Tax Year Prior to 2020: Sold ESPP stock purchased before company split into 2 different companies. Form 3922 is incorrect.

[zundapp]

I have been in my company ESPP program for many years. The company, A, split itself into 2 entities. I ended up with stock in both companies. I now work for company B.

I sold company A stock a couple years ago and claimed the discount as income.

I am now selling some of company B stock that came from this split.

All of the income from the discount was already reported.

However, company B stock did not officially exist on the purchase dates reported on the 1099-B.

How do I report this?

[VictorW9]

I believe you have the original form 3922 sent to you when you acquired the stock. The cost basis will therefore be the actual price you paid for the stock (the discounted price) times the number of shares. For example ($15 x 200 = $3,000) plus the amount you reported on your line 7 of your 1040 or in box 1 of your W-2 say $600 was the bargain you got. Your basis now when selling will be $3,600. These numbers were just for illustrative purposes.

[zundapp]

Thanks for the reply but I may not have explained my situation accurately enough.

From 2000-2014 I worked for company A and participated in the ESPP with a 15% discount.

In 2014 the company decided to split into 2 different companies. I now work for company B.

When the split happened, all shareholders of company A were given a number of shares in company B.

In 2015 I sold all my shares in company A.  On my taxes I reported the cost basis as per the various 3922 forms I had collected. I paid for the entire 15% discount at that time as regular income.

Now I have sold some of the shares in company B that I obtained as a result of the split.

The 1099B I received shows the various stock purchase dates during the years before company B existed.

1) Since I already reported the full amount of the ESPP discount in 2015, Do I have to report that again?

2) If I just report the stock sales as normal (non-ESPP) shares, will the purchase dates that predate the companies existence cause a problem or result in an audit?

3) How should I report the capital gains in this situation?

[tek4]

I was sorry to see you didn't get a real answer to your question because I have a similar situation in knowing how to handle the discount rate that needs to be reported as ordinary income at the time of sale.  I know the cost basis is spread over both companies, but I can't find anything on the internet that explains how the discount is handled - does it spread over both company's stock at the same rate the cost basis does, does the discount fully stay with the original company's stock (which parallels what you did in reporting it all when you sold "Company A's stock"), or is there a completely different way the discount splits / spreads?

If you ever figured it out or confirmed how via other sources, I'd sure love to know.  Thanks.

[GeorgeM777]

If you was two different publicly traded companies, why would you need to spread your cost basis over two companies.  The previous poster indicated that the ESPP purchases/sales involved company A and company B, and therefore, the poster could have dealt with each ESPP purchase and sale separately.  In other words, calculate the discount rate and gain/loss for company A stock, and do the same for company B stock.   

Additionally, there is the issue whether your sales of ESPP stock were qualified dispositions or non-qualified dispositions.  The link to the TurboTax article below has some examples of each type of disposition as well as some other information which you might find helpful.

Employee Stock Purchase Plans

@tek4

[tek4]

Because they were one company - the company itself split.  To give the real example, I worked for Hewlett Packard (HP ... HPQ stock symbol).  But HP split into HP Inc. (retained the HPQ symbol) and Hewlett Packard Enterprise (HPE stock symbol).  When that split happened, HPQ retained 47.15% of the cost basis and HPE took the other 52.85%.  To make matters worse, HPE then sold off parts of its business, which further splintered the 52.85% cost basis.  But lets keep things more simple.  I am good with cost basis, but I was unsure if the discount rate distribution follows the same rules such that HP Inc. would be the same 47.15% of the discount rate taxable amount and HPE (before its subsequent divestitures) would be the same 52.85%.  I would think so, but don't want to assume!  On the simple side, all stock is qualified (held at least two years after the offering (grant date) and at least one year after the exercise (purchase date)).

If I sold all the stock at the same time, maybe there wouldn't be an issue since it would all come out in the wash, but I only sold some of each and different amounts from different lots.  So to correctly report, I need to know how the discount rate taxable amount is handled - is it the same or different than cost basis, and if different, what?  Thanks.

[GeorgeM777]

Yes, you can apply the same analysis to the discount rate as you did to the adjusted cost basis following the split in HPQ stock.  We appreciate the additional information you provided.

Your cost basis analysis is consistent with the HPE's letter dated November 11, 2015, in which the company provided an example of how a shareholder may calculate their cost basis in HPQ stock following the distribution of HPE stock.   

In a recent TurboTax article discussing qualified and non qualified ESPP sales, the example of a qualified disposition contemplated that the bargain element (i.e., employee discount) was added to cost basis in connection with calculating the total capital gain.  Thus, your suggested approach of allocating the discount rate based on the percentages used to determine cost basis in HPQ and HPE stock seems reasonable.

Here is the link to the TurboTax article that discusses Employee Stock Purchase Plans.  The example referenced above is entitled Situation 3 and appears near the end of the article.

Employee Stock Purchase Plans

@tek4

[tek4]

Yes, I had seen that article and it was very helpful ... other than tackling the company split scenario I have.  Your response helps me feel more confident in my approach, so thanks.  You can consider this "resolved".