The NASPP Blog

March 1, 2011

Misinformation About ESPPs

I’ve mentioned before that you shouldn’t believe everything you read on the internet about stock compensation. This can be true even if the information comes from a source that might be expected to be reliable. Rajal Mankad of Garmin pointed out some misinformation on the Turbo Tax website about qualifying dispositions of ESPP shares.

The Turbo Tax article includes an example of a qualifying disposition in which the FMV on the purchase date ($25) is less than the FMV on the grant date ($30). The purchase price is 85% of the lesser of these two FMVs ($21.25); the FMV of the shares when they are sold is $50. According to the article, the compensation income for the qualifying disposition is $3.75 per share (the purchase date FMV of $25 less the purchase price of $21.25). But, as I’m sure my readers are aware, this is not correct. Where the purchase price is not fixed at grant, the compensation income recognized upon a qualifying disposition of ESPP shares is the lesser of:

  1. The discount as computed based on the FMV at grant (this can be calculated by subtracting the amount in box 8 of Form 3922 from the amount in box 3–in fact, this calculation is the reason why the amount in box 8 was added to the form in the final Section 6039 regs).
  2. The difference between the FMV at the time of sale and the price paid for the shares.

Thus, in the example in the article, the compensation income for the qualifying disposition should be $4.50 per share ($30 FMV at grant multiplied by 15%). 

The Turbo Tax article also suggests that the brokerage and other transaction fees can be used to reduce amount #2 above. I don’t believe this is correct. The final ISO regs were clear that the compensation income recognized upon disposition should not be reduced by the transaction fees; while those regulations are specific to ISOs, I think they serve to illustrate the IRS’s position on transaction fees. Moreover, in the case of a qualifying disposition ESPP, amount #2 above is specifically defined as the difference between the FMV of the shares at the time of sale and the purchase price. I think it is reasonable to treat the sale price as the FMV of the shares, but I don’t think the IRS would view it as reasonable to reduce the FMV by the transaction fees for the sale. Those fees are the amount necessary to facilitate the trade; they aren’t part of the price a willing buyer would pay a willing seller for the shares (which is the definition of “FMV”).

Congratulations Are in Order
Congratulations to Mike Melbinger of Winston & Strawn for being selected as one of the BTI Client Service All-Stars 2011–a considerable achievement. Catch Mike’s blog on compensation at CompensationStandards.com.

John Olson of Gibson Dunn, a frequent speaker at NASPP Conferences, is also a BTI Client Service All-Star for 2011.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara