kuzo robinson at kruzo[at]yahoo.com wrote:
- quote -

Touché!

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

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"Frank S. Duke, Jr." <dukefs[at]one.net> wrote:
- quote -

Right, I was thanking the specific ones the helped ME,
all of whome appear to be gentleMEN.

I am sure the commenDs of others are just as useful.

K

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kuzo robinson at kruzo[at]yahoo.com wrote:

- quote -

A great many of the learned contributors to this forum are
not GentleMEN but their commends are still highly valued and
just as useful.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

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Gentlemen,

Thank you all for your help.

I am learning ... :-)

K

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kruzo[at]yahoo.com (kuzo robinson) wrote in

- quote -

TurboTax is Correct

See Situation 3:
http://www.turbotax.com/articles/Emp...hasePlans.html

I ran your numbers in a spreadsheet I have that I created
from the above "rules".

If you question the validity of the TT article "rules", they
are derived from Page 10 of IRS Publication 525.
http://www.irs.gov/pub/irs-pdf/p525.pdf

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kruzo[at]yahoo.com (kuzo robinson) writes:

- quote -

No.

- quote -

No.

TurboTax did it properly.

- quote -

Because that's how qualifying sales of ESPP stock is taxes.

- quote -

No.

- quote -

Whenever the stock is sold for more than the purchase price.
When ESPP stock is sold at a profit, some/all of the discount
is recaptured as ordinary income no matter how long you've
held the stock.

Here are the rules, as I have summarized them out of books
like Kaye Thomas's _Compensation in Stock and Options_ and
elsewhere. At the end of this rules description there is
a calculation of your case and you'll see that TT
did it right.

Prelims:
(1) Any gain considered capital gets long-term status if the
stock is held more than 12 months from the day you actually
purchase it (i.e. the *end* of the offering period).
(2) There is a special holding period for ESPPs - you meet this
holding period on that *later* of:
(a) Two years from the beginning of the offering period, or
(b) One year from the day you actually purchased the stock.

(3) There are five prices involved. They are
(a) The purchase price (P).
(b) The actual stock price at the beginning of the
offering period (B).
(c) The actual stock price at the end of the
offering period (E).
(d) The actual stock price when you sell (S).
(e) The hypothetical start-of-period purchase
price (H), which is the price you would pay
for the stock if the purchase price ended up
being based on the stock price at the beginning
of the offering period. Obviously, if the stock
price went up during the period, H=P.

Ok..

If the special holding period is *not* met:
(a) E-P is recognized as wage income. This happens
regardless of what S is. Even if you sell at a
loss, you have E-P of wage income.
(b) Since you do recognize E-P of income, that income
is added to your "raw" basis (which is P -- what you
paid for it) to get your adjusted basis. P + E - P = E.
(c) As your basis has been adjusted to E, your capital gain or
loss on the sale is S-E. This is long-term if you sold more
than a year after purchase.

If the special holding period *is* met, things are
rather weirder, since the beginning of the offering
period comes into play, not the end:
(a) If you sell at a loss (i.e. S<P), you have *no* wage income
to recognize. Your basis is P, your sales proceeds are S,
your gain is S-P, which is a loss since S<P.
(b) If you sell at a profit (i.e. S> P), you do have to report some wage
income. The amount of wage income you report is the
*lesser* of:
(1) Your actual profit, i.e. S-P, or
(2) The difference between the stock price at the
beginning of the period and the hypothetical
start-of-period purchase price, i.e. B-H.
(c) Any recognized wage income in (b) is added to
your "raw" basis P to get your adjusted basis.
You then subtract that from S to get your capital
gain or loss, which will always be long-term, since
if the special holding period is met, that implies
the stock was held long-term.

Ok, in your case the special holding period is met and therefore
we have to worry about B and H. For you the numbers are:
B = value of stock at beginning of offering period = $20.00
H = purchase price of stock *if* purchase was based on
the beginning-of-period price = $20 - 15% of $20 = $17
E = stock price at end of period = $10.00
P = what you actually paid = $8.50
S = what you sold for = $12.00

You sold for an actual, economic profit, i.e. S> P. Therefore
your ordinary income will be the *lesser* of:
S - P = $12.00 - $8.50 = $3.50
B - H = $20.00 - $17.00 = $3.00
The lesser of the numbers is $3.00. So you will have $3.00
of ordinary income and your basis for computing capital gain/loss
will be $8.50 + $3.00 = $11.50.

You sold 100sh, so you'll pick up $300 of ordinary income.
Likewise, your gain is $1200 - ($11.50*100sh) = $50, just
like TT said.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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kruzo[at]yahoo.com (kuzo robinson) wrote:

- quote -

Is the plan such that you buy the stock at the lower of the
first or last day of the pan year? If so the you would pay
the lower - 15 % and that would be the discount. If you sold
after the grant date and the stock went down you'd owe tax
on the discount and have a loss at the end of the year. If
you hold it more than a year, I thought it was now qualified
and you pay the long term tax rate,.

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ruzo[at]yahoo.com (kuzo robinson) wrote:

- quote -

snip

Sorry, I didn't read beyond this paragraph. In my
experience Intuit doesn't know what it is doing when it
comes to ISOs and ESPPs.

Drew Edmundson, CPA (NC)

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I am using TurboTax to report the ESPP.
It makes no sense to me how the worksheet brakes down what I
think should be reported as long term gaim into 2: long term
gain and Oridinary income.

Here are the details of a SAMPLE calculation:

Offering grant date 06/01/2001
Market price per share at offering date $20
Discount percentage 15.00%
Purchase or exercise date 05/31/2002
Market price per share at purchase (exercise) date $10
Stock price per share actually paid at purchase date $8.50
Commission -- $0
Date sold 08/04/2003
Number of shares sold 100.
Sale proceeds (Form 1099-B, prorated if necessary) 1,200.00

So, according to my understanding, the total cost is
$8.50 x 100 = $850
And the total net long term gain is $350, right?

The way Turbo Tax caluclates it is this:
-------------------------------
Amounts reported on: Schedule D

Cost $1,150.00
Net gain (loss) $50.00 ..................(!!!, Author)
Long-term or short-term: Long-term

Amount to be reported as compensation - usually on Form W-2:0.00

Is the amount on line 5a or 5c already included on Form W-2 Box 1? NO
Ordinary income if held at least 2 years: $300.00 .............(!!!,
Author)
Qualifying or Disqualifying: Qualifying
-------------------------------

My question is, why does it brake it down into $50 for long
term net gain and $300 for ordinary income? And why is it
ordinary income "if held at least 2 years" (that's
TurboTaxes standard phrase in the ESPP worksheet, item 5c)?

Could it be that it is somehow cofused and expects to see
something reported on W-2, and since 0 is entered invents
this creative way to report it as compensation? But it still
does not explain the possibility of entry "Ordinary income
if held at least 2 years". When is ESPP sale reported as
ordinary income after holding for 2 years anyway.

Very confused and needing help,

K

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