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Subject:   ISO Question
Date:   Mon, 9 Apr 2001
From:   Mike W

We filed an 83b at the time of receiving (Oct '00) an ISO for restricted shares. It has 50% of the stock available at 6 months (triggered in 1 week) for still being employed there at 6 months. The second 50% at twelve months for attaining specific sales goals during the full 12 months.

We do NOT think the company is going to survive.

Do we have any tax consequences?

Tks

Mike W

Clarification

Date:   Tue, 10 Apr 2001

I bet you're busy. I wanted to give a more detailed explanation now that I have had done some research and understand some of the parameters involved.

We were told to file the 83b at the time the ISO's were granted, and we did. They had 2 triggers:

At 6 months (for just still being employed) we would have 50% of the total stock.

At 12 months the other 50% if we reached specific sales goals over that first 12 months.

We could exercise our options at any time. If we exercised the respective 50% before its trigger date the stock would be restricted with a right of repurchase remaining with the company. The repurchase amount would be what we paid should we terminate, etc. before. If we exercised after the date, the only restriction would be "market hold off" for 6 months after an IPO happened.

It doesn't look like this company is going to survive. And it looks like we didn't need to submit the 83b until we exercised the options. Is this correct? AND If we didn't need to "What do we do with the IRS now that we sent in the 83b incorrectly?" (My CPA did not know the answer to this.)

Thanks for your help!

Answer

Date:   11 May 2001

Hello Michael,

Since you filed an 83(b) election relating to an event that wouldn’t result in a taxable event for AMT or regular tax, it has no effect. You don’t really need to do anything, but it might be a good idea to include an explanation with your income tax return why nothing was reported with respect to the election.

If you haven’t exercised your options, this could be a big nothing.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.