In general there's little reason to hold the stock for two years. The tax benefits to doing so are minimal, typically nowhere near enough to make up for the risk of owning your employer's stock.
This is my opinion too. If the stock goes down 2% after the two years, you loose all of your 17-18% because it is a leveraged bet.
How does he lose all of it? If he pays $85 for $100 stock, and it drops 2%, won't he still be able to sell it for $98?
Also how is it leveraged? He is getting a discount buying the stock, but he isn't borrowing money to buy it. If he buys it, and it drops 15%, isn't he essentially back to where he started? He paid $85 for a $100 stock, then it dropped 15% to $85, then he sold it. The only consequence is that when he sells it he now has to claim that $15 discount as ordinary income and pay taxes on that, which in the 15% income bracket costs him an additional $2.25 in taxes (plus he would owe some state income tax for michigan). It seems like his stock could realistically drop 10-12% from his purchase date to his sale date and he would still come out ahead, unless I am completely misunderstanding how this works.
The ordinary income component doesn't magically disappear after two years.
I don't know how your father's ESPP works exactly. I'll give an example using how my wife's ESPP works, which seems to be a relatively common structure for these plans.
The program is structured into six-month offering periods. During the offering period, money is collected from paychecks and saved in a pot to buy shares at the end of the period. The price that is paid for the shares is 85% of the price at the beginning or end of the offering period, whichever is lower.
If she doesn't meet the holding period, her basis is equal to the FMV the date she purchased the shares. Any further discount is regular income reported on the W-2.
If she does meet the holding period, her basis is equal to the FMV on the date the option was granted (i.e. the lower price of the beginning or end of the holding period). Any further discount is regular income reported on the W-2.
Suppose the stock was worth $20 at the beginning of the offering period and $25 at the end of the offering period. She would pay $17 for the shares.
If she sold immediately for $25, her basis would be $25 (the FMV on the purchase date), meaning $0 of capital gains income and $8 of regular wage income.
If she met the holding period and sold two years later for $25, her basis would be $20 (the FMV at the beginning of the offering period), meaning $5 of capital gains income and $3 of regular wage income.
So by waiting two years, she gets a lower tax rate on $5/share of income (saving perhaps 75˘/share in taxes in the 15% bracket). If you want to hold on to $25 worth of stock for two years to save 75˘ on taxes, go ahead, but it seems a bit of a risky thing to do with 10% of your salary.
Suppose instead that the stock was worth $25 at the beginning of the offering period and went down to $20 at the end of the offering period. She would still pay $17 for the shares, but meeting the holding period doesn't change her basis at all, so there's zero tax advantage to waiting.
The more the stock went up between the beginning and end of the offering period, the more potential tax advantage there is to waiting. Unless it went up
a lot during this time, I don't think the risk is worth it.