<BLOCKQUOTE><font size="1" face="Verdana, Arial">quote:</font><HR>Originally posted by ez062404:
I just received restricted stock from my employer that vests in 5 years. What happens to my stock if I take an 83(b) election and then leave the company, in say, two years? Do I forfeit all stock as I would if I hadn't filed an 83(B) election in the first place?<HR></BLOCKQUOTE>
My response:
Following ALawyer's very fine advice concerning reading your papers carefully, you are probably be entitled to the shares if you complete two years of employment following the date on which the restricted stock is granted. Under the tax rules, you can either defer the income attributable to the grant of the restricted stock until your rights in the stock become vested, or elect (by making a Code Sec. 83(b) election) to recognize income at the time the stock is granted.
Under Code Sec. 83(b), a recipient of a restricted stock award may elect, within 30 days of grant, to include in his gross income the fair market value of the shares on the date of grant (instead of waiting for the attribution of income until the restrictions lapse), with the amount of the income based on the then fair market value of the shares. The fair market value of the stock to be reported as income is not reduced for the restrictions on the stock (unless there is a permanent limitation on the transfer of the stock that would require you to resell the stock to your employer at a price determined under a formula).
The advantage of accelerating income is that any future appreciation in the stock won't be taxed to you until you sell the stock and then it will be taxed at capital gain rates.
If you don't make the Code Sec. 83(b) election, you will be treated as receiving taxable income equal to the fair market value of the stock on the date the restrictions lapse.
If you make the Code Sec. 83(b) election, you will receive taxable income in the year you elect. The amount of income will be the fair market value of the stock on the date the restricted stock award was granted. For example, assume that you are granted 1,000 shares in 1999 when their value is, say, $100 per share, that the restrictions on the stock lapse in 2001 when the stock is worth $160 per share, and that you sell the shares in 2003 for $200 per share. If you didn't make a Code Sec. 83(b) election you would be treated as having received $160,000 compensation, taxable at ordinary income tax rates, in 1999 and as realizing a capital gain of $ 40,000 in 2001. If you made the Code Sec. 83(b) election you would be taxed on $100,000 compensation income in 1999 and on $100,000 of capital gains in 2001.
The benefit of the Code Sec. 83(b) election to you, on the above assumed facts, is the postponement of tax on the $100,000 post-election increase in the value of the stock until 2001 and the taxation of the entire $100,000 appreciation at capital gain rates (rather than only $40,000 if no election was made). However, remember that the reason why tax deferral is available is because there is a substantial risk that your right to the stock could be forfeited since you have to remain with your employer for probably two years after the grant to have vested rights in the stock. If you do forfeit your rights to the stock you would not be entitled to a refund of any tax you paid upon making the Code Sec. 83(b) election. However, you would be entitled to treat the forfeiture as if it was a sale of the stock at a loss.
Clearly, the rules governing restricted stock awards are both technically complex and call for some careful tax planning strategies to be employed.
Good luck and, stay with the company. Also, I hope your stock shoots through the roof !!
IAAL
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