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Subject:   ESPP Plans
Date:   Tue, 14 Jan 2003
From:   Luke

Mike,

I have read many of the articles on your website and find the information to be outstanding. I have a clarification question/example on ESPP plans and the taxation upon sale. Here is the scenario:

January 1, 2002 price: $10/share
July 1, 2002 price: $20/share
Exercise price on July 1: $8.50/share
Future sale price: $30/share

Please confirm:

1. These shares must be held to January 1, 2004 to qualify for long-term gain treatment, avoiding a disqualifying disposition.
   
   
2. If the holding period is met, there will be $1.50/share of ordinary income and $20/share of long-term capital gains.
   
   
3. If the holding period is not met resulting in a disqualifying disposition, there will be $21.50/share of ordinary income with no capital gains.

Luke

Answer

Date:   17 Feb 2003

Hello Luke,

1. Yes
2. Yes
3. No. The ordinary income is the excess of the fair market value on the date of exercise over the option price, or $20 - $8.50 = $11.50. There would be a capital gain for the excess $30 - $20 = $10.

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.