- quote -

The formula was fixed but the option price was neither fixed nor
determinable on the grant date because I could not have accurately
predicted the option price on the exercise date. However your
original instructions on how to deal with the sale do appear to be
correct, and a number of others agree with you.

http://stockoptionadvisors.com/optio...02-03-04.shtml
http://www.fairmark.com/execcomp/espp/qualifying.htm
http://www.cpa2biz.com/Content/media..._of_ESPPs1.jsp

Perhaps more importantly, I found the appropriate section of IRS code,
section 423(c) which also agrees with your assessment. Oddly enough,
this section of the tax code is considerably more clear on this
subject than Publication 525, which was supposedly written to make
things simpler for me.

http://www4.law.cornell.edu/uscode/u...3----000-.html

Thanks again for your help,
Pedro

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Pedro wrote:
- quote -

date of grant price or it could be determined by the actual
market price on the date of purchase if that was lower.

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- quote -

Let's assume from here on out that the holding period has been met and
that there is no disqualifying disposition.

I generally agree with what you've written but my original question
still stands. In either case (FMV on grant date OR sale price) the
difference is relative to the discounted price on the offering date,
not to the actual price paid, right? I believe this is correct
because "the option price was not fixed or determinable at the time
the option was granted", therefore "the option price is figured as if
the option had been exercised at the time it was granted."

Thanks again,
Pedro

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Pedro wrote:
- quote -

period from date of grant AND more than one year from the date of
purchase, ordinary gain from a disposition (sale, gift, death)
will be the LESSER of 15% of FMV at date of grant or the actual
gain on the date of disposition. Any additional gain is
long-term capital. If sold at a loss, there is no ordinary
income... just a long term capital loss.

If you fail the above test and have a disqualifying disposition,
ordinary income is equal to the excess of FMV over the purchase
price on the date of purchase. Ordinary income is then added to
the purchase price to derive the adjusted cost basis for
computing the capital gain or loss.

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Hi, I found a few threads in the archives about dealing with
discounted option prices for ESPP stock that is sold, but none really
touched on the following point.

- quote -

"...you must include in your income as compensation, the lesser of:

* The amount, if any, by which the price
paid under the option was exceeded by
the fair market value of the share at the
time the option was granted, or

* The amount, if any, by which the price
paid under the option was exceeded by
the fair market value of the share at the
time of the disposition or death.

For this purpose, if the option price was not fixed
or determinable at the time the option was
granted, the option price is figured as if the
option had been exercised at the time it was
granted."

In my case, the options were granted every six months with the option
price being 85% of the lesser of a) the fair market value of the stock
on the offering date (i.e., the beginning of the six month period) or
b) the fair market value on the exercise date. Therefore the option
price was not <i> fixed or determinable at the time the option was
granted</i> , even though the formula allowed the price to be
determined on the exercise date.

Accordingly, I interpret this section of Pub. 525 to mean that when I
sell my ESPP shares (after meeting the holding period), I should
include as ordinary income the lesser of:
a) fair market value on the offering date - discounted price on the
offering date, or
b) sale price - discounted price on the offering date.

In each case, it doesn't necessarily matter what the actual price I
paid for the stock was because the amount subtracted is the discounted
price on the offering date, given that the option price throughout the
six-month period was not determinable on the grant date.


Does this interpretation seem correct, or at least valid? I look
forward to your responses.

Thanks,
Pedro

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >