Taxes on Repurchase of Private Company Restricted Stock Upon Termination

[oktulsatax]

What is the name of your state (only U.S. law)? TX
Several years ago I purchased restricted stock as an employee of a private company for 10$ per share. I filed an 83(b) election and since the FMV of the stock was 10$ owed no taxes. My employment agreement stipulated that if I was terminated without cause the company would repurchase the stock for the greater of current FMV or the orginal purchase price. I was recently terminated. Per the agreement the company repurchased the stock for 10$ per share as the current FMV was 8$ per share. From a Federal Income Tax standpoint should this be treated as a zero capital gain (bought for 10$, repurchased by company for 10$) OR should this be treated as a 2$ capital loss and 2$ of ordinary income (bought for 10$ and company repurchased for 10$ while FMV was 8$, a 2$ per share benefit)?

 

[tranquility]

What is the name of your state (only U.S. law)? TX
Several years ago I purchased restricted stock as an employee of a private company for 10$ per share. I filed an 83(b) election and since the FMV of the stock was 10$ owed no taxes. My employment agreement stipulated that if I was terminated without cause the company would repurchase the stock for the greater of current FMV or the orginal purchase price. I was recently terminated. Per the agreement the company repurchased the stock for 10$ per share as the current FMV was 8$ per share. From a Federal Income Tax standpoint should this be treated as a zero capital gain (bought for 10$, repurchased by company for 10$) OR should this be treated as a 2$ capital loss and 2$ of ordinary income (bought for 10$ and company repurchased for 10$ while FMV was 8$, a 2$ per share benefit)?

Nothing is quite as it seems here. It is a twist I have not seen before as the election tends to be for stock that has not yet vested. With the promise in the agreement, it has a minimum value that was the FMV at the time you received the stock and you could not have been hurt by the election. I would need to do some research to see if a valid election was made under these circumstances. The reason I question as to if the election was valid, is because the core of any "election" is one does not know the end result beforehand so you choose what you think will happen and live with the results. This election is based on the issue on if the stock will rise or fall in value. That agreement made the end result clear.

That is why the capital loss and ordinary income scenario makes some sense from a fairness perspective. The agreement locked in the taxes at the FMV value at issuance with no risk to upside growth. But even that would not be the correct treatment if the election was invalid.

If you came in with this issue at this time, I would almost assuredly put you on extension to consider the issue when I had more time.

 

[oktulsatax]

To clarify.....the employement agreement stipulated that if I was terminated within a 24 month period without cause then the company would repurchase the stock for the greater of current FMV or original purchase price. I made the 83(b) election with the full intention of being employed far beyond the 24 month period. Yet another interesting twist, for what it may be worth.

 

[tranquility]

To clarify.....the employement agreement stipulated that if I was terminated within a 24 month period without cause then the company would repurchase the stock for the greater of current FMV or original purchase price. I made the 83(b) election with the full intention of being employed far beyond the 24 month period. Yet another interesting twist, for what it may be worth.

The intention is not important, it is the relevance of 83(b). As I wrote, this tends to be for property transferred that there is a risk of forfeiture. (Which is why vesting is usually a part of the issue.) You purchased the stock. There does not seem a substantial risk of forfeiture if the price you paid was the amount you were guaranteed if fired and the stock forfeited. I do not think a valid election was made. Again, maybe another member has seen this before, but I'm not sure what the taxability is here without some research.

 

[FlyingRon]

It's a 0 sum transfer (regardless of whether you did an 83(b) election or not) in this case, in my opinion. If you had not made the election and the stock increased in value, you'd end up with income based on your vesting. If it had gone up in value and you had made the election, you'd get it at the time you sold.

 

[LdiJ]

It's a 0 sum transfer (regardless of whether you did an 83(b) election or not) in this case, in my opinion. If you had not made the election and the stock increased in value, you'd end up with income based on your vesting. If it had gone up in value and you had made the election, you'd get it at the time you sold.

Based on what the OP has told us so far, I would tend to agree. Based on what he said so far he paid for the stock at FMV at the time that he purchased it...with only a guarantee that the company would buy it back for at least what he paid for it if he was later terminated without cause. In that situation, its doesn't make any sense that the OP would make an 83(b) election.

However, the OP has not told us how he paid for the stock. If it was cash up front, that is one story, if it was in lieu of wages, that is another.

 

[FlyingRon]

Agreed. He said, I purchased for $10, so I assume he paid $10 with his (after tax funds).

If that is not true, that is distinct issue than the 83(b) election. In fact, if he didn't pay for it that way, then it's not clear if he can actually make use of 83(b) anyhow.

 

[oktulsatax]

My purchase of the stock was made with cash sitting in the bank (after tax) and I was fully vested in it from the date if purchase. The company originally issued a W2 that treated the repurchase as a zero capital gain (or technically left it to me to show it that way on my tax filings) then later changed their minds and issued a revised W2 in mid-March that showed additional ordinary income for the 2$ above FMV for which they repurchased the stock (with no withholding and no time for me to plan). They noted in correspondence that I may be able to take a 2$ capital loss.

 

[davew128]

I think I'm agreeing with Tranquility here. If the stock was worth $8 and the company contractually paid $10, the difference should be compensation to the now former employee OP and also a capital loss for the same amount.

 

[LdiJ]

I think I'm agreeing with Tranquility here. If the stock was worth $8 and the company contractually paid $10, the difference should be compensation to the now former employee OP and also a capital loss for the same amount.

Based on the additional info provided by the OP, I agree.