Section 83 and Stock Subject To Vesting

Section 83(a) of the Internal Revenue Code states that if "property" is issued " in connection with the performance of services," the difference between the "fair value" of, and the amount paid by the recipient for, the property-usually stock- is taxable to the recipient (and deductible by the corporation) as additional compensation as of the earlier of: (1) the first date forfeiture restraints (if any) lapse, or (2) the first date the property is transferable, value being calculated without regard to restrictions other than those which by their terms never lapse. If an employee is buying stock at a bargain and there are no "substantial" forfeiture risks (other than those which will never lapse) attached, then the impact of §83 is relatively simple-the recipient pays tax on the bargain element upon receipt of the stock.

By Joseph W. Bartlett, Of Counsel, Sullivan & Worcester LLP

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