ESPP - Merill Lynch Cost Basis Tax issue

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FootballFan5548
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Joined: Mon May 01, 2017 2:20 pm

ESPP - Merill Lynch Cost Basis Tax issue

Post by FootballFan5548 »

Since 2011 I had been buying into my company's ESPP. We get a 15% discount, I believed in my company, (and I wasn't a Boglehead back then) so I kept on buying in.... It paid off very well for me, as in July 2017 we got acquired for a significant premium over book value and all of my existing ESPP holdings were tendered and sold at a much higher price. Very nice gains on nearly $100k of equity...

now for my issue... Merrill Lynch was the ESPP broker, and for the life of me, I can't make any sense of the cost basis for my 2017 tax return and this equity gain. Merill is showing a cost basis of $0.00 for many of the years where I had two "buy" transactions in the ESPP program. For some of the other years it's showing a cost basis well below the amount which I had been paying in... like $500 for total cost basis of an entire year, which makes no sense. Basically, I have no clue how to calculate cost basis on this transaction and it's causing me to owe an absolute fortune in taxes, which I think is in error.

Anyone ever deal with something similar or have any idea how to handle this? When I called Merrill, I was told they're not licensed tax professionals and I need to talk to my own tax professional... which was frustrating.
inbox788
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by inbox788 »

Begin with the 1099 forms. Do you have any for 2017 ESPP investments? Any prior years? I used to lose the paper copies all the time, and finally a few years ago, I was able to get everything electronic, and that has been a savior. Log into the ML website and look at their tax section to see how far back the documents go. Come back and let us know what you found.

Also, your last/year-end earning statement/pay stub may also be helpful. There should be an ESPP line. List any/all categories if you're not sure what they are.

Now if they are reporting these erroneous number to the IRS, you may encounter problems down the road. They should be responsible for the covered years, which should be all but the first year or two at most.

Did you sell all of your holdings? And if not, which lots did you wind up selling? And what accounting method was used? Specific ID vs FIFO vs ???. And how is it documented?

When dealing with ML, avoid anything discussion that might sound like you're seeking tax advice. All you need from them is accounting data and information that they have. The more specific you're request, the less they can use a lame excuse to dismiss your request.

Don't stress. I hate doing taxes, but your issue is fairly straight forward once you figure out the information you need and where to get it.
Jack FFR1846
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by Jack FFR1846 »

We had a lot of discussion about this because it is so complicated. If you buy at a 15% discount, your W2 includes this as income and . You may have an added gain from the time you vested till you sold. You will owe tax on this gain. Then there can be gain if you purchased at an additional discount because they used the price at the beginning of the buy period (so if the stock rose). You owe tax on this gain and the gain is included in box 14 - SG on your W2 and is part of your total income.

I'm really just reading from the explanation we were sent. We also were told that our provider (eTrade) shows $0 as the cost basis, which is of course not real. I can go to my eTrade account and find the basis. But the discount and stock gain from rising over the buy period is already reported on your W2. Don't double pay your tax, please.
Bogle: Smart Beta is stupid
Topic Author
FootballFan5548
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by FootballFan5548 »

There were not any 2017 investments since we found out at the end of 2016 we were going to be acquired, so the last official "buy" was 12/31/16.

My HR was able to find all of my memos showing my biannual contributions for each year I was enrolled. For instance, January - June 2013 I bought 66 shares, July- December 2013, I bought 63 shares, etc. Of course, those numbers do NOT add up to the Merrill Lynch amount of shares that are shown for some reason on my 1099. I've found my 2016 last paystub and it shows an amount of roughly $400 so roughly $10,400 for the full year of 2016. Can I use that as my basis?

I did not sell any of my holdings until the acquisition took place, when all were sold for me for a combination of cash and new company stock... mostly cash. This is very very confusing. For the first time I'm using an outside tax preparer, but I'm also concerned when he asks questions I won't know the answers for him.
lstone19
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by lstone19 »

One of the issues at play here is that under the new reporting rules (covered securities), brokerages are required to report the discounted price you paid for the stock as the basis even though you're allowed to report an adjusted basis recognizing what was reported on W-2s. In the case of some employer plans, the basis that the brokerage is required to report is zero.

Are you sure ML didn't provide you any supplemental information that includes the adjustments you can make? For 2017, I had stock sales from an RSU plan of my employer administered by Fidelity and my wife had sales from an ESPP of her employer administered by E*Trade. Both of them provided a supplement that listed for each sale, what the adjusted basis should be as well as the amount of income previously reported on a W-2. For the RSUs, the official reported basis was zero so the adjusted basis was the same as the W-2 income. For the ESPP, the official reported basis was the 15% discounted price with the W-2 income being the difference between that and the adjusted basis.

These adjustments go on Form 8949 columns f (reason code) and g (amount). Column e is always the basis reported on the 1099-B.

Note that the above only applies to covered securities. But unless there are different rules for employer plans, all stock purchases beginning 2011 are covered.
inbox788
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by inbox788 »

FootballFan5548 wrote: Tue Mar 06, 2018 1:56 pmMy HR was able to find all of my memos showing my biannual contributions for each year I was enrolled. For instance, January - June 2013 I bought 66 shares, July- December 2013, I bought 63 shares, etc. Of course, those numbers do NOT add up to the Merrill Lynch amount of shares that are shown for some reason on my 1099. I've found my 2016 last paystub and it shows an amount of roughly $400 so roughly $10,400 for the full year of 2016. Can I use that as my basis?

I did not sell any of my holdings until the acquisition took place, when all were sold for me for a combination of cash and new company stock... mostly cash. This is very very confusing. For the first time I'm using an outside tax preparer, but I'm also concerned when he asks questions I won't know the answers for him.
Don't worry, if he's a competent tax preparer, he will help you find the answer you need or point you where to look. My accountant always wants the last December earnings statement because a lot of the needed is clearly marked there. You probably have been paying taxes all along, hopefully through share withholding. What this means is that you might have received 66 shares via ESPP, but maybe 10 were sold off to pay taxes and the broker might only receive the remaining 56. Just realize you'll be paying taxes on every extra dollar you get as either income or capital gains. Just trace one lot across time, one step at a time and it will make more sense.

The $400 could be the bargain element (on 66+63 shares). Since you've already paid taxes on that, your cost basis is whatever the stock was worth on June 2013 when you bought the 66 shares, minus whatever shares were sold to pay taxes, so multiply the price by the remaining shares.
https://turbotax.intuit.com/tax-tips/in ... /L8NgMFpFX

The $10,400 doesn't make as much sense. What exactly are the headings on these numbers and what period do they apply to? Just the pay period or YTD?
Topic Author
FootballFan5548
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by FootballFan5548 »

The $10,400 is just $400 per pay period multiplied by 26 pay periods to get $10,400. So that's the amount I paid in out of my paycheck. That's why I was wondering if that should be my basis.

Thanks for the help... I'm hopeful I can get this resolved.
inbox788
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by inbox788 »

FootballFan5548 wrote: Tue Mar 06, 2018 4:04 pm The $10,400 is just $400 per pay period multiplied by 26 pay periods to get $10,400. So that's the amount I paid in out of my paycheck. That's why I was wondering if that should be my basis.

Thanks for the help... I'm hopeful I can get this resolved.
Ah, that makes a little sense now. There's still the bargain element that you should have been paying taxes for all along now, which should be 15%+ of that amount. Or that may be the value of the shares that were taken out of your account (missing shares between 66 and what winds up in your brokerage), but should show up somewhere on your earning statement or w2. Is there a value around $1500-2500 that you can't account for?
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FiveK
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Re: ESPP - Merill Lynch Cost Basis Tax issue

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Ace1
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Re: ESPP - Merill Lynch Cost Basis Tax issue

Post by Ace1 »

Football Fan
Typically for an ESPP, you would receive a form 3922 that contains the details of each stock purchase
for each year you made a purchase. This document contains all the data you need to determine your basis.
There are 2 components to calculating your basis.
First part is the discount you received when you purchased the shares.
This amount MAY have been in each years w2 as additional earnings.
If it was, you have the answer to part one. If it was not, you need to calculate that value, and add it into
your taxable income using form 4852, substitute w2.
Second part of the formula is a value that considers fair market value at offer and purchase date but results
in the price you actually paid for the shares ..( should be the payroll deduction you experienced).
The sum of the two parts (discount and purchase price) will be your basis.
If the broker has reported incorrect basis (based on the abcde code on the 1099B), you will need to add in
the basis adjustment to get to your correct calculated basis.
For additional explanation, intuit has a very nice explanation of the formula ... google espp tax reporting.
If the number of shares sold exceeds your purchase number of shares, you probably had dividend reinvestment
occurring, and this will add to your basis, since you declared those dividends each year.
Ace
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