NAME
SYNOPSIS
DESCRIPTION
INPUTS
OUTPUTS
NOTES
IMPLEMENTATION
BUGS
SEE ALSO

NAME

espp - C function to compute the taxable income from ESPP disposition

SYNOPSIS

        #include "tax/espp.h"

        time_t grant_date, exercise_date, sale_date;
        double grant_price, exercise_price, sale_price,
          purchase_price, sale_fmv_price;
        int deceased;

        struct EsppResult result = espp(
          grant_date, exercise_date, sale_date,
          grant_price, exercise_price, sale_price,
          purchase_price, sale_fmv_price, deceased
        );

DESCRIPTION

espp is a C function to compute the taxable income from the sale or other disposition of stock purchased through a qualifying ESPP program.

The EsppResult structure is defined in tax/espp.h as follows:

        struct EsppResult {
                double stcg;
                double ltcg;
                double ordinc;
                int disq;
        };

INPUTS

grant_date: the first trading day of the offering period, or the first trading day of the first purchase period after enrollment if a new offering period does not begin
grant_price: closing price on grant_date
exercise_date: the trading day that the stock was purchased
exercise_price: closing price on exercise_date
sale_date: date of sale or other disposition
sale_price: price at which stock was sold, less commission, or closing price on sale_date if disposition was not a sale
purchase_price: price actually paid for stock on exercise_date
sale_fmv_price: closing price on sale_date
deceased: nonzero if and only if the enrollee was deceased by the end of the tax year containing sale_date

OUTPUTS

stcg: short term capital gains (or loss if negative)
ltcg: long term capital gains (or loss if negative)
ordinc: ordinary income
disq: nonzero if and only if the sale is a disqualifying disposition

NOTES

All ESPP income is imputed at sale_date. However, no tax is normally withheld unless the account from which the stock is sold is subject to backup withholding.
An ESPP is a kind of employee stock option plan. However, unlike other kinds of stock option plans, no income (not even AMTI) is imputed on exercise_date.
ESPP contributions are after tax. (They are included in your W-2 income for the year in which the contribution occurred.)
All prices are aggregate, meaning that they comprise the price per share multiplied by the number of shares.
All of the parameters of this function must apply to every share sold. If shares from multiple exercises are sold, then the function must be called once per applicable exercise.
A disqualifying disposition must be promptly reported to the ESPP administrator, whether or not the enrollee is an employee when the disposition occurs. Ordinary income from a disqualifying disposition is included in W-2 income for the tax year in which the sale or other disposition occurs.
Ordinary income from a qualifying disposition is not included in W-2 income, but you must include it in ``Wages, salaries, tips, etc.'' (line 7 of Form 1040 for 2005). [Source: http://turbotax.intuit.com/tax_help/EmployeeStockPurchasePlans.html 9/4/2006]
exercise_date is the last trading day of the purchase period. A new purchase period begins at the same time as the offering period, and thereafter every 6 months, up to 4 purchase periods per offering period.
purchase_price is sometimes called ``the option price.''
purchase_price is usually 85% of the lesser of grant_price and exercise_price. Consult your plan for details.
Most plans will automatically begin a new offering period the day after exercise_date if exercise_price is less than grant_price, unless you elect otherwise. Consult your plan for details.
Under most plans, the first purchase period after enrollment is guaranteed to be the beginning of an offering period. Otherwise, the plan most likely provides for a single offering period for all enrollees. Consult your plan for details.
Normally, the plan will purchase on your behalf the maximum whole number of shares that can be acquired at purchase_price with your outstanding contributions, and will carry the balance over. However, US IRC section 423(b)8 sets a statutory limit of $25,000 on the total grant_price of all ESPP shares purchased on behalf of an employee during any given calendar year. If this limit is reached, then the balance will probably be refunded to you. Consult your plan for details.
The computation is based on US IRC section 423(c), as quoted in http://www.stockoptionadvisors.com/optionalert/2002-03-04.shtml on Feb 3, 2004.
If the disposition was a qualifying charitable contribution, then the actual capital gain for income tax purposes is zero rather than what is predicted by this program. Nonetheless, the deduction may be the full sale_fmv_price if certain criteria are met. See IRS pub. 526 for details.
If exercise_price is less than grant_price, then a disqualifying disposition can receive better tax treatment than a qualifying disposition. This is not a bug, but rather a peculiarity of the tax code.

IMPLEMENTATION

        /*
         * LEGAL NOTICE:
         * (c)2004-2006 Anders Johnson
         * The author is not qualified to give tax advice, and he
         * categorically disclaims any and all liability for this program.
         * This program may be distributed according to the terms of the
         * GNU Public License, version 2.
         */


        #include "tax/espp.h"


        #ifdef __cplusplus
        namespace tax {
        #endif


        struct EsppResult espp(
          time_t grant_date, time_t exercise_date, time_t sale_date,
          double grant_price, double exercise_price, double sale_price,
          double purchase_price, double sale_fmv_price, int deceased
        ) {
                struct EsppResult result;
                double cg, oi;
                int lt = time_compare(&sale_date, &exercise_date, 1);
                int q = deceased ||
                  (lt && time_compare(&sale_date, &grant_date, 2));
                if(q) {
                        if(sale_fmv_price < purchase_price) {
                                cg = sale_price - purchase_price;
                                oi = 0.0;
                        }
                        else if(sale_fmv_price < grant_price) {
                                cg = sale_price - sale_fmv_price;
                                oi = sale_fmv_price - purchase_price;
                        }
                        else {
                                cg = sale_price - grant_price;
                                oi = grant_price - purchase_price;
                        }
                }
                else {
                        cg = sale_price - exercise_price;
                        oi = exercise_price - purchase_price;
                }
                result.stcg = lt ? 0.0 : cg;
                result.ltcg = lt ? cg : 0.0;
                result.ordinc = oi;
                result.disq = !q;
                return result;
        }


        /*
         * Returns nonzero iff t1 exceeds t0 by more than yrs years
         * according to US tax rules.
         */
        int time_compare(
          const time_t *t1, const time_t *t0, int yrs
        ) {
                /* NOTE: If you buy on Feb 28, need to wait until Mar 1.
                   http://www.fairmark.com/news/oldblog.htm (Feb 2004) */
                struct tm tm1 = *localtime(t1);
                time_t t0a = *t0 + 24 * 60 * 60;
                /* We shouldn't relly need to worry abount DST, because
                   t0 isn't likely to be near midnight nor on a weekend,
                   but to be safe... */
                struct tm tm0 = *localtime(t0);
                if(tm0.tm_hour < 12) {
                        t0a += 6 * 60 * 60;
                } else {
                        t0a -= 6 * 60 * 60;
                }
                tm0 = *localtime(&t0a);
                return (
                  tm1.tm_year > tm0.tm_year + yrs ||
                  (tm1.tm_year == tm0.tm_year + yrs &&
                   (tm1.tm_mon > tm0.tm_mon ||
                    (tm1.tm_mon == tm0.tm_mon &&
                     tm1.tm_mday >= tm0.tm_mday
                    )
                   )
                  )
                );
        }


        #ifdef __cplusplus
        }; // namespace tax
        #endif

BUGS

The time_compare function assumes that for tax purposes the date of an event is the date in the local time zone when the event occurred. In reality, I don't know if the appropriate time zone is that of the taxpayer's primary residence, of his location at the time of the event, of the exchange on which the stock is traded, or of something else.