Q:

What information do I need to file my Q: What is a Non-Qualified plan and how

tax return? does it work?

Q: What is a Qualified 423 plan and how Q: How can I determine my capital gain
does it work? or loss on shares sold?

education / taxes released december 2010

Filing Your Tax Forms After

Selling Your Employee Stock
Purchase Plan (ESPP) Shares
summary

Morgan Stanley Smith Barney has prepared the following Q: What information do I need to
file my tax return?
information to assist you in understanding the tax A: The following pages describe the
information you will need when you
consequences involved when selling shares from an prepare your 2010 individual income
ESPP. Included are sample forms and an explanation of tax return (Form 1040). Assemble
the following forms when you are
the information for reporting the sale of these shares on ready to prepare your tax return:
•• Your Purchase Confirmation Form
your individual income tax return for 2010. Please retain •• Form W-2, Wage and Tax State-
ment from your employer
all forms sent to you by Morgan Stanley Smith Barney •• Morgan Stanley Smith Barney’s
Form 1099-B
to use when preparing your tax return. Morgan Stanley •• Schedule D (Form 1040): Capital
Gains and Losses
Smith Barney and its affiliates do not provide tax or legal
advice. You should therefore seek tax advice based on your
particular circumstances from an independent tax advisor
of your choosing.
 education / taxes
Where do I get the information I need?
Forms
Purchase Confirmation Form
(or equivalent information
from your account, see last
page for example)
Form 1099-B
Form W-2
Schedule D (Form 1040)
Q: What is a Qualified 423 plan and
how does it work?
A: A Qualified 423 plan is considered a
tax-qualified plan by the IRS if it is admin-
istered according to the regulations set out
in Section 423 of the U.S. Internal Rev-
enue Code and your company explicitly
states it is intended to qualify under the
Code. This allows participants to benefit
from special tax considerations if shares
are held at least two years from the grant
date of the offering period and one year
from the acquisition of the shares. Sales
after this time are identified as “quali-
fied dispositions,” whereas sales during
this time are identified as “disqualifying
dispositions.” Compensation income for
423 plans is not taxed until the year of sale.
2 morgan stanley smith barney | 2010
How to Obtain
This is mailed to your home at the time of your
original purchase. Duplicates may be available
online at www.benefitaccess.com. After log-
ging in, go to the Document Library and then
Statements & Records.
Morgan Stanley Smith Barney sends this to
you by February 15th of the year following
payment of the net proceeds.
OR
Available online at www.benefitaccess.com.
After logging in, go to the Document Library
and then Statements & Records.
Your company will send this to you.
Visit your local Internal Revenue Service (IRS)
tax office or call (800) TAX FORM. You may
also obtain this form via the Internet at www.
irs.gov.
Q: What is a Non-Qualified plan and
how does it work?
A: A Non-Qualified plan is the term
used for any other ESPP that is not
structured and administered as a Quali-
fied Section 423 plan. These plans do
not receive any special tax consideration
and compensation income on discount-
ed non-qualified plans is taxed the year
shares are purchased.
Questions?
Call Morgan Stanley Smith Barney’s
Customer Service Department at the 800
number provided on the Tax Reporting
Statement (Form 1099-B).
Call Morgan Stanley Smith Barney’s
Customer Service Department at the 800
number provided on the Tax Reporting
Statement (Form 1099-B).
Call your company’s payroll department.
Call your local IRS office or consult your
tax advisor.
Filing Information
The following example reflects a salary
of $45,000 and an acquisition of 200
shares of ABC Company stock. The ex-
hibits will show you where you can find
the information you need to prepare
your individual tax return and how to
complete Schedule D of your Form 1040.
These examples will show the results
of stock sales for both Qualified Section
423 plans and Non-Qualified plans.

Step 1
Your compensation income from
the purchase of your ESPP shares
If your plan does not offer a discount
on the purchase of shares there is no
compensation income recognized. For
plans that do offer a discount, the amount
of compensation income that will be
reported is calculated in the table on
the right.
Exhibit 1 shows the purchase con-
firmation from Morgan Stanley Smith
Barney for a plan with a 12-month
offering period, a 6-month purchase
period, a 15% discount, and a “look
back” that allows the final discounted
purchase price to be based on the
lesser of the grant date FMV or pur-
chase date FMV. Your company’s plan
parameters may differ, however the
sample calculations would use the
same fields as the exhibit.
education / taxes
Type of Disposition Compensation Income
Qualifying Disposition (QD) Lesser of: the amount of the discount based
on the grant date Fair Market Value (FMV)
multiplied by the number of shares acquired.
OR
The sales price per share minus the actual
price paid per share times the number of
shares (or total gain).
Disqualifying Disposition (DD) Amount of the discount based on the pur-
chase date FMV multiplied by the number
of shares acquired.
Other Disposition (e.g. Non-Qualified Plans) Same as a Disqualifying Disposition, only
taxable in the year of purchase instead of
the year of sale.
exhibit 1: purchase confirmation form
ABC COMPANY
987 Smith St.
Metropolis, KS 20098
The example above is hypothetical and does not necessarily reflect the results of an actual purchase.
You may instead receive a company-provided confirmation when shares are acquired, depending on your
company’s preferences.
morgan stanley smith barney | 2010 3
 education / taxes

exhibit 2: form w-2 wage and tax statement

$48,065.00 g

For Qualified plans, your company Qualifying Disposition If the shares were sold after January 1, 2012,
will include the total amount of the it would be a qualifying disposition with
compensation income being the lesser of 1)
discount as compensation income on the total discount at grant or 2) the actual
your Form W-2 during the year of the gain or loss on the sale (seen in Exhibit 4).
sale (as shown in Exhibit 2). For Non-
Qualified plans, compensation income
Grant Date Discount $35.50 – $30.175 = $5.325 per share
is included on your Form W-2 during $5.325 x 200 shares = $1,065 compensation income
the year of purchase. This amount will
be added to any other income reported Actual Gain (Loss) on Sale $50.25 – $30.175 = $20.075 per share gain
by your company to the IRS, as seen in ($20.075 x 200 shares sold) – $25 commissions & fees
= $3,990 actual gain
(G) below. In this example, shares were
sold the same year they were purchased,
Cost Basis $35.50 x 200 shares = $7,100
resulting in a disqualifying disposition.
The amount of compensation income The lesser of these two calculations is $1,065, which is what would appear on the Form W-2
is determined by using the discount on as compensation income for a qualified disposition.
the date of purchase.
Since there is a look back, the par-
ticipant received a discounted pur-
chase price of $30.175 per share when
the FMV on the purchase date was
$45.50. Compensation income and
cost basis are calculated as shown in
Disqualifying Disposition
the Disqualifying Disposition chart.
The forms in this guide reflect a Compensation Income $45.50 - $30.175 = $15.325 per share discount
disqualifying disposition, so the $3,065 $15.325 x 200 shares purchased = $3,065
compensation income
gain realized at the purchase of com-
pany stock has been added to the salary
Cost Basis i $45.50 x 200 shares = $9,100
of $45,000. Please note that no taxes
are withheld at the time of purchase.

4 morgan stanley smith barney | 2010

 education / taxes

Step 2
How to complete Your IRS Form
1040, Schedule D (Capital Gains
and Losses), Exhibits 3 and 4
••Column (a)—Description of proper-
ty: Refer to Exhibit #4 ( j), the “Quanti- exhibit 3: form w-2 wage and tax statement
ty” and write this amount and your com-
pany name in column (a) of Exhibit #4.
•• Column (b)—Date acquired: Refer
to Exhibit #1 (h), the “Purchase Date”
and write this date in column (b) of Ex-
hibit #3.
•• Column (c)—Date sold: Refer to Ex-
hibit #4 (l), the “Trade Date” and write 200 shares of
ABC Company common stock 6/30/10 11/21/10 $10,025  00 $9,100  00 $925  00

this date in column (c) of Exhibit #3.

•• Column (d)—Sales price: Refer to
Exhibit #4 (m), the “Gross Proceeds
Less Commissions and Fees” and write
this amount in column (d) of Exhibit #3.
•• Column (e)—Cost or other basis: Re-
$10,025  00
fer to Step #1 (i) “Cost Basis” and write
the total in column (e) of Exhibit #3.
•• Column ( f )—Gain or (Loss) for
entire year: Subtract column (e) from
column (d) and enter the result in col- $925  00

umn ( f ).
Note: the example shown in Exhibit
#4 is based on one transaction. If you
conducted multiple transactions in
2010, you must list each separately on
Schedule D. exhibit 4: form w-2 wage and tax statement

Definitions
grant date fmv: The Fair Market
Value of your company’s stock on the
date of grant. This is usually defined
as the beginning of the offering pe- MORGAN STANLEY SMITH BARNEY
TAX REPORTING SERVICE CENTER

riod, although your company’s plan 388 GREENWICH ST

NEW YORK, NY 10013
TAX ID NUMBER: 11-2418191
may differ.
purchase date fmv: The Fair Mar-
ket Value of your company’s stock on
the date of purchase.
qualifying disposition: A sale l j m
of shares from a Qualifed Section 423
plan that occurs more than two years
after the Grant Date and more than one
year after the Purchase Date.
disqualifying disposition: Any
sale of shares from a Qualified Section
423 plan that occurs before the Quali-
fying Disposition time period ends.

morgan stanley smith barney | 2010 5

 education / taxes

Alternative Source for As referenced on page 1, you can also use

your personal Benefit Access account to find
Questions & Answers Tax Information via the information used in the above examples.
Q: How can I determine my capital gain Benefit Access Please reference Exhibits 5 and 6 from your
ESPP account view below.
or loss on shares sold?
A: Please refer to Step #2 of this exhibit #5: espp single account view
brochure.

Q: What if my plan discount is greater

or less than 15%?
A: A different discount will affect the total
compensation income, however the meth-
od for calculating the total as shown in
Step 1 remains unchanged.

Q: What is the cost (tax) basis of

shares I obtained through an ESPP?
A: The cost basis is calculated by add-
ing the per share purchase price of the
stock to the compensation income per
share of the stock (if any). The cost
basis will differ depending on the na-
ture of the disposition. Please refer to
Step#1 for more details.
exhibit #6: share lot detail view
Q: Can I file a Form 1040EZ or Form
1040A with a Schedule D for a year in
which I sold stock?
A: No, you are not permitted to file
a Form 1040EZ or Form 1040A for a
year in which you have sold any stock.
Schedule D must be attached to
Form 1040.

Q: How are the Grant Date and Pur-

chase Date FMVs determined?
A: Please refer to your company’s plan
documentation for the exact date and
how the price is determined.

Q: What if I no longer work for the

company after I sell the stock?
A: The IRS requires a Form 1040 to
be filed whenever any stock is sold,
regardless of employment status.

6 morgan stanley smith barney | 2010

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Morgan Stanley Smith Barney LLC, its Financial Advisors and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters,
it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the
taxpayer’s particular circumstances from an independent tax advisor.

© 2010 Morgan Stanley Smith Barney LLC. Member SIPC. 2010-PS-2392 CCG24049 6489198 11/10