options for S stock will be granted to S employees, and the plan is approved by the stockholder of S (in this case, P) within the applicable 24-month period. If S later amends the plan to provide for the grant of options to acquire P stock (rather than S stock), S must obtain approval from the stockholders of S (in this case, P) within 12 months before or after the date of the amendment of the plan because the amendment of the plan to allow the grant of options for P stock is considered the adoption of a new plan. See paragraph (iii) of Example 1 in [Section] 1.423-2(c)(5) of these proposed regulations. This conclusion differs from that in paragraph (iii) of Example 1 under [Section] 1.422-2(b)(6), which concludes that the stockholders of P rather than the stockholders of S must approve the plan as a result of its amendment to provide for the grant of options to acquire P stock. The IRS and the Treasury Department invite comment on this result and are proposing a conforming change to Example 1, paragraph (iii) under [Section] 1.422-2(b)(6).

These proposed regulations also would provide additional guidance regarding the application of the stockholder approval requirements where an employee stock purchase plan is assumed in connection with a corporate transaction. Example 3 in [Section] 1.423-2(c)(5) of these proposed regulations illustrates this principle.

3. Maximum Aggregate Number of Shares

Section 1.423-2(c)(3) of the existing regulations provides that an employee stock purchase plan must designate the maximum aggregate number of shares that may be issued under the plan. Consistent with [Section] 1.422-2(b)(3)(ii), these proposed regulations would provide that the plan may specify that the maximum aggregate number of shares available for grants under the plan may increase annually by a specified percentage of the authorized, issued, or outstanding shares at the date of the adoption of the plan. Further, a plan providing that the maximum aggregate number of shares issued subject to options under the plan may change based on any other specific circumstances will satisfy the requirements of [Section] 1.423-2(c)(3) only if the stockholders approve an immediately determinable maximum number of shares that may be issued under the plan in any event. Examples 4 and 5 in [Section] 1.423-2(c)(5) of these proposed regulations illustrate these principles.

4. Employees Covered by the Plan

Section 423(b)(4) permits an employer to exclude from participation one or more of the following categories of employees: Employees who have been employed less than two years; Employees who customarily work 20 hours or less per week; Employees who customarily work not more than five months in any calendar year; and Highly compensated employees (HCEs) within the meaning of section 414(q). Section 1.423-1(e)(1) of these proposed regulations has been updated to reflect the 1986 amendment of section 423(b)(4)(D) to substitute "highly compensated employees (within the meaning of section 414(q))" for "officers, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees." See Public Law 99-514, section 1114(b)(13).

One commentator suggested that the regulations clarify that an employer may exclude from participation a subset of one of the groups set forth in section 423(b)(4). For example, an employer should be permitted to exclude a subset of HCEs, such as officers, from participation in the plan. The commentator further suggested that the regulations clarify that an employer may

[Page Number 43878]

impose shorter service requirements than those permitted. For example, an employer should be permitted to exclude employees who have been employed less than one year from participation in the plan.

The IRS and the Treasury Department agree that a more inclusive application of the rules of section 423(b)(4) is consistent with the intent of section 423. Accordingly, [Section] 1.423-2(e)(2) of these proposed regulations would provide that an employee stock purchase plan does not fail to satisfy the coverage provision of section 423(b)(4) merely because the plan excludes employees who have completed a shorter period of service or whose customary employment is for fewer hours per week or fewer months in a calendar year than is specified in subparts (A), (B) and (C) of section 423(b)(4), provided the exclusion is applied in an identical manner to all employees of every corporation whose employees are granted options under the plan. In addition, these proposed regulations would provide that the terms of an employee stock purchase plan may exclude HCEs: (a) with compensation above a certain level, or (b) who are officers or subject to the disclosure requirements of section 16(a) of the Securities Exchange Act of 1934, provided the exclusion is applied in an identical manner to all HCEs of every corporation whose employees are granted options under the plan. Examples 3, 4, 5, 6, and 7 in [Section] 1.423-2(e)(6) of these proposed regulations illustrate these principles. (The examples under [Section] 1.423-2(e)(3) of the existing regulations have been re-numbered as [Section] 1.423-2(e)(6) of these proposed regulations.)

Another commentator suggested that the regulations permit employers to exclude from plan participation employees who are nonresident aliens and who receive no earned income that constitutes income from sources within the United States. The IRS and the Treasury Department agree that it may be appropriate to exclude foreign employees from plan participation in certain limited circumstances. However, unlike section 410(b), section 423 does not provide an exclusion for such nonresident aliens. Accordingly, the IRS and the Treasury Department are constrained by statutory authority from providing a general exclusion from plan participation for employees who are nonresident aliens and who receive no United States source income. Therefore, [Section] 1.423-2(e)(3) of these proposed regulations would provide that employees who are citizens or residents of a foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of [Section] 7701(b)(1)(A))) may be excluded from the coverage of an employee stock purchase plan only if the grant of an option under the plan to a citizen or resident of the foreign jurisdiction is prohibited under the laws of such jurisdiction or if compliance with the laws of the foreign jurisdiction would cause the plan to violate the requirements of section 423. Example 8 in [Section] 1.423-2(e)(6) of these proposed regulations illustrates this principle.

Another commentator suggested that the regulations permit employers to exclude collectively bargained employees from plan participation. However, unlike section 410(b), section 423 does not provide an exclusion for collectively bargained employees. Accordingly, the IRS and the Treasury Department are again constrained by statutory authority from providing a general exclusion from plan participation for collectively bargained employees.

One commentator suggested that the regulations be amended to provide that an offering will not lose its tax-favored status due to the inadvertent exclusion of employees from plan participation. Rather, the commentator suggested that the granting corporation be permitted to correct certain errors in plan administration through a corrections program that would permit the excluded employees to participate in past offerings under a plan. Such a corrections program is beyond the scope of these regulations. However, the IRS and the Treasury Department invite comments on whether such a program is appropriate (including the statutory authority for such a program) and suggestions for the types of violations that might be covered and the methods of correction.

Section 1.423-2(e)(4) of these proposed regulations includes language that appears under [Section] 1.423-2(e)(1) of the existing regulations. Section 1.423-2(e)(2) of the existing regulations has been re-numbered as [Section] 1.423-2(e)(5) of these proposed regulations.

5. Equal Rights and Privileges

Section 423(b)(5) requires that, subject to certain exceptions, an employee stock purchase plan, by its terms, provide that all employees granted options under the plan have the same rights and privileges.

Section 1.423-2(f)(3) of these proposed regulations includes language that appears in [Section] 1.423-2(f)(1) of the existing regulations. (The examples in [Section] 1.423-2(f)(2) of the existing regulations have been relocated to Examples 1 and 2 of [Section] 1.423-2(f)(7) of these proposed regulations. The example in [Section] 1.423-2(f)(4) of the existing regulations has been relocated to Example 3 of [Section] 1.423-2(f)(7). Section 1.423-2(f)(4) of the existing regulations is re-numbered under these proposed regulations as [Section] 1.423-2(f)(6)).

One commentator suggested that a plan or offering should not fail to satisfy the equal rights and privileges provision of section 423(b)(5) if the provisions of the plan or offering applied to foreign employees are reasonably designed to avoid adverse consequences for such employee under foreign law as a result of plan participation. The IRS and the Treasury Department agree that in certain limited circumstances it may be appropriate for the terms of an employee stock purchase plan to be less favorable with respect to foreign employees than those terms are with respect to employees resident in the United States. Accordingly, [Section] 1.423-2(f)(4) of these proposed regulations would provide that a plan or offering will not fail to satisfy the requirements of section 423(b)(5) if, in order to comply with the laws of a foreign jurisdiction, the terms of an option granted under a plan or offering to citizens or residents of such foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of [Section] 7701(b)(1)(A))) are less favorable than the terms of options granted under the same plan or offering to employees resident in the United States. Example 4 in [Section] 1.423-2(f)(7) of these proposed regulations illustrates this principle.

A plan or offering will not satisfy the requirements of section 423(b)(5), however, if, in order to comply with the laws of a foreign jurisdiction, the terms of the plan or offering are more favorable with respect to citizens or residents of such foreign jurisdiction than the terms of the plan or offering are with respect to employees resident in the United States.

Another commentator suggested that the regulations addressing the carryover of amounts from one offering to another be clarified. In response to this comment, these proposed regulations would clarify [Section] 1.423-2(f)(3) of the existing regulations (which has been re-numbered as [Section] 1.423- 2(f)(5)). Generally, a plan permitting one or more employees to carry forward amounts that were withheld but not applied toward the purchase of stock under an earlier plan or offering and apply such amounts toward the purchase of additional stock under a subsequent plan or offering will be a violation of the

[Page Number 43879]

equal rights and privileges requirement under section 423(b)(5). However, the carry forward of amounts withheld but not applied toward the purchase of stock under an earlier plan or offering will not violate the equal rights and privileges requirement of section 423(b)(5) if all other employees participating in the current plan or offering are permitted to make direct payments toward the purchase of shares under a subsequent plan or offering in an amount equal to the excess of: (a) the greatest amount that any employee is allowed to carry forward from an earlier plan or offering over (b) the amount, if any, the employee will carry forward from an earlier plan or offering. Example 5 in [Section] 1.423-2(f)(7) of these proposed regulations illustrates this principle.

Further, a plan will not fail to satisfy the equal rights and privileges requirement of section 423(b)(5) merely because employees are permitted to carry forward amounts representing a fractional share which were withheld but not applied toward the purchase of stock under an earlier plan or offering and apply such amounts toward the purchase of additional stock under a subsequent plan or offering.

6. Option Price

Under section 423(b)(6), the option price must not be less than the lesser of: (a) an amount equal to 85 percent of the fair market value of the stock at the time the option is granted, and (b) an amount not less than 85 percent of the fair market value of the stock at the time the option is exercised. Consistent with [Section] 1.422-2(e)(1), [Section] 1.423-2(g)(1) of these proposed regulations would provide that the option price may be determined in any reasonable manner, including the valuation methods permitted under [Section] 20.2031-2 (Estate Tax Regulations), so long as the option price meets the minimum pricing requirements of section 423(b)(6).

7. Date of Grant

Section 1.421-1(c) provides, that for purposes of [Subsection] 1.421-2 through 1.424-1, the language "the date of the granting of the option" and "the time such option is granted" and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. The date of grant for an option granted under an employee stock purchase plan is important for several reasons. First, the favorable tax consequences under section 421 apply to the shares acquired pursuant to the exercise of an option granted under an employee stock purchase plan if the shares are not disposed of within two years from the date of grant of the option or within one year from the date of exercise of the option. Second, the $25,000 limitation under section 423(b)(8) is determined based on the fair market value of the stock measured on the date of grant of the option. The date of grant is also important for purposes of determining the employees eligible to participate in the plan and, in certain cases, determining the purchase price of stock under the plan.

Section 1.421-1(c) further provides that a corporate action constituting an offer of stock for sale is not considered complete until the date on which the maximum number of shares that can be purchased under the option and the minimum option price are fixed or determinable. Because options under an employee stock purchase plan may be priced at the lesser of an amount equal to 85 percent of the fair market value of the stock at the time the option is granted, and an amount not less than 85 percent of the fair market value of the stock at the time the option is exercised, it is not always possible to determine the minimum option price on the first day of an offering. However, many granting corporations intend for the first day of an offering to be the date of grant.

Accordingly, [Section] 1.423-2(h)(2) of these proposed regulations would provide that, for purposes of options granted under an employee stock purchase plan, the principles of [Section] 1.421-1(c) shall be applied without regard to the requirement that the minimum option price be fixed or determinable in order for the corporate action constituting an offer of stock to be considered complete. As a result, the first day of an offering could be the date of grant for an option issued under an employee stock purchase plan even though the minimum option price is not fixed or determinable on the first day of the offering. These proposed regulations include an amendment to [Section] 1.421- 1(c).

One commentator questioned whether it is necessary for a plan to contain a limit on the number of shares that can be purchased by each participant during an offering in order for the date of grant of the option to be the first day of an offering. Section 1.423-2(h)(3) of these proposed regulations would provide that the date of grant will be the first day of an offering if the terms of an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each participant during the offering. Similarly, the date of grant will be the first day of an offering if the terms of the plan or offering require the application of a formula to establish, on the first day of the offering, the maximum number of shares that may be purchased by each participant during the offering.

However, [Section] 1.423-2(h)(3) of these proposed regulations does not require that an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each participant during the offering or incorporate a formula to establish a maximum number of shares that may be purchased by each participant during the offering. If the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exercise will be the date of grant of the option. The $25,000 limit under section 423(b)(8) and the limit on the aggregate number of shares that may be issued under an employee stock purchase plan are not sufficient to establish the maximum number of shares that can be purchased under an option so that the date of grant will be the first day of the offering. Examples 1, 2, 3 and 4 in [Section] 1.423- 2(h)(4) of these proposed regulations illustrate these principles.

Section 1.423-2(h) of the existing regulations is re-numbered as [Section] 1.423-2(h)(1) of these proposed regulations.

8. Annual $25,000 Limitation

Section 423(b)(8) provides that an employee stock purchase plan must, by its terms, provide that no employee may be permitted to purchase stock under all the employee stock purchase plans of his or her employer corporation and its related corporations at a rate which exceeds $25,000 in fair market value of the stock (determined on the date of grant) for each calendar year in which an option granted to the employee is outstanding and exercisable. Section 1.423-2(i) of these proposed regulations would provide guidance on the operation of the $25,000 limitation that incorporates and clarifies the guidance provided in the existing regulations.

One commentator suggested that the calculation of the amount of stock that may be purchased under an employee stock purchase plan be determined in a manner consistent with the $100,000 limitation for incentive stock options described in [Section] 1.422-4. The proposed regulations generally adopt this suggestion and would provide that the $25,000 limit for employee stock purchase plans is, to the extent possible, calculated in a manner consistent with the $100,000 limitation for incentive stock options. The timing of both measures is based on when the option first becomes exercisable and both

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measures are made based on the fair market value of the stock determined at the date of grant. Section 1.423-2(i) of these proposed regulations emphasizes that an employee may purchase up to $25,000 of stock (based on the fair market value of such stock on the date of grant) in each calendar year during which an option granted to the employee under an employee stock purchase plan is not only outstanding, but also exercisable. Example 5 in [Section] 1.423-2(i)(5) of these proposed regulations illustrates this principle.

For clarification, Example 1 in the existing regulations has been separated into Example 1 and Example 4 in [Section] 1.423-2(i)(5) of these proposed regulations.

9. Special Rule Where Option Price Is Between 85 Percent and 100 Percent of the Value of the Stock

Section 423(c) provides a special rule for calculating the timing and amount of compensation income that must be recognized when the option price for a share is between 85 and 100 percent of the value of the share on the date of grant. Generally, the income recognized is the lesser of: (a) the excess of the fair market value of the share on the date of grant over the option price, and (b) the excess of the fair market value of the share at the time of disposition (or death) over the option price. The flush language of section 423(c) provides that if the exercise price is not known on the date of grant, the exercise price shall be determined as if the option were exercised on the date of grant.

One commentator suggested that it is unclear how this special rule and the flush language of section 423(c) apply when the option price is determined based on some percentage of the value of a share on the last day of an offering. Example 3 of [Section] 1.423-2(k)(3) of the existing regulations specifically addresses this issue and has been retained in [Section] 1.423- 2(k)(3) of these proposed regulations. Example 4 has been added under [Section] 1.423-2(k)(3) to illustrate the tax consequences under an employee stock purchase plan that uses a look-back feature to determine the exercise price of the option.

Proposed Effective Date

These regulations under section 423 are proposed to apply as of January 1, 2010, and will apply to any option issued under an employee stock purchase plan that is granted on or after that date. Taxpayers may rely on these proposed regulations for the treatment of any option issued under an employee stock purchase plan that is granted after publication of these proposed regulations in the Federal Register .

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS. The IRS and the Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written or electronic comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these proposed regulations is Thomas Scholz, Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.421-1, paragraphs (c)(1) and (j)(1) are revised to read as follows:

[Section] 1.421-1 Meaning and use of certain terms.

* * * * *

(c) Time and date of granting option. (1) For purposes of this section and [Subsection] 1.421-2 through 1.424-1, the language "the date of the granting of the option" and "the time such option is granted," and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. Except as set forth in [Section] 1.423-2(h)(2), a corporate action constituting an offer of stock for sale is not considered complete until the date on which the maximum number of shares that can be purchased under the option and the minimum option price are fixed or determinable.

* * * * *

(j) Effective/applicability date --(1) In general. Except for paragraph (c)(1), these regulations are effective on August 3, 2004. Upon the date of publication of the Treasury decision adopting paragraph (c)(1) of this section as a final regulation in the Federal Register , paragraph (c)(1) will apply as of January 1, 2010.

* * * * *

Par. 3. Section 1.422-2, paragraph (b)(6), Example 1 (iii) is revised to read as follows:

[Section] 1.422-2 Incentive stock options defined.

* * * * *

(b) * * *

(6) * * *

Example (1).

* * * (iii) Assume the same facts as in paragraph (i) of this Example 1. Assume further that the plan was approved by the stockholders of S (in this case, P) on March 1, 2006. On January 1, 2008, S changes the plan to provide that incentive stock options for P stock will be granted to S employees under the plan. Because there is a change in the stock available for grant under the plan, the change is considered the adoption of a new plan that must be approved by the stockholder of S (in this case, P) within 12 months before or after January 1, 2008.

* * * * *

Par. 4. Section 1.422-5, paragraph (f)(1) is revised to read as follows:

[Section] 1.422-5 Permissible provisions.

* * * * *

(f) Effective/applicability date --(1) In general. Except for [Section] 1.422-2(b)(6), Example 1 (iii), these regulations are effective on August 3, 2004. Upon the date of publication of the Treasury decision adopting Section 1.422-2(b)(6),

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Example 1 (iii) of this section as a final regulation in the Federal Register , Section 1.422-2(b)(6), Example 1 (iii) will apply as of January 1, 2010.

* * * * *

Par. 5. Section 1.423-1 is revised to read as follows:

[Section] 1.423-1 Applicability of section 421(a).

(a) General rule. Subject to the provisions of section 423(c) and paragraph (k) of [Section] 1.423-2, the special rules of income tax treatment provided in section 421(a) apply with respect to the transfer of a share of stock to an individual pursuant to the individual's exercise of an option granted under an employee stock purchase plan if the following conditions are satisfied--

(1) The individual makes no disposition of such share before the later of the expiration of the two-year period from the date of the grant of the option pursuant to which such share was transferred or the expiration of the one-year period from the date of transfer of such share to the individual; and

(2) At all times during the period beginning on the date of the grant of the option and ending on the day three months before the date of exercise, the individual was an employee of the corporation granting the option, a related corporation, or a corporation (or a related corporation) substituting or assuming the stock option in a transaction to which section 424(a) applies.

(b) Cross-references. For rules relating to the requisite employment relationship, see paragraph (h) of [Section] 1.421-1. For rules relating to the effect of a disqualifying disposition, see section 421(b) and paragraph (b) of [Section] 1.421-2. For the definition of the term disposition, see section 424(c) and paragraph (c) of [Section] 1.424-1. For the definition of the term related corporation, see section paragraph (i) of [Section] 1.421-1.

(c) Effective/applicability date. Upon the date of publication of the Treasury decision adopting the rules of this section as a final regulation in the Federal Register , these rules will apply as of January 1, 2010. Par. 6. Section 1.423-2 is revised to read as follows:

[Section] 1.423-2 Employee stock purchase plan defined.

(a) In general --(1) The term employee stock purchase plan means a plan that meets the requirements of paragraph (a)(2)(i) through (ix) of this section. If the terms of the plan do not satisfy the requirements of paragraph (a)(2)(iii) through (ix) of this section, such requirements may be satisfied by the terms of an offering made under the plan. However, where the requirements of paragraph (a)(2)(iii) through (ix) are satisfied by the terms of an offering, such requirements will be treated as satisfied only with respect to options exercised under that offering. The plan and the terms of an offering must be in writing or electronic form, provided that such writing or electronic form is adequate to establish the terms of the plan or offering, as applicable.

(2) To qualify as an employee stock purchase plan under this section and [Section] 1.423-1, the plan must meet all of the following requirements--

(i) The plan must provide that options can be granted only to employees of the employer corporation or of a related corporation (as defined in paragraph (i) of [Section] 1.421-1) to purchase stock in any such corporation (see paragraph (b) of this section);

(ii) The plan must be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted (see paragraph (c) of this section);

(iii) Under the terms of the plan, an employee cannot be granted an option if, immediately after the option is granted, the employee owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or of a related corporation (see paragraph (d) of this section);

(iv) Under the terms of the plan, options must be granted to all employees of any corporation whose employees are granted any options by reason of their employment by the corporation (see paragraph (e) of this section);

(v) Under the terms of the plan, all employees granted options must have the same rights and privileges (see paragraph (f) of this section);

(vi) Under the terms of the plan, the option price cannot be less than the lesser of--

(A) An amount equal to 85 percent of the fair market value of the stock at the time the option is granted, or

(B) An amount not less than 85 percent of the fair market value of the stock at the time the option is exercised (see paragraph (g) of this section);

(vii) Under the terms of the plan, options cannot be exercised after the expiration of--

(A) Five years from the date the option is granted if, under the terms of such plan, the option price cannot be less than 85 percent of the fair market value of the stock at the time the option is exercised, or

(B) Twenty-seven months from the date the option is granted, if the option price is not determined in the manner described in paragraph (A) (see paragraph (h) of this section);

(viii) Under the terms of the plan, no employee may be granted an option that permits the employee's rights to purchase stock under all employee stock purchase plans of the employer corporation and its related corporations to accrue at a rate that exceeds $25,000 of fair market value of the stock (determined at the time the option is granted) for each calendar year in which the option is outstanding at any time (see paragraph (i) of this section); and

(ix) Under the terms of the plan, options are not transferable by the optionee other than by will or the laws of descent and distribution, and are exercisable, during the lifetime of the optionee, only by the optionee (see paragraph (j) of this section).

(3) The determination of whether a particular option is an option granted under an employee stock purchase plan is made at the time the option is granted. If the terms of an option are inconsistent with the terms of the employee stock purchase plan or an offering under the plan, the option will not be treated as granted under an employee stock purchase plan. If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section. Accordingly, none of the options granted under the offering will be eligible for the special tax treatment of section 421. However, if an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an individual who is not entitled to the grant of an option under the terms of the plan or offering, the option will not be treated as an option granted under an employee stock purchase plan, and the grant of the option will not disqualify the options granted under the plan or offering. If, at the time of grant, an option qualifies as an option granted under an employee stock purchase plan, but the terms of the option are not satisfied, the option will not be treated as granted under an employee stock purchase plan and this failure to comply with the terms of the option will not disqualify the options granted under the plan or offering.

(4) Examples. The following examples illustrate the principles of paragraph (a)(3):

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Example 1.

Corporation A operates an employee stock purchase plan under which options for A stock are granted to employees of A. The terms of an offering provide that the option price will be 90 percent of the fair market value of A stock on the date of exercise. A grants an option under the offering to Employee Z, an employee of A. The terms of the option provide that the option price will be 85 percent of the fair market value of A stock on the date of exercise. Because the terms of Z's option are inconsistent with the terms of the offering, the option granted to Z will not be treated as an option granted under the employee stock purchase plan. Further, unless Z is granted an option under the offering that qualifies as an option granted under the employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section and none of the options granted under the offering will be eligible for the special tax treatment of section 421.

Example 2.

Corporation B operates an employee stock purchase plan that provides that options for B stock may only be granted to employees of B. Under the terms of the plan, options may not be granted to consultants and other non-employees. B grants an option under the plan to Consultant Y, a consultant of B. Because Y is ineligible to receive an option under the plan by reason of Y's status as a non-employee, the grant of the option to Y is inconsistent with the terms of the plan and the option granted to Y will not be treated as an option granted under the employee stock purchase plan. However, the grant of the option to Y will not disqualify the options granted under the plan or offering because Y was not entitled to the grant of an option under the plan.

Example 3.

Corporation C operates an employee stock purchase plan under which options for C stock are granted to employees of C. C grants an option under the plan to Employee X, an employee of C who is a highly compensated employee. The terms of the employee stock purchase plan exclude highly compensated employees from participation in the plan. Because X is ineligible to receive an option under the plan by reason of X's exclusion from participation in the plan, the option granted to X will not be treated as an option granted under the employee stock purchase plan. However, the grant of the option to X will not disqualify the options granted under the plan or offering because X was not entitled to the grant of an option under the plan.

Example 4.

Corporation D operates an employee stock purchase plan under which options for D stock are granted to employees of D. D grants an option under the plan to Employee W, an employee of D. The terms of the option provide that the option price will be 90 percent of the fair market value of D stock on the date of exercise. On the date of exercise, W pays only 85 percent of the fair market value of D stock. Because the terms of W's option are not satisfied, the option granted to W will not be treated as an option granted under the employee stock purchase plan. However, the failure to comply with the terms of the option granted to W will not disqualify the options granted under the plan or offering.

(b) Options restricted to employees. An employee stock purchase plan must provide that options can be granted only to employees of the employer corporation (or employees of its related corporations) to purchase stock in the employer corporation (or one of its related corporations). If such a provision is not included in the terms of the plan, the plan will not be an employee stock purchase plan and options granted under the plan will not qualify for the special tax treatment of section 421. For rules relating to the employment requirement, see paragraph (h) of [Section] 1.421-1.

(c) Stockholder approval --(1) An employee stock purchase plan must be approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted. The approval of the stockholders must comply with all applicable provisions of the corporate charter, bylaws and applicable State law prescribing the method and degree of stockholder approval required for the issuance of corporate stock or options. If the applicable State law does not prescribe a method and degree of stockholder approval, then an employee stock purchase plan must be approved--

(i) By a majority of the votes cast at a duly held stockholder's meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the plan; or

(ii) By a method and in a degree that would be treated as adequate under applicable State law in the case of an action requiring stockholder approval (such as an action on which stockholders would be entitled to vote if the action were taken at a duly held stockholders' meeting).

(2) For purposes of the stockholder approval required by this paragraph (c), ordinarily, a plan is adopted when it is approved by the granting corporation's board of directors, and the date of the board's action is the reference point for determining whether stockholder approval occurs within the applicable 24-month period. However, if the board's action is subject to a condition (such as stockholder approval) or the happening of a particular event, the plan is adopted on the date the condition is met or the event occurs, unless the board's resolution fixes the date of approval as the date of the board's action.

(3) An employee stock purchase plan, as adopted and approved, must designate the maximum aggregate number of shares that may be issued under the plan, and the corporations or class of corporations whose employees may be offered options under the plan. A plan that merely provides that the number of shares that may be issued under the plan may not exceed a stated percentage of the shares outstanding at the time of each offering or grant under the plan does not satisfy the requirements of this paragraph (c)(3). However, the maximum aggregate number of shares that may be issued under the plan may be stated in terms of a percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan. The plan may specify that the maximum aggregate number of shares available for grants under the plan may increase annually by a specified percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan. A plan that provides that the maximum aggregate number of shares that may be issued as options under the plan may change based on any other specific circumstances satisfies the requirements of this paragraph only if the stockholders approve an immediately determinable maximum number of shares that may be issued under the plan in any event. If there is more than one employee stock purchase plan under which options may be granted and stockholders of the granting corporation merely approve a maximum aggregate number of shares that are available for issuance under the plans, the stockholder approval requirements described in paragraph (c)(1) of this section are not satisfied. A separate maximum aggregate number of shares available for issuance pursuant to options must be specified and approved for each plan.

(4) Once an employee stock purchase plan is approved by the stockholders of the granting corporation, the plan need not be reapproved by the stockholders of the granting corporation within the prescribed 24-month period unless the plan is amended or changed in a manner that is considered the adoption of a new plan. Any increase in the aggregate number of shares that may be issued under the plan (other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split) will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. Similarly, a change in the designation of corporations whose employees may be offered options under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period unless the plan provides that designations of participating corporations may be made

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from time to time from among a group consisting of the granting corporation and its related corporations. The group from among which such changes and designations are permitted without additional stockholder approval may include corporations having become parents or subsidiaries of the granting corporation after the adoption and approval of the plan. In addition, a change in the granting corporation or the stock available for purchase under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. Any other changes in the terms of an employee stock purchase plan are not considered the adoption of a new plan and, thus, do not require stockholder approval.

(5) Examples. The following examples illustrate the principles of this paragraph (c):

Example 1.

(i) Corporation E is a subsidiary of Corporation F, a publicly traded corporation. On January 1, 2010, E adopts an employee stock purchase plan under which options for E stock are granted to E employees.

(ii) To meet the requirements of paragraph (c)(1) of this section, the plan must be approved by the stockholders of E (in this case, F) within 12 months before or after January 1, 2010.

(iii) Assume the same facts as in paragraph (i) of this Example 1, except that the plan was approved by the stockholders of E (in this case, F) on March 1, 2010. On January 1, 2012, E changes the plan to provide that options for F stock will be granted to E employees under the plan. Because there is a change in the stock available for grant under the plan, under paragraph (c)(4) of this section, the change is considered the adoption of a new plan that must be approved by the stockholders of E (in this case, F) within 12 months before or after January 1, 2012.

Example 2.

(i) Assume the same facts as in paragraph (i) of Example 1, except that on March 15, 2011, F completely disposes of its interest in E. Thereafter, E continues to grant options for E stock to E employees under the plan.

(ii) The new E options are granted under a plan that meets the stockholder approval requirements of paragraph (c)(1) of this section without regard to whether E seeks approval of the plan from the stockholders of E after F disposes of its interest in E.

(iii) Assume the same facts as in paragraph (i) of this Example 2, except that under the plan as adopted on January 1, 2010, only options for F stock are granted to E employees. Assume further that, after F disposes of its interest in E, E changes the plan to provide for the grant of options for E stock to E employees. Because there is a change in the stock available for purchase or grant under the plan, under paragraph (c)(4) of this section, the stockholders of E must approve the plan within 12 months before or after the change to the plan to meet the stockholder approval requirements of paragraph (c) of this section.

Example 3.

(i) Corporation G maintains an employee stock purchase plan. Corporation H does not maintain an employee stock purchase plan. On May 15, 2010, G and H consolidate under State law to form one corporation. The new corporation is named Corporation H. The consolidation agreement describes the G plan, including the maximum aggregate number of shares available for issuance under the plan after the consolidation. Additionally, the consolidation agreement states that the plan will be continued by H after the consolidation. The consolidation agreement is unanimously approved by the stockholders of G and H on May 1, 2010. H assumes the plan formerly maintained by G and continues to grant options under the plan to all eligible employees.

(ii) Because there is a change in the granting corporation (from G to H), under paragraph (c)(4) of this section, H is considered to have adopted a new plan. Because the plan is fully described in the consolidation agreement, including the maximum aggregate number of shares available for issuance under the plan, the approval of the consolidation agreement by the stockholders constitutes approval of the plan. Thus, the stockholder approval of the consolidation agreement satisfies the stockholder approval requirements of paragraph (c)(1) of this section, and the plan is considered to be adopted by H and approved by its stockholders on May 1, 2010.

Example 4.

Corporation I adopts an employee stock purchase plan on November 1, 2010. On that date, there are two million shares of I stock outstanding. The plan provides that the maximum aggregate number of shares that may be issued under the plan may not exceed 15 percent of the number of shares of I stock outstanding on November 1, 2010. Because the maximum aggregate number of shares that may be issued under the plan is designated in the plan, the requirements of paragraph (c)(3) of this section are met.

Example 5.

(i) Corporation J adopts an employee stock purchase plan on March 15, 2010. The plan provides that the maximum aggregate number of shares of J stock available for issuance under the plan is 50,000, increased on each anniversary date of the adoption of the plan by 5 percent of the then outstanding shares. Because the maximum aggregate number of shares is not designated under the plan, the requirements of paragraph (c)(3) of this section are not met.

(ii) Assume the same facts as in paragraph (i) of this Example 5, except that the plan provides that the maximum aggregate number of shares available under the plan is the lesser of (a) 50,000 shares, increased each anniversary date of the adoption of the plan by 5 percent of the then-outstanding shares, or (b) 200,000 shares. Because the maximum aggregate number of shares that may be issued under the plan is designated as the lesser of two numbers, one of which provides an immediately determinable maximum aggregate number of shares that may be issued under the plan in any event, the requirements of paragraph (c)(3) of this section are met.

(d) Options granted to certain shareholders --(1) An employee stock purchase plan must by its terms provide that an employee cannot be granted an option if the employee, immediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or a related corporation. In determining whether the stock ownership of an employee equals or exceeds this 5 percent limit, the rules of section 424(d) (relating to attribution of stock ownership) shall apply, and stock that the employee may purchase under outstanding options (whether or not the options qualify for the special tax treatment afforded by section 421(a)) shall be treated as stock owned by the employee. An option is outstanding for purposes of this paragraph (d) although under its terms it may be exercised only in installments or after the expiration of a fixed period of time. If an option is granted to an employee whose stock ownership (as determined under this paragraph (d)) exceeds the limitation set forth in this paragraph (d), no portion of the option will be treated as having been granted under an employee stock purchase plan.

(2) The determination of the percentage of the total combined voting power or value of all classes of stock of the employer corporation (or a related corporation) that is owned by the employee is made by comparing the voting power or value of the shares owned (or treated as owned) by the employee to the aggregate voting power or value of all shares actually issued and outstanding immediately after the grant of the option to the employee. The aggregate voting power or value of all shares actually issued and outstanding immediately after the grant of the option does not include the voting power or value of treasury shares or shares authorized for issue under outstanding options held by the employee or any other person.

(3) Examples. The following examples illustrate the principles of this paragraph (d):

Example 1.

Employee V, an employee of Corporation K, owns 6,000 shares of K common stock, the only class of K stock outstanding. K has 100,000 shares of its common stock outstanding. Because V owns 6 percent of the combined voting power or value of all classes of K stock, K cannot grant an option to V under K's employee stock purchase plan. If V's father and brother each owned 3,000 shares of K stock and V did not own any K stock, then the result would