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PDtax
PDtax, CPA firm owner
Category: Tax
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Experience:  32 years tax experience, including four years at a Big 4 firm.
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Question about the 83b election for a startupHi, I am one

Customer Question

Question about the 83b election for a startup

Hi, I am one of the founders of a startup that is registered as a Delaware C Corp. When we first incorporated our company there were 2 founders who were issued common shares of stock that is not restricted and not with a vesting schedule. This was 9 months ago. Since the stock was not on a vesting schedule and thus not at risk of forfeiture we did not elect an 83b. Now the problem is we need to introduce a vesting schedule for these 2 founders.

My questions are:
- If we introduce a vesting schedule on these shares that were granted 9 months ago now will they be treated by the IRS as taxable income as their value changes. i.e. income tax not capital gain tax since the shares are linked with our employment with the company. I heard that since the grant and the vesting are 2 separate events and the vesting schedule is introduced to align interests it will not be considered income. Is this true?

- Can we file an 83b now even though the grant date was 9 months ago because we are only introducing the risk of forfeiture now? What are the odds of that succeeding with the IRS?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Customer:

Welcome to the site. I will be helping you today.

Customer:

to Q & A...

Expert:  PDtax replied 1 year ago.
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Expert:  PDtax replied 1 year ago.
Can I ask a few questions?

How were the shares originally transferred to the 2 founders? At what value, what was FMV, and how did they pay?

The late vesting thing has me for a loss. Please explain that, since it might be the only option to save your 83 (b). As you know, it is late.
Customer: replied 1 year ago.

I do not understand the question but the shares were originally subscribed to by the founders at a $0.00001 per share. They actually did not pay for them. There was no FMV since this was a new company.

Expert:  PDtax replied 1 year ago.

I asked because the 83(b) election is traditionally required in a restricted stock purchase agreement. If the agreement in place when the shares were purchased was not restrictive, that is, all the elements of the purchase were complete, then the 83(b) deferral technique may not be valid. The Section 83(b) election can be made when the property received was nontransferable and subject to a substantial risk of forfeiture. You did not mention any restrictions on the original purchase, so I believe you are out of luck.

 

IRS would consider the purchase complete when funds transferred, since nothing else was required to vest. The purchase would be a taxable transaction at that time. There is not a remedy for the late election you seek. I asked about the FMV of the shares, and the purchase price assigned, to see if there was a discount at purchase.

 

Adding a vesting schedule after there was a payment made and there was no substantial risk of forfeiture is not a viable excuse for the 83(b) relief, since the purchases were completed without vesting.

 

I can suggest a repair technique, which could be an exchange of those shares for new shares subject to the vesting schedule. The founders may be subject to tax on the original purchase of their shares for $.00001 per share, compared to the fair market value of those shares at purchase.

 

The 83 (b) election could then be made by the founders within 30 days of the exchange of their shares for the new restricted ones. Copies of that election are then included in the personal returns of the purchasers.

 

Thanks for asking at Just Answer/PDtax.

 

 

Expert:  PDtax replied 1 year ago.
Can I ask you to reconsider your rating? I will be glad to assist further.
Expert:  PDtax replied 1 year ago.
As I saw your problem, the shares had been issued without restrictions, and the 30 day time period had passed, making the election both not applicable and late. I suggested a remedy, and I don't understand your rating.

Please advise.

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