Conference 7.286::digital

>    We all know why our ESOP program was stopped.(or maybe some people
>    don't) The tax credit to DEC went bye bye.Wouldn't it be nice if
>    our company gave us employees something like that without regards
>    to any break of any kind?(profit sharing?)

It's really not quite that simple.
Yes, the tax break made it advantageous for the Company to provide the stock
to employees, but it also set up a mechanism for maintaining the plan.
The Company can still give us all stock, but it becomes taxable income
to the employees.  If there's no difference in how it looks to employees,
then why make it more complicated by masking income as stock?
(Just ask for the extra 0.75% the ESOP plan represented at your next review.)

- tom]

    They do give us something like that.  It's called the ESPP (Employee
    Stock Purchase Program), and it's a good deal.  The 15% discount
    turns out to be about a 60% annualized return (because your money
    is in the program for an average of about 3 months).  The only risk
    is a drastic drop in the value of the stock during the period from
    the day they decide the price to the first day you can sell it (usually
    one day).  Unlikely, but theoretically possible.  Well worth the
    risk given the huge return on investment.
    
    It is difficult to determine DEC's real contribution to this plan,
    beause the price you pay for the stock has no relation to the price
    DEC paid to acquire it for you.
    
       Gary

    Please regard this as a friendly request:
    
    How do you come up with a 60% annualized return on a 15% profit
    on our stock purchase plan??
    
    I'm really interested to see how this is calculated.
    
    Al

    60% is the correct annualized return, when calculated in this way:
    
    Take the same amount of money out of your paycheck each week as you
    have taken out for the stock purchase program and put it in some
    "interest bearing" investment. At the end of six months, take all of
    the money out. In order for the money you take out to be equal to the
    money you get by selling your stock at the end of six months, the
    annual interest rate on the "interest bearing" investment has to
    be 60%.
    
    Why is this? 
    
    You are guaranteed 15% absolute return on your stock purchase
    investment (if you sell immediately). But the 15% was achieved in
    six months, making the effective *annualized* return 30%. But you
    did not have to put up all of the money up front, but only an equal
    portion each week. On the average, you only had half of the money
    tied up for the whole six months, making an *annualized* return
    of 60%.
    
    This calculation only applies for the six month period. If you continue
    to hang on to the stock, or if you sell it, the high effective return
    on your money no longer applies. Then, if you keep it, you are betting
    on the stock market. 
    
    Also, note that if the price of DEC stock climbs during the six
    months, your effective return is *much* higher than 60% annualized
    return.
    
    Anybody who does not have the max taken out of their paycheck for
    the stock purchase program is unwise, in my view. It is a no lose
    situation, and even worth borrowing the money (at 20% interest)
    to do it.
    
    Rich

>    60% is the correct annualized return, when calculated in this way:
 
70.6% is the "correct" annualized return, when calculated as in the
previous reply.  This is because the 15% discount equates to a 17.6%
return.  If you spend $100 and get a 15% discount, the value of what
you buy isn't $115, it's $117.65.

But the method given isn't meaningful.

The stock plan at my previous company wasn't as good as DEC's.  At the
end of each week in which my account contained enough money, I bought
shares at a 15% discount from the average market price on that day.  

With the DEC plan:
>    the 15% was achieved in
>    six months, making the effective *annualized* return 30%.

With my previous company's plan:
the 15% was achieved in
one week, making the effective *annualized* return 780%.

(Or a 17.6% return yields an effective *annualized* return of 917.7%!)
							Larry

    The return on the stock plan is discussed in detail in the
    Investing notes file.  The 60% number I gave is, of course, a ballpark
    figure, quickly calculated by multiplying the discount (15%) by
    the approximate average length of time the money is invested (three
    months).  The true return is higher than that, as indicated in .5.
    A precise calculation is a bit more complicated.
    
    I do take exception to the assertion that 15% is guaranteed.  There are
    NO guarantees, merely probabilities.  There is a one day gap between
    the time the stock is purchased for you and the earliest point at which
    you can sell (well, maybe it's just 16 hours).  In theory, anything can
    happen to the stock price during that period, including a massive drop
    in price.  The opening price one day can be quite different from
    the closing price the previous day.  So, while it's extremely unlikely,
    in theory you can lose money.
    
    It's a gamble, but the odds are massively in your favor.  
    
       Gary

    re .1:
    
    The ESOP plan gave DEC a tax *CREDIT* not a deduction.(there's a
    huge difference) Any company (in the US anyway) cannot claim any
    sort of tax break(credit or deduction) on an employees salary
    (unless,of course,he/she is part of a special program,but that's
    something else,we're talking about average employees) Therefore,since
    ESOP and salaries are like apples and oranges,let's leave one out.Let's
    leave salaries out.
    If I read .1 correctly,it's saying that the .75% bonus is the same
    as your salary to DEC.We should just ask to have that figure tacked
    on to our raises.Given what I said above,do you think DEC would
    do it? *NO*,*NO*,a hundred times NO! In no way could DEC claim that
    .75% as any kind of tax break.
    You also say that a way to maintain the program had to be set up.This
    implies to me that this cost DEC.If there was any cost,it was
    minimal.How much would you bet that 95% of the people needed to
    administer that plan already worked for DEC? They probably worked
    in departments that were being phased out.
    I'll stick with my original question as posed in .0: Wouldn't it
    be nice if DEC gave us something for nothing?
    
    
    Now that I have gotten that out,I'm ready to be roasted and skewered.

> < Note 499.7 by WINERY::BOUCHARKE >

>    If I read .1 correctly,it's saying that the .75% bonus is the same
>    as your salary to DEC.We should just ask to have that figure tacked
>    on to our raises.Given what I said above,do you think DEC would
>    do it? *NO*,*NO*,a hundred times NO! In no way could DEC claim that
>    .75% as any kind of tax break.
My comment about asking for the extra 0.75% was partly facetious.
You are wrong in one regard, however, in that DEC can't take the 0.75% as a tax
break.  It becomes a valid cost of doing business, and as such, is directly
deductable.  I know the difference between a credit and a deduction,
but I lumped them both under "tax break" for simplification.

>    You also say that a way to maintain the program had to be set up.This
>    implies to me that this cost DEC.
The task of maintaining a plan falls to both the employer and the government.
With the phase out of the ESOP plan, the IRS presumably removed all the right
boxes from all the right forms, so the Company had no reason to separate
the benefits of the plan from normal benefits.  If 401(k) is repealed,
do you think the SAVE plan will be maintained?  

>    I'll stick with my original question as posed in .0: Wouldn't it
>    be nice if DEC gave us something for nothing?
Sure, I suppose it would, but why won't you accept a 0.75% raise 
as that "something?"

- tom powers]

    Does anybody understand the tax implications of ESOP now?

    We get a 1099 with an amount declared as income -- even if we
    didn't sell the stock. Investor Services refuses to answer
    tax questions.

    o I did not ask for this stock.

    o I did not sell the stock.

    o But according to several people, I must pay tax on the
      "income" reported on the 1099 form.

    I don't see how this can be considered "income" when I haven't
    sold it, never bought it, and didn't ask for it.

    I would sure appreciate some input here. April 15 is right
    around the corner and I stand to lose some good money if
    this is true (DEC did not withold taxes on this amount).

    - Larry    

    RE: .9
    
    >Does anybody understand the tax implications of ESOP now?

    There are several notes in the INVESTING conference providing more
    detail on the tax implications.

    
    >o I did not ask for this stock.

    True, but it was part of DEC benefit plan.
    
    >o I did not sell the stock.
    
    Yes, but the IRS considers it a rollover.
    

    >o But according to several people, I must pay tax on the
      "income" reported on the 1099 form.

    Absolutely.  Any amounts reported on the 1099-R must be reported
    as income.
    
   > I don't see how this can be considered "income" when I haven't
   > sold it, never bought it, and didn't ask for it.

    No one said life was fair...According to the new tax law it is income
    and you get to pay taxes on it.    

    REF .10,

    Thanks for the info.

    One thing that irritates me about this is that DEC will not
    answer questions about it and advises us to use our "tax expert".
    We also pay for that (except when we can use NOTES).

    I understand this attitude when it relates to the employee
    stock purchase program or restricted stock options, but, in
    this case, we're talking about something that affects everyone
    in the company. What about all the people who got along just
    fine with the 1040EZ or 1040A?

    I had almost convinced myself that I didn't need to report
    this income. A friend of mine had come to the same conclusion.
    A couple of others, however, had gone to tax accountants and
    gotten the same advice you gave.

    Wonder how many DECcies will be audited this year?

    - Larry    

If you sell it, you'll end up with more than enough money to pay the taxes
on it *and* to pay for a tax advisor.

/john

> If you sell it, you'll end up with more than enough money to pay the taxes
> on it *and* to pay for a tax advisor.

    Do you think that many people will even understand that
    they NEED a tax advisor? How many will conclude that they
    don't need to report the income -- like some of us almost
    did?

    I'm happy to have the money. I'm just angry that DEC refuses
    to tell us what to do about it.

>    I'm happy to have the money. I'm just angry that DEC refuses
>    to tell us what to do about it.
    
    Well, it depends on what you *did* with it.  You could have rolled
    it over, sold it, or kept it.  You taxes would be different in each
    case.  I imagine that DEC has enough problem doing its own taxes,
    and doesn't need the problem of trying to figure employees' taxes
    also.

I don't have unrestrained sympathy for people complaining about the tax
complications of ESOP, but the Company could have handled the matter better.
Yes, we were warned last spring about some of the tax consequences,
so I rolled mine over into an IRA.  However, the Company understands 
(understood) the plan better than most employees did, and more effort could
have gone into explaining how to account for the money and why there
was no withholding, especially for people who sold through Investor Services.
Yes, it is a complication, but it's also several hundred to several
thousand dollars per employee (depending on length of service and salary
level).
In short, everybody should have won, if they can only figure out how.

    re:  Those who don't look gift horses in the mouth ...
    
    It was nice of the company to sign us up for the ESOP, and give
    us a few shares of stock free of charge, notwithstanding the tax
    breaks given to the Company.  But we were lucky, because DEC is
    a stable company, and the stock value has not fluctuated too much
    since the time DEC bequeathed it to us.
    
    Thousands of others were not so lucky.  I know someone who received
    a large number of shares from his company as part of an incentive
    plan, worth (at the time) over $100,000.  However, the company ended
    up declaring bankruptcy a year later, leaving him with a bagful
    of worthless stock certificates.  The IRS, however, taxes you on
    the value of the stock at the time you receive it!  So he now owes
    the IRS (adjusted for gross capital losses) a little over $30,000.
    
    So count your blessings that you are at least getting some money
    out of the whole deal, rather than owing the IRS for more than
    what you received ...
    
    Geoff

    Re .Previous on explanations/complaints
    
    Investor Services is not the correct place to air gripes/why didn't
    they? things. Investor Services only *administered* the plan, they
    weren't responsible for setting policy. The name of the group says
    it all, *services*. I don't remember the precise name of the com-
    mitee or its head, but I'll try and get it and post it here. Some-
    thing like 'US Committee on ...'
    
    Bob Mc