Section 83 Transfers of Property

1
Section 83 Transfers of Property
Straight Bargain Purchase of Employer Stock
fair market
value year 1

year 3
50,000
60,000

10,000 appreciation
purchase price 40,000
discount or spread 10,000
fair market value at time of purchase
50,000 Year 1 taxable compensation
income?
2

• 1012 Cost Basis in Stock
• purchase price (actual cost) 40,000
• tax cost
• (amount previously taxed) 10,000
  (yr. 1 compensation income)
• Total adjusted basis 50,000
• Year 3 Gain from Stock Sale for 60,000
• Amount Realized (AR) 60,000
• less Adjusted Basis (AB)
  50,000
• 10,000

3
Amount, Character, and Timing
of Taxable Income
Taxable Income
Character year 1 purchase
10,000 ordinary
(salary) year 3 stock sale 10,000
capital gain (stock sale)
total taxable income
20,000

10,000
10,000 year 1 compensation
income appreciation in stock
value from bargain purchase
60,000 less 50,000 basis
4
Conditional Bargain Purchase of Employer Stock
fair market
value year 1

year 3
50,000
60,000

10,000 appreciation
purchase price 40,000
discount or spread 10,000
fair market value at time of purchase
50,000 CONDITION Stock not transferable
until year 3. Employee must sell stock back to
employer at 400 per share (40,000) is she
leaves employer prior to year
3 Substantial risk of forfeiture? Year
1 taxable compensation income? Year 3 taxable
income?
5

• 1012 Cost Basis in Stock
• purchase price (actual cost) 40,000
• tax cost
• (amount previously taxed) 20,000
  (yr. 3 compensation income)
• total adjusted basis 60,000
• Year 3 Gain from Stock Sale for 60,000
• Amount Realized (AR) 60,000
• less Adjusted Basis (AB)
  60,000
• 0

6
Amount, Character, and Timing
of Taxable Income
Taxable Income
Character year 1 purchase
0 N/A year 3 risk lifted
20,000 ordinary
(salary) year 3 stock sale
0 capital gain (stock sale)
total taxable income
20,000 Result 10,000 bargain and
10,000 appreciation treated as compensation

60,000 less 60,000
basis
7

• With and Without Risk of
  Forfeiture Compared
• simple bargain purchase
  with risk of forfeiture
• year 1 purchase 10,000
  (ordinary)
  0
• year 3 - risk lifted N/A
  20,000
  (ordinary)
• year 3 stock sale 10,000 (capital)
  0
• total taxable income 20,000
  20,000
• Impact of 83 risk of forfeiture rules
• advantage 3 year deferral

8
Tax Consequences to
Employer 83(h) simple
bargain purchase with risk of
forfeiture year 1 employee
purchase 10,000 deduction
no deduction year 3 - risk lifted
N/A
20,000 deduction year 3 stock sale
N/A
N/A total deductions
10,000 20,000
Impact of 83 risk of forfeiture
rules disadvantage delayed
deduction
9
83(b) Election
(assumes risk of forfeiture)
Taxable Income Character year 1
purchase 10,000
ordinary (salary) year 3 - risk lifted
-
- Taxpayer can elect to report 10,000
income in year 1 (difference between year 1
50,000 fmv and year 1 40,000 purchase price)
rather than wait until risk of forfeiture is
lifted in year 3 Why would taxpayer choose to
be taxed in year 1 rather than year 3??
10
1012 Cost Basis in Stock purchase price
(actual cost) 40,000 tax cost (amount
previously taxed) 10,000 (yr. 1
compensation) total adjusted basis 50,000
per 83(b) election Year 3 Gain from Stock
Sale for 60,000 Amount Realized (AR)
60,000 less Adjusted
Basis (AB) 50,000 10,000
11

• 83(b) Election
• (assumes risk
  of forfeiture)
• Taxable Income Character
• year 1 purchase 10,000
  ordinary (salary)
• year 3 - risk lifted 0
  0
• year 3 stock sale
  10,000 capital gain (stock
  sale)
• total taxable income 20,000
  
• Impact of 83(b) election

12
83(b) election - taxpayer must weigh
disadvantage of early taxable at
ordinary income rates


against advantage of
lower capital gains rates on sale Factors
1. What is the amount that would be taxed in
year 1? i.e. how much of a
discount did employee get? 2. How much
appreciation is expected? 3. What is the
likelihood that property will later be forfeited?
13
Section 83(b)
Stock Options Option with a
Readily Ascertainable Fair Market Value
total net
profit to employee 27 (35 less 8 cost) Stock
fmv 20
25
35 time
grant of option
exercise of option sale
of stock (exercise
price 8) (purchase for 8)
(sale for 35 fmv)
discount/spread 17
year 1
year 5
year 10 Assume exercise price 8 Assume
that option has a readily ascertainable fmv
12 Year 1 taxable compensation income?
14

• 1012 Cost Basis in Stock
• purchase price (actual cost) 8
• tax cost
• (amount previously taxed) 12
  (yr. 1 compensation income fmv option)
• total adjusted basis 20
• Year 10 Gain from Stock Sale for 35
• Amount Realized
  (AR) 35
• less Adjusted Basis (AB)
  20
• 
  15

15
Option with a Readily
Ascertainable Fair Market Value
Amount, Character, and Timing of Taxable Income
Taxable Income Character
year 1 (grant of option) 12 (fmv
option) ordinary
(salary) year 5 (exercise of option)
0
N/A year 10 (sale of stock) 15
capital
gain total taxable income
27 35 less 20 basis
16
Alternative Tax Treatment Tax at
Time of Exercise year 1
(grant of option) no tax
year 5 (exercise)
tax on spread
25 fmv less 8 purchase 17
17
1012 Cost Basis in Stock purchase price
(actual cost) 8 tax cost (amount
previously taxed) 17 (yr. 5
compensation income spread) total adjusted
basis 25 Year 10 Gain from Stock Sale
for 35 Amount
Realized (AR) 35 less
Adjusted Basis (AB) 25

10
18

• Alternative Tax Treatment Tax at
  Time of Exercise
• Taxable Income Character
• year 1 (grant of option)
  0 N/A
• year 5 (exercise of option) 17
  (spread) ordinary (salary)
• year 10 (sale of stock) 10
  capital gain
• total taxable income 27

19
Stock Option
Alternatives Compared 83 tax
grant of option tax option exercise ISO
- 422 year 1 (grant) 12
(ord) 0
0 year 5 (exercise) 0
17 (ord)
0 year 10 (stock sale) 15
(cap) 10
27 (cap) total taxable income
27 27 27 35 sales price
less 8 basis 27