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Author: cosmoan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121599  
Subject: Employee Stock Purchase Date: 3/1/1999 9:17 PM
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According to my interpretation of the IRS code (from their web site), gains from discounted stock purchased under an employee stock purchase program are NOT eligible for the 20% capitol gains rate REGARDLESS of how long the stock is held. The catch word is "discounted". In other words, if I purchase stock at a discount (say 10%) through my company, when I later sell the stock the gain is taxed as regular income regardless of how long the tax is held.

Can someone with more experience confirm or refute this?

Thanks
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11309 of 121599
Subject: Re: Employee Stock Purchase Date: 3/2/1999 12:34 AM
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[[ccording to my interpretation of the IRS code (from their web site), gains from
discounted stock purchased under an employee stock purchase program are
NOT eligible for the 20% capitol gains rate REGARDLESS of how long the
stock is held.]]

I don't know what you read, but this is certainly NOT correct.

[[ The catch word is "discounted". In other words, if I purchase
stock at a discount (say 10%) through my company, when I later sell the stock
the gain is taxed as regular income regardless of how long the tax is held.]]

No...generally the discount amount will be ADDED to your W-2 income, and be treated as ordinary income. You then increase your basis in the stock up to the FMV of the shares, and your holding period begins on the date that you purchase the shares.

You can read more about this in IRS Publication 550. YOu might want to check it out.

TMF Taxes
Roy

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Author: RheS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11459 of 121599
Subject: Re: Employee Stock Purchase Date: 3/4/1999 6:31 PM
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cosmoan asks "According to my interpretation of the IRS code (from their web site), gains from discounted stock purchased under an employee stock purchase program are NOT eligible for the 20% capitol gains rate REGARDLESS of how long the stock is held. The catch word is "discounted". In other words, if I purchase stock at a discount (say 10%) through my company, when I later sell the stock the gain is taxed as regular income regardless of how long the tax is held. Can someone with more experience confirm or refute this?"

Not according to what I've been told, both at my current company, and previous ones.

I swiped this from my current employer's internal Stock Administration info site:

Accordingly, XXXX urges you to consult your tax advisor concerning the possible tax consequences and filing requirements prior to the sale of any stock.

Summary of US tax treatment today: A taxable event occurs when the stock is sold. Tax treatment depends on how long the stock is held.

If you sell your stock within 2 years of the first day of the offering period or within 1 year of the purchase date, the difference between the fair market value at purchase date and your actual purchase price (FMV - Purchase Price) will be included on your W-2 as ordinary income. Any additional gain/loss, above and beyond the fair market value at purchase date, should be reported as Capital Gain/Loss when you file your income tax return.

International employees should consult their local tax advisor and/or their Finance Department to determine local tax implications.



I would sure like this to be the case... but cosmoan raises concerns. Could my employer be wrong, or citing old information? They are a large company... it seems unlikely. But I would like to know more.

Dick Smith

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Author: RheS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11470 of 121599
Subject: Re: Employee Stock Purchase Date: 3/4/1999 9:16 PM
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I'm going to reply to my own post... I think I understand this Employee Stock Purchase thing now...

(And, if I don't, maybe Roy will comment.)

In post11459, I quoted cosmoan, who says "According to my interpretation of the IRS code (from their web site), gains from discounted stock purchased under an employee stock purchase program are NOT eligible for the 20% capitol gains rate REGARDLESS of how long the stock is held." and then I replied quoting my current employer's ESPP information, which said "If you sell your stock within 2 years of the first day of the offering period or within 1 year of the purchase date, the difference between the fair market value at purchase date and your actual purchase price (FMV - Purchase Price) will be included on your W-2 as ordinary income. Any additional gain/loss, above and beyond the fair market value at purchase date, should be reported as Capital Gain/Loss when you file your income tax return."

But I then followed Roy's referal to IRS Publication 525 in a post about options... and found the answer.

There is a specific rule for Statutory Stock Options which can be part of an Employee Stock Purchase Plan. In that case, the rules my company is quoting applies. Now, nobody ever said that the ESPP was really "options" but that's what seems to be happening.

Here's a referal to the HTML version of the IRS document... search down for the title Statutory Stock Options, and read that section.

http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p52501.htm

So, by adding a few requirements to the ESPP (which seem to match rules that my company's plan... and every previous employer's plan had!), the ESPP "offering" becomes subscribing to an option, which is then granted at the end of the offering period, and immediately exercised. And that gets you better tax treatment, at no cost to your employer, so the benefits lawyers set up all the plans that way.

Tricky... but it makes sense now.

Dick

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11715 of 121599
Subject: Re: Employee Stock Purchase Date: 3/9/1999 12:13 PM
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[[I would sure like this to be the case... but cosmoan raises concerns. Could my
employer be wrong, or citing old information? They are a large company... it
seems unlikely. But I would like to know more.]]

Dick...

It appears that the statement from your company deals with stock OPTIONS. The original question dealt with stock PURCHASE.

They are as different as horseshoes and hand granades from a tax standpoint. I'm sure that your company missive is correct for YOUR situation...but not necessarily for the question posed by the original poster.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11726 of 121599
Subject: Re: Employee Stock Purchase Date: 3/9/1999 12:35 PM
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[[ There is a specific rule for Statutory Stock Options which can be part of an
Employee Stock Purchase Plan. In that case, the rules my company is quoting
applies. Now, nobody ever said that the ESPP was really "options" but that's
what seems to be happening.]]

Not necessarily. Purchasing stock "options" and purchasing stock at a discount are two completely separate tax issues. You have to nail down exactly which issue that you are dealing with. Another reading of IRS Publication 550 will provide additional information as to stock purchased at a discount.

[[ So, by adding a few requirements to the ESPP (which seem to match rules that
my company's plan... and every previous employer's plan had!), the ESPP
"offering" becomes subscribing to an option, which is then granted at the end of
the offering period, and immediately exercised.]]

If that is what your company plan is, then you are on the right track. But your COMPANY should provide you with a plan summary that tells you EXACTLY what they are doing. This is an important piece of documentation that you'll want to keep handy.

TMF Taxes
Roy

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Author: David39 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11766 of 121599
Subject: Re: Employee Stock Purchase Date: 3/9/1999 4:00 PM
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I read Publication 525 regarding this matter for a client and have come up with a different conclusion (as long as the price is at least 85% of the stock's price). I have pasted an example from Pub 525 that comes up with a different conclusion.

The stock you are referring to is called restricted stock. The company will include the difference between the price you paid and the fair market value of the stock as compensation. The company will take a deduction for the amount shown as compensation.

Excerpts from Pub 525,

Holding period. If you hold the stock you buy under the option for more than 1 year after the stock is transferred to you, and more than 2 years after the option was granted to you, gain or loss from the sale of the stock is generally a capital gain or loss. The difference between the amount you pay for the stock (the option price) and the amount you receive when you sell it is a capital gain or loss reported on Schedule D (Form 1040).

If you do not meet these holding period tests, you have compensation in the year you sell the stock. That income is the amount by which the stock's fair market value, as of the date you exercise the option, is more than the option price. However, this amount cannot be more than your gain on the sale. If your gain is more than the amount you report as compensation, the rest is a capital gain reported on Schedule D (Form 1040). If you sell the stock for less than the option price, your loss is a capital loss.

Example. Your employer, X Corporation, granted you an incentive stock option on March 11, 1996, to buy 100 shares of X Corporation stock at $10 a share, its fair market value at the time. You exercised the option on January 19, 1997, when the stock was selling on the open market for $12 a share. On January 25, 1998, you sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. In 1998, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as compensation. The rest of your gain is capital gain figured as follows:

Selling price ($15 × 100 shares) $ 1,500 Purchase price ($10 × 100 shares) -1,000 Gain $ 500 Amount reported as compensation [($12 × 100 shares)- $1,000] - 200 Amount reported as capital gain $ 300


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Author: RheS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11770 of 121599
Subject: Re: Employee Stock Purchase Date: 3/9/1999 5:28 PM
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I posted, about my company's Employee Stock Purchase Plan: "There is a specific rule for Statutory Stock Options which can be part of an Employee Stock Purchase Plan. In that case, the rules my company is quoting applies. Now, nobody ever said that the ESPP was really "options" but that's what seems to be happening."

Roy (TMF Taxes) cautions care: "Not necessarily. Purchasing stock "options" and purchasing stock at a discount are two completely separate tax issues. You have to nail down exactly which issue that you are dealing with. Another reading of IRS Publication 550 will provide additional information as to stock purchased at a discount."

Yes... I finally found the actual plan documents... which were not given to me upon signup with the plan, at least that I remember. They're on the company's Intranet, however, and I now have a copy in front of me. When you dig into the plan document itself, you find the magic word "option" which is mentioned no where in any of the material that the company gives out, including the enrollment forms or anything else. And this explains the tax treatment which the company's material suggested, which was "the discount is regular income if you hold the shares less then two years from the start of the offering period, or less than one year from the purchase."

Roy again, still properly cautious: "If that is what your company plan is, then you are on the right track. But your COMPANY should provide you with a plan summary that tells you EXACTLY what they are doing. This is an important piece of documentation that you'll want to keep handy."

Well, yes... they probably should. But, in my experience, they don't provide it... they make it available if you ask, but first offer you little sanitized "tax treatment" explanations which don't really explain the why of it.

And, as I said in that previous post, I have never been in an ESOP plan, over the course of several jobs in twenty years, that didn't offer this same tax treatment... and therefore was probably structured in the same complicated (and unexplained) way. So I suggest that other Fools, who are struggling to understand how their plan works, check out the plan documents, as Roy suggests (and if you can find them!), and look for the magic word Option. Because that seems to be the key to giving you a better tax treatment of the ESOP at little cost to the company, so that the way your plan is probably structured.

Roy is right... don't guess. But I'll bet that any big-company plan is like mine.

Dick Smith

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12005 of 121599
Subject: Re: Employee Stock Purchase Date: 3/11/1999 11:08 PM
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[[Roy is right... don't guess. But I'll bet that any big-company plan is like mine.]]

Well, Dick...if nothing else you got YOUR stuff cleared up. And I'll be you'll NEVER forget how your plan works in the future, eh?

So the silver lining is that you were able to wedge the information from your employer and get yourself on the right track.

TMF Taxes
Roy

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