Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Need ESPP holding period requirements example
Posted by: sconners68, April 3, 2017 09:24PM
The general statement for a qualifying disposition of ESPP shares is 2 years from grant date and 1 year from purchase. Understanding that purchase is an exercise of an option and the holding period date begins on the next day, which yields the one year and a day rule.
There is nothing in the law or IRS regs AFAIK that alters the two year period from grant date, but the only examples that I can find online show it also to be disqualified disposition unless you wait until two years and a day.

For Example:
If the grant date is April 1st, 2014, and the exercise date is March 31st, 2015, then when is the first date that you can sell the stock as a qualified disposition?

Is the date April 1st, 2016 or April 2nd, 2016? and why?

Thanks

Re: Need ESPP holding period requirements example
Posted by: Kaye Thomas, April 11, 2017 11:50PM
The general rule in tax law is that the holding period of any asset includes the date of disposition but not the date of acquisition. If you buy an asset on March 31, for tax reporting purposes you will show March 31 as the date of acquisition, but as a matter of strict technicality, your holding period began April 1, which is why you have to wait until the following April 1 if you want a sale to be treated as long-term. There are no rulings specifically applying this logic to a disqualifying disposition, but it's reasonable to assume that those periods would work the same way, even though some of the language used in stating the rules fails to match up with as much precision as we'd like.

In your example, a disposition on April 1 would likely be considered disqualifying because the grant date of April 1 starts a two-year measuring period that begins on April 2. If I were representing a client who had sold on April 1, and there was a significant disadvantage in treating the sale as disqualifying, I would be prepared to argue that the two-year period had been satisfied -- but I would also advise my client to be prepared for an adverse determination.

Kaye Thomas
Fairmark.com

Re: Need ESPP holding period requirements example
Posted by: sconners68, April 12, 2017 01:19PM
Thanks for the reply.

From 1.424-1 Definitions and special rules applicable to statutory options.
[www.law.cornell.edu]
(c)Disposition of stock.

Example 1.
On June 1, 2004, the X Corporation grants to E, an employee, a statutory option to purchase 100 shares of X Corporation stock at $100 per share, the fair market value of X Corporation stock on that date. On June 1, 2005, while employed by X Corporation, E exercises the option in full and pays X Corporation $10,000, and on that day X Corporation transfers to E 100 shares of its stock having a fair market value of $12,000. Before *June 1, 2006*, E makes no disposition of the 100 shares so purchased. E realizes no income on June 1, 2005, with respect to the transfer to him of the 100 shares of X Corporation stock. X Corporation is not entitled to any deduction at any time with respect to its transfer to E of the stock. E's basis for such 100 shares is $10,000.

This example seems to indicate that the two year holding period of a statutory option begins with and includes the grant date.

Re: Need ESPP holding period requirements example
Posted by: sconners68, April 12, 2017 01:19PM
From IRS Publication 525 (2016), Taxable and Nontaxable Income (https://www.irs.gov/publications/p525)
Under the Statutory Stock Options section,
.....
Holding period requirement.

You satisfy the holding period requirement if you don't sell the stock until the end of the later of the 1-year period after the stock was transferred to you or the 2-year period after the option was granted. However, you are considered to satisfy the holding period requirement if you sold the stock to comply with conflict-of-interest requirements.

Your holding period for the property you acquire when you exercise an option begins on the day after you exercise the option.


The IRS explicitly states that the holding period begins on the day after the exercise of the option, but makes no mention of the other component which is the two year from grant date.

Re: Need ESPP holding period requirements example
Posted by: Kaye Thomas, April 12, 2017 08:28PM
That's what I had in mind when I said "some of the language used in stating the rules fails to match up with as much precision as we'd like" and that I'd be willing to argue that position. I wouldn't advise a client to rely on that language, though, in the normal situation where waiting one more day is not a big deal. If push came to shove, I think the IRS would have a good chance of prevailing in arguing that for tax purposes in general, your holding period begins the day after you acquire an asset.

Kaye Thomas
Fairmark.com



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