Question

On September 30, 2014, Stalling Inc. issued 2,000 shares of its publicly traded stock as compensation to its employee, Mr. Harry. On the date of issuance, the stock’s fair market value was $42,000. Under the terms of his 2014 compensation contract, Mr. Harry couldn’t dispose of the stock before October 1, 2018, and if he terminated his employment with Stalling before that date, he had to return the stock to the corporation. On October 1, 2018, Mr. Harry, who still worked for Stalling, sold all 2,000 shares for $61,500.

a. Assume that Mr. Harry made no election with respect to the restricted stock in 2014. How much compensation income does Mr. Harry recognize in 2018 because the restrictions lapsed? How much gain or loss does he recognize on sale of the stock?

b. Assume that Mr. Harry filed a timely election in 2014 to accelerate income recognition with respect to the 2,000 shares of restricted stock. How much compensation income does Mr. Harry recognize in 2018 because the restrictions lapsed? How much gain or loss does he recognize on sale of the stock?

Answer 1

Ans a Under section 83(b) without election, compensation income of $61,500 will be recognized (FMV of stock on vesting date less any amount paid for it) and will be taxable as ordinary income. No gain or loss will be recognized.

Ans b Under section 83(b) with election, income of $42,000 will be recognized (FMV of stock on transfer date less any amount paid for it) and his holding on these shares will be treated form date of transfer and subsequently any appreciation amount (FMV on transfer date – FMV on vesting date) will be treated as capital gain(Long term) if holing is for more than one year, in this case amount of $19,500 will be long term capital rate that will be taxed on lower rate.