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Do I need to file an 83b on an ISO purchase (fully vested) 9 months out of the 409A eval?

83b election isoOur attorney answers, "no, the stock is fully vested, ask your accountant." Our accountant says "I think it is a safe thing to do, because I have heard of the IRS cracking down on the valuation of stock in a public company, but ask your attorney." 

Our company is going through some significant changes and I expect our next 409A will show a big increase. Our company is Private. I'm wondering if there is a possibility if the increase in the valuation would somehow warrant an 83b for the employees purchasing their options-they are fully vested.

I want to make sure our employee is covered and it does not create an AMT event.

Answers

Topic Expert
Darren Cordier
Title: President
Company: FV Specialists, Inc.
(President, FV Specialists, Inc.) |

The 83b election is a choice to recognize income now as compensation and get capital gains treatment for the appreciation in stock price. The question is a bit unclear. If they choose the election and the exercise price of the ISO is based on the old 409A valuation, there may be current tax consequences since the price has appreciated above the exercise price. The employee may be liable for underestimating income. If they do not make an 83b election, no income is recognized until sale of the stock.

This is based on my understanding, but this is not tax advice. Whomever provided tax advice to you is the expert and should make the call. But if you're asking if you need a valuation of the stock value as of the issuance date of the ISO for the 83b election filing, then the answer is a definite yes.

Wray Rives
Title: CPA CGMA
Company: Rives CPA PLLC
(CPA CGMA, Rives CPA PLLC) |

83(b) elections apply to restricted stock purchased or granted not necessarily exercise of ISO, there are other tax considerations regarding exercising an ISO. If the stock you purchase through the ISO is subject to restrictions, then the answer is maybe. If there is no compelling reason to exercise the ISO, such as you plan to leave or the option term is about expire, why do you want to exercise the option now anyway?

If you are purchasing stock subject to restrictions, then the key factor is do you expect the stock to appreciate in value. There is a very narrow window to actually file the 83(b), If the purchase already happened, you may be outside the 30 day window anyway. You might want to read http://rivescpa.co/?p=787 to understand the issues around an 83(b) election and download http://rivescpa.co/wp-content/uploads/2012/07/Taxation-Issues-with-Incentive-Stock-Options.pdf for tax considerations with ISO's and other equity compensation plans.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anonymous,

I'm assuming you're exercising the ISO to acquire restricted shares? Or are employees literally purchasing the ISO itself at the FMV of the ISO under black scholes or similar?

What I'm hearing in your question is in line with Darren's comment. If you have undergone "significant changes" since the 409a, you may be outside of the safe harbor. In either of the scenarios (exercising options and filing an 83b on the resultant restricted stock but at an incorrect price and therefore get your 83b invalidated, or purchasing ISOs which may be in-the-money and thus not ISOs at all), you'd have a problem.

Could you clarify exactly what this transaction is?

KP

Joan Nevins
Title: CFO
Company: Kalido Inc
(CFO, Kalido Inc) |

I would just point out that you do not need to have a 409A doen every month in order to establish FMV. Most private companies do one annually and rely on the Board to evaluate whether there have been any significant changes which would affect the valuation. If there have not been any changes and the Board has recently granted ISOs at its determined FMV, then you could point to that evidence in your 83b election.
But you still have the timing issue with respect to the date of exercise v. filing.

Anonymous
(Controller & Operations Mgr) |

Thank you everyone, all answers were very helpful.

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