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Subject:   ESPPs and reinvested dividends
Date:   Sat, 14 Feb 2004
From:   Scott

Dear Michael - as a compensation professional, I truly enjoy reading your articles on equity based plans.

I have a question that has been stumping me as I haven't been able to find a definitive reference. How are reinvested dividends treated in a qualifying disposition from a 423 ESPP plan? As an example, if someone was to sell 1200 shares of an ESPP (purchased pre-2002 - with identical grant/purchase dates) of which 200 shares were from reinvested dividends during the same period, do the dividends adjust the cost basis? I can't recall seeing a 1099-DIV issued on reinvested dividends for an ESPP so I was curious how to calculate their value or adjustment to basis in determinting either a tax loss or gain on sale.

I know there must be an answer to this, but haven't been able to find it anywhere.

Your thoughts would be most appreciated,
Scott

Answer

Date:   Thu, 04 Mar 2004

Hello Scott,

The dividends are taxable and the amount of the reinvestment is tax basis. Companies should be issuing form 1099-DIV for dividends paid with respect to ESPP shares.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.