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MEMORANDUM
TO: Participants in the 1st State Bancorp, Inc. (the
"Company")
Management Recognition Plan
DATE: June 6, 2000
FROM: Stradley Ronon Housley Kantarian & Bronstein, LLP
RE: Taxation of MRP Awards
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THIS DOCUMENT CONSTITUTES PART OF
A PROSPECTUS COVERING SECURITIES
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
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This memorandum concerns the taxation of the awards that
will automatically occur under the Company's Management
Recognition Plan (the "MRP") upon its receipt of stockholder
approval.
Please understand that this memorandum is merely designed
to summarize the tax rules generally applicable to MRP awards.
We could provide individual tax advice to the recipients of MRP
awards ("Recipients"), should anyone desire assistance.
Section 83 of the Internal Revenue Code (the "Code")
controls the federal income taxation of property that is
transferred in connection with the performance of services. The
recipient of restricted property (such as an MRP award)
recognizes income not on the date of the award but on the date
that his or her interest vests. The amount of the recipient's
taxable income will equal the fair market value of the
restricted property when vesting occurs. Subsequent gain or
loss is treated as capital gain, with the amount that is
included in the recipient's ordinary income determining his or
her basis in the property.
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Taxation of MRP Awards
June 6, 2000
Page 2
Operation of the MRP. The Bank's MRP will generally work
as follows:
Date Event
---- -----
Award Date The MRP should provide a "Notice of MRP
Award" to each Recipient. The notice will
specify the number of shares subject to
the award. Recipients will not receive
shares of the Company's common stock, or
be subject to federal income taxation as
the result of receiving an award.
Each Vesting Date The MRP trust will transfer to each
Recipient a number of unrestricted shares
equal to the number of shares that have
become vested, plusany dividends
attributable to those shares (provided
that the Recipient has not previously
terminated service).
Vesting will accelerate to 100% upon a Recipient's
termination of service due to death, disability or upon a change
in control. Special rules apply if a transfer of Common Stock
would cause the Recipient to own in excess of 10% of the Common
Stock.
Tax Withholding. In the case of Recipients who are non-
employee directors, federal income tax withholding is not
required when their MRP awards give rise to taxable income. On
the other hand, Recipients who are employees must satisfy
federal income tax withholding not only at the time their MRP
awards generate taxable income, but also before they may receive
shares of Common Stock from the MRP trust.
IRS Reporting. In the case of an employee, the ordinary
income arising from the vesting of MRP awards and from the
payment of tax bonuses is reportable on Form W-2, in Box 11. In
the case of a non-employee director, such income is reportable
on Form 1099-MISC, in Box 7.
