ESOP's questions

[mblatour]

I have a new client (couple) who wasn't very organized and gave me a mess of paperwork....fun! As I'm weeding through quarterly and yearly statements from Morgan Stanley trying to find any sort of reporting forms, I get to one 1099-B for the wife which shows 4 stock sales and also see a yearly summary which shows the exercised details for those 4 transactions. I will admit, I haven't seen but a couple of these in 10 years, so please bear with me. Do I report the info from the 1099-B as usual on the Schedule D for those 4 and leave it at that?

OR do I need to take additional info from the yearly summary which shows Federal and MN State taxes withheld, as well as Gain reported and enter that into the Schedule D worksheet in my software?


Whilst I have you here - her hubby had a code V for $11,250 (stock options of course!) for the first time on his W-2. They gave me a quarterly statement from Jan-March to show me that he paid Federal & MN taxes on that amount. That would just be included in his Wages correct? I was thinking he'd need a 1099-B, but correct me on this if I'm wrong because he only exercised not sold the stock options.

Thank you so much for any direction here....sorry if I spoke in circles!! lol

Becky

[Snaggletooth]

Stock Option Cycle

Sometimes the best way to understand things is to live and die with an example, so let's do a chronological journey with a typical ESOP.
Let's stop three times on the journey.

Jerry goes to work with PepsiCola in Year 0. Part of his compensation plan allows for the awarding of stock options, but he must first be with the company long enough for his benefits to "vest". During Year 0 he receives stock option rights to buy 1000 shares of PepsiCola for a penny apiece, but the options have a validation date during Year 5.

Fast forward to Year 5, when Jerry's service vests and the options become viable. PepsiCo is selling for $20/share. Jerry then buys 1000 shares for a penny, or $10 total. Jerry's economic benefit is deemed to be $19,990. Let's make our first stop at this point. This "economic benefit" is deemed to be COMPENSATION, and if the world came to an end at that moment, $19,990 would go on his W-2 in the box that reports, "Wages, Tips, Other Compensation". Nothing else has happened at this point.

But we don't anymore crank the vehicle and we have to stop again. $19,900 is immediately taxable and more importantly, SUBJECT TO WITHHOLDING. Withholding means that $1520 must go for SS/Medicare. Beyond that, assume 20%, or another $3980 goes for FIT. Total withholding is thus some $5500 and for all practical purposes must be withheld immediately. (I've left out state income taxes, but that's just another bucket)

OK, Jerry, pay up this $5500. But wait a minute! Jerry doesn't have $5500 in cash laying around, he only has stock!! So how does the $5500 get withheld? Never fear, for Pepsi, like most ESOPs, already has this event covered. They unfurl their "stock repurchase plan". They buy back 275 of Jerry's shares from him at the same price, for $5500. Now at this point, all the boxes on the W-2 which show "withholding" are populated as well.

This could end the journey if Jerry wishes. He now has 725 shares of PepsiCo in his possession and the only thing that has happened is his W-2 is altered for wages and for withholdings. These 725 are worth $14,500. And since he has been taxed on it, his basis is also $20/share or $14,500. There is no need for any other tax document, in particular no 1099-B.

But Jerry would rather have cash, so let's move him along to his last stop. Before the day is over, he goes to Pepsi Human Resources, and signs an order to sell his 725 shares. But by the time his transfer agent actually SELLS the stock, it's value has gone up three cents, to $20.03 per share.
At this point in the cycle, we now have a SALE and a 1099-B. He has sold his 725 shares for $14,522 and sticks it in his pocket. His basis was $14,500 so he has a reportable capital gain at year-end of $22 on this sale.

It is very common for ESOP stock to be sold within 24 hours of consummating the options. Taxpayers often receive a 1099-B for large amounts of money and are intimidated, believing they are being taxed on huge amounts of money. But the actual profit is minimal, and there could easily be a small loss as well.

Think of the whole thing as three distinct transactions, and you won't have problems. Realize also, that after exercise of the options, there is usually nothing forcing the employee to sell his stock, and if he keeps it until Dec 31 there will be no 1099-B.

[mblatour]

Snag, your knowledge never ceases to amaze me!

Fast forward to Year 5, when Jerry's service vests and the options become viable. PepsiCo is selling for $20/share. Jerry then buys 1000 shares for a penny, or $10 total. Jerry's economic benefit is deemed to be $19,990. Let's make our first stop at this point. This "economic benefit" is deemed to be COMPENSATION, and if the world came to an end at that moment, $19,990 would go on his W-2 in the box that reports, "Wages, Tips, Other Compensation". Nothing else has happened at this point.

But we don't anymore crank the vehicle and we have to stop again. $19,900 is immediately taxable and more importantly, SUBJECT TO WITHHOLDING. Withholding means that $1520 must go for SS/Medicare. Beyond that, assume 20%, or another $3980 goes for FIT. Total withholding is thus some $5500 and for all practical purposes must be withheld immediately. (I've left out state income taxes, but that's just another bucket)

OK, Jerry, pay up this $5500. But wait a minute! Jerry doesn't have $5500 in cash laying around, he only has stock!! So how does the $5500 get withheld? Never fear, for Pepsi, like most ESOPs, already has this event covered. They unfurl their "stock repurchase plan". They buy back 275 of Jerry's shares from him. Now at this point, all the boxes on the W-2 which show "withholding" is populated as well.

This could end the journey if Jerry wishes. He now has 725 shares of PepsiCo in his possession and the only thing that has happened is his W-2 is altered for wages and for withholdings. These 725 are worth $14,500. And since he has been taxed on it, his basis is also $20/share or $14,500. There is no need for any other tax document, in particular no 1099-B.

But Jerry would rather have cash, so let's move him along to his last stop. Before the day is over, he goes to Pepsi Human Resources, and signs an order to sell his 7250 shares. But by the time his transfer agent actually SELLS the stock, it's value has gone up three cents, to $20.03 per share.
At this point in the cycle, we now have a SALE and a 1099-B. He has sold his 725 shares for $14,522 and stick it in his pocket. His basis was $14,500 so he has a reportable gain at year-end of $22 on this series of transactions.

It is very common for ESOP stock to be sold within 24 hours of consummating the options. Taxpayers often receive a 1099-B for large amounts of money and are intimidated, believing they are being taxed on huge amounts of money. But the actual profit is minimal, and their could easily be a small loss as well.

Think of the whole thing as three distinct transactions, and you won't have problems. Realize also, that after exercise of the options, there is usually nothing forcing the employee to sell his stock, and if he keeps it until Dec 31 there will be no 1099-B.

Thank you so much for your reply. My husband definitely fits the first stop in the journey as far as the "economic benefit" and taxes withheld by all purposes on his W-2 (with no 1099-B).

The wife is where I'm still snagged (no pun intended - lol). Her 1099-B shows those very small gains as you mentioned above for the 4 transactions. The date of sale and acquisition date are the same (so your 24 hr. comment was dead on). But what I am not getting is where is her "economic benefit" or "compensation" being reported? Not on her W-2....... I'm still missing something in the link and my clients don't know what's what, and I certainly don't want to look like a fool asking. Thanks!

[Gary2]

I think this still needs some more clarification.

First, although I remember a time when ESOP was used either synonymously with ESPP or generically for any employee stock plan, nowadays it's usually reserved for a particular type of qualified retirement plan (for which Publix is the best known example). The current thread doesn't sound like an ESOP in that sense.

What is sounds like is an NQSO plan - Non-Qualified Stock Options - because of the code V. And indeed the code V represents additional compensation added to box 1. If you look at the paystubs, you'll see that at some point, often late December, an extra amount corresponding to the code V amount was added to gross but wasn't in net.

[mblatour]

I think this still needs some more clarification.

First, although I remember a time when ESOP was used either synonymously with ESPP or generically for any employee stock plan, nowadays it's usually reserved for a particular type of qualified retirement plan (for which Publix is the best known example). The current thread doesn't sound like an ESOP in that sense.

What is sounds like is an NQSO plan - Non-Qualified Stock Options - because of the code V. And indeed the code V represents additional compensation added to box 1. If you look at the paystubs, you'll see that at some point, often late December, an extra amount corresponding to the code V amount was added to gross but wasn't in net.

Gary, the husband didn't provide any paystubs unfortunately, but he did provide the Exercise Confirmation Statement from Morgan Stanley/Smith Barney which has his employer's name as the Company ID. The plan name is the 2005 Incentive Plan. This very much to me looks like an ESOP; but I'm bad at explaining it I am afraid.

His wife doesn't work for the same employer and yet has a yearly statement, also from Morgan Stanley/Smith Barney, and hers says "Global Stock Plan Services". No employer listed. Again, she's the one whom received the 1099-B. Does this help to clarify?

[Gary2]

Gary, the husband didn't provide any paystubs unfortunately, but he did provide the Exercise Confirmation Statement from Morgan Stanley/Smith Barney which has his employer's name as the Company ID. The plan name is the 2005 Incentive Plan. This very much to me looks like an ESOP; but I'm bad at explaining it I am afraid.

His wife doesn't work for the same employer and yet has a yearly statement, also from Morgan Stanley/Smith Barney, and hers says "Global Stock Plan Services". No employer listed. Again, she's the one whom received the 1099-B. Does this help to clarify?

Let me put it this way. With ESOPs in the sense of a retirement plan that invests in the employer's stock, they wouldn't be able to sell the stock while still employed, so these aren't ESOPs in that sense.

As for the paystubs, that's just to confirm what should be the case. It would be a major error on the employer's part (or the payroll company's part) to include a code V value in box 12 and not also include that in total wages in box 1. I no longer consider it necessary for me to prove to myself that the employer did it right unless the client insists and provides enough of the backup docs. I just assume that the compensation has been properly added to the W-2.

[mblatour]

Let me put it this way. With ESOPs in the sense of a retirement plan that invests in the employer's stock, they wouldn't be able to sell the stock while still employed, so these aren't ESOPs in that sense.

As for the paystubs, that's just to confirm what should be the case. It would be a major error on the employer's part (or the payroll company's part) to include a code V value in box 12 and not also include that in total wages in box 1. I no longer consider it necessary for me to prove to myself that the employer did it right unless the client insists and provides enough of the backup docs. I just assume that the compensation has been properly added to the W-2.

Thanks Gary. I feel good about it being included. The husband did say he was already "taxed" on it and therefore I will just ask when I speak to him tomorrow that he's certain it is in the wages as well.

I'll just have to figure something out on my own by researching the wife. I've got about 7 to 8 hours into a return that I'll charge about $200 for. Sickens me......

[Lion]

Sounds like for wife you might have all the info you need in her 1099 info for wife. If you're not sure, give us info with exact or round numbers for all that you know re wife's sale.

If hubby didn't sell, nothing to report yet. (Unless it's the one that has an AMT issue.) And, there is one case where a 1099-B does not have to be issued, so there's that.

Follow the money. If it doesn't seem to flow in numbers that seem reasonable to you with what you know from your clients, then come back here with specific questions.

[mblatour]

Sounds like for wife you might have all the info you need in her 1099 info for wife. If you're not sure, give us info with exact or round numbers for all that you know re wife's sale.

I tried posting, but it won't layout cleanly into columns. It just wants to jam everything together, which makes it a big mess.....

[mblatour]

Sounds like for wife you might have all the info you need in her 1099 info for wife. If you're not sure, give us info with exact or round numbers for all that you know re wife's sale.

Okay here goes (I'll leave out boxes for non-covered securities, plan#'s, and misc. junk):

Form 1099-B (there are 4 transactions like what I show below):

Description: Ascena etc, etc
Date of Sale: 9/24/13
Date of Acquist: 9/24/13
Qty: 34.00
Gross Proceeds: $562
Cost Basis: $577
Fed Tax Withheld: $0

This looks cut and dry to me, but then here is where I get confused....her year end statement she gave me says this:

Exercise and Sell-to-Cover Transactions
Exercise Date: 9/24/13, 9/27/13
Grant Price: $0.00, $16.98, $17.33
Shares Exercised: 82, 0, 34
Gain: $1,392
Sales Proceeds (less commissions) (less fees): $589.11, ($25.00), ($2.52)
Option Cost: $0
Taxes: Federal ($385.46), Fica1 ($86.33), Fica2 ($20.19), State ($69.61)
Backup withholding: $0
Net Amt/Net Shares: $0.00

Again, there are 4 transactions like this one above.


Thoughts?
Thank you!

[Snaggletooth]

Amazing?

Becky thank you so much. There are some things about me that people think are amazing, but most of them are not as complimentary as your comment.

Just take care of the North Shore for me until I can get back up to that wonderful Superior lakeshore. What a great place to spend a few days in the middle of July. I've even been in winter and have enjoyed it immensely. The North Shore is well-known to people in Minnesota, but it is not that well known outside of the area. Which is fine - I don't want it to turn into another tourist trap.

[mblatour]

Ice Caves

Just take care of the North Shore for me until I can get back up to that wonderful Superior lakeshore. What a great place to spend a few days in the middle of July. I've even been in winter and have enjoyed it immensely. The North Shore is well-known to people in Minnesota, but it is not that well known outside of the area. Which is fine - I don't want it to turn into another tourist trap.

You are so welcome! Speaking of the North Shore, the ice formations this winter have been absolutely breathtaking. I have so many photographer friends whom share their photos daily and the beauty beyond anything you've ever seen! With the grand lake nearly 100% frozen over at one point, eventually that ice had to be pushed up onto the shorelines causing breathtaking ice formations! In addition, across the way in Bayfield, WI, at the Apostle Islands, if you Google the Ice Caves, upwards of 50,000 people trekked over a mile on foot to see the incredibly unique formations that Mother Nature had created off the shoreline walls on the edge of of Lake Superior. I cannot even describe to you what I saw in those pictures, therefore I can only imagine what it must have been like to see in person!

We truly have something special here.

[Lion]

The Sales Proceeds equal equal the Gross Proceeds. Unless you have reason to doubt their cost basis or doubt the w/h taxes were applied to the W-2 or want to check the math, ignore the w/h taxes as they're a W-2 item (you'd need check stubs to confirm the extra w/h taxes were added) and not Schedule D. I don't audit my clients' transactions in April when I'm busy. If they need my help with that, they can call me when the transaction takes place. What don't you agree with re their Cost Basis?

[mblatour]

What don't you agree with re their Cost Basis?

My biggest concern was that the wife didn't have a Code V on her W-2 showing any sort of transaction occurred and the husband did. I wanted to be sure that the taxes WERE actually reported someplace. I did call Morgan Stanley today and chatted with a rep about the account vaguely as I wasn't granted permission by my tax client; although I know they'd have given it. I never gave them any account number or anything. They said to just use the 1099-B as they didn't think there was anything more to report.

Fingers crossed!

[joanmcq]

The wife has an ESPP, the husband has NQSOs. Code V is only for NQSOs. Hubby has a 1099-B somewhere if he sold, which is highly likely. Most of the NQSOs I see are same day exercise & sell. So he'll have to dig up the 1099, or you'll have to figure out the sale price from any other docs he has. The V amount is only the amount of the spread, which is taxed as wages. Wife's 1099-B sounds correct. Just use those figures as you would any other stock sale.

Disregard any of the withholding & stuff shown on the statements, it's all on the W2.