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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Hi, We are setting up a Delaware C Corp. There are four

Resolved Question:

Hi,

We are setting up a Delaware C Corp. There are four partners, one in US and 3 outside of US (India). The 2 founders are based out of India, one investor in US and the other in India. The sequence of events is 2 founders + 1 investor incorporate at a low stock price, the US investor comes in at a significantly higher stock price within 2 days and perhaps an institutional investor will follow within a few weeks.

From a founders perspective, the stock would be vested over a period of four years and therefore need to consider 83(b) Election. Both the founders would want to Elect 83(b) and pay taxes if any upfront since the initial stock value is low.

Questions:
1. There is a founder with a SSN but now an indian resident who does not file taxes in India. Does he need to file taxes in US if he elects 83(b) and quotes their SSN.
2. The founder without a SSN, electing 83(b) does he need to file tax returns in US
3. What would be FMV of the stock for the tax calculation purposes. Purchase price or some other method?
Submitted: 10 months ago.
Category: Tax
Expert:  Lev replied 10 months ago.
Hi and welcome to our site!

When the corporation is created - and founders are making contributions in exchange for stock - the income is generally NOT recognized as long as the stock is not sold. Thus - as long as you keep shares - the appreciation of shares does not result in any tax liability. When shares are sold - either back to the corporation or to investors - the capital gain is recognized.

 

The issue might come when shares are given as a compensation of services - for instance for employment. In this case employees recognize income based on the fair market value of shares - and such income is subject of ordinary income tax and employment tax.

The issue is that according to section 83 income is only recognized he stock vests. However - if the section 83(b) election is made - the founder/employee recognizes “income” upon the purchase of the stock (the difference between fair market value and the price paid). That income is taxed as wages, but when shares eventually are sold (after they are vested) - the gain will be taxed as a capital gain - not as wages.

 

First of all - as founders - you may have all shares vested - and establish the basis according to initial contribution. Then - when shares will be sold - the gain will be treated as capital gain - and there is no need to make section 83 election.

Generally - the scheme you proposed is good for key employees who are not founders and founders want such employees to be attached with the vesting schedule.

 

Specifically for your questions.

1. There is a founder with a SSN but now an Indian resident who does not file taxes in India. Does he need to file taxes in US if he elects 83(b) and quotes their SSN.

To make section 83(b) election, you have to send a letter to the IRS within 30 days of the grant being made. Here is a simple letter - http://www.irs.gov/irb/2012-28_IRB/ar12.html#d0e3012

There is no requirements to file the tax return just to make an election - unless the person is required to file. Yes SSN must be included - the SSN serves as a tax identification ID.

2. The founder without a SSN, electing 83(b) does he need to file tax returns in US

Again - if the tax return is not required - no need to file. However - the person would need a tax ID - and for the nonresident alien who doesn't have any tax ID - Section 83(b) Election letter must be filed as an attachment to application for ITIN - form W7.

3. What would be FMV of the stock for the tax calculation purposes. Purchase price or some other method?
There is no specific method requirements - any reasonable method may be used.

In general - you need to estimate the value of the corporation. For the corporation just recently created which doesn't have any valuable assets - the fair market value may be estimated as the total amount contributed by founders. That value may be divided by the number of outstanding shares - and you will have an estimated value of each share.

 

The benefit of using section 83 election - to treat expected gain as a capital gain - and not as wages - with lower tax liability.

Honestly - I do not see how that election would benefit in your situation...

Let me know if you need any help.

Customer: replied 10 months ago.

Dear Lev,


 


Thanks for answering the question. I have a follow up question:


 


We understand if the stock is entirely vested at time of purchase, there is no particular need for 83(b) election.


However in our specific circumstance as per our CSPA, the company would retain right to repurchase the stock at original purchase price, and a percentage of stock is released from the option every month. Our understanding is that this is same as vesting and hence need to elect 83(b) since the price of unvested stock would increase significantly as we bring investors on board.

Expert:  Lev replied 10 months ago.
You may make section 83(b) election - that is not an issue.
However I do not see any reason of doing that.
If you own shares - the gain or loss is not recognize as long as shares are not sold.
If shares are sold - the gain is recognized.
If the corporation awards shares as a compensation for services based on vested schedule - and you make section 83(b) election - the same will be true - you will establish the basis of shares - and the gain will be recognized only when shares are sold.
So far - I see no difference. Appreciation of shares will not be taxable in either case until shares are sold.
But that is up to you if you want to take that route.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Customer: replied 10 months ago.

Hi Lev,


 


Thanks for the answer, some of the other sources on the internet suggest if there is any risk of forfeiture, the stock owners regardless of whether they own complete stock should do an 83(b) election. Specifically this link:http://www.startuplawblog.com/section-83b/


 


It seems from your response and other resources, it would be a guarded measure to elect 83(b).


 


Thanks again for all your help.


 


 

Expert:  Lev replied 10 months ago.
That is correct - and you may make section 83(b) election - that is not an issue.
However - if your situation - shares you receive as founders are not taxable income.
Only shares you receive as a compensation for services are taxable.
So - while you definitely may go with section 83(b) election - there is no tax benefits for doing this based on your situation.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you

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