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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Taxable Basis of Stock in Lieu of Salary Due Cash Taxpayer

Customer Question

A Cash basis taxpayer receives corporate stock in lieu of salary, and owns only 33.3% of the stock of a C corporation.

Is the Stock Taxable to that individual as ordinary income when they receive the stock and is the basis in the stock Zero for valuation.

Also can the corporation deduct the salary since the C Corporation is accrual basis taxpayer.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

IRC Sec. 83 governs the taxability of property received in connection with the performance of services. Section 83(a) provides that if property is transferred in connection with the performance of services, the employee who performed the services has gross income in an amount equal to the excess of the fair market value of the property over the amount paid for the property by the employee. Section 83(a) also provides that both the income event and the measurement of the fair market value of the property are to take place only when the property is first either transferable (by you to somebody else) or not subject to a substantial risk of forfeiture. If the property is forfeited before it is free and clear of those restrictions, there will be no income event.


Accordingly, if there are no restrictions and if a value may be ascertained, then you have income in the year of receipt (or the year such restrictions lapse) equal to the fair market value of the stock in excess of any payments you made. If there are restrictions on transferability or there is a substantial risk of forfeiture, then no income will be required to be recognized until such restrictions lapse and/or risk of forfeiture is eliminated. When such restrictions lapse or the risk of forfeiture is eliminated, then you will recognize compensation (i.e. ordinary) income on the then FMV.


Alternatively, you may consider making an IRC Sec. 83(b) election. Such an election would require you to recognize in to income the FMV of the stock on the date of transfer (without regard to restrictions). Making such an election will give you a basis equal to the income recognized (plus any amount paid). Plus, if you hold the stock long enough (i.e. more then one year), you will eventually recognize capital gains (not ordinary income) on the appreciation from the date of recognition to the date of the sale. Your holding period starts when the restrictions lapse or the risk of forfeiture is eliminated.


However, you need to make and file the 83(b) election within 30 days of receiving the stock. The election is fairly mechanical however, I suggest you seek out competent tax counsel right away if you want to make this election. It may save you a lot in taxes since the capital gains rate is maxed out at 15% versus ordinary rates at 35%.


The corporation may deduct the "compensation expense" whenever the employee/owner recognizes it as taxable income. Thus, if you make an 83(b) election, the corp may deduct whatever you declare as the fair market value of the stock. If you do not make the election, then the corp may only deduct the relevant amount when you take it into income later when the restrictions lapse or the risk of forfeiture is eliminated.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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