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Subject:   failure to file 83b?
Date:   Wed, 16 Mar 2005
From:   Andy

Hi Mike,

I work for a startup software company in Mountain View and have ISOs granted on 11/10/03 and 11/1/04. On 11/16/04, I exercised options from each grant that were un-vested. I think I forgot to file an 83(b) election. Is there a way to find out?

If I didn't make the election, which of these statements that you made would apply?

• "If the election is not made the preference isn't measured until the restrictions lapse or the stock becomes vested", or
  
  
• "The IRS has said in regulations issued during August, 2004 that for regular tax reporting, Section 83 doesn't apply when an ISO is exercised, so the Section 83(b) election is not effective for regular tax purposes. The holding period starts on the date of exercise for avoiding regular tax ordinary income at disposition under the ISO rules."

In both exercises, the market value and the exercise price were the same, so there should be no current taxable event. My question is, on what date does any sale of these shares become long-term gain? Did my failure to file an 83(b) election change that date?

Thank You,
Andy

Answer

Date:   Fri, 08 Apr 2005

Hello Andy,

If you don't recall filing an 83(b) election, you probably didn't, because you have to sign the form before it is mailed to the IRS. Check with your plan administrator to see if the company helped you with this.

Both of the statements you quoted are correct, the first for AMT reporting, the second for regular tax reporting.

If you hold the stock more than two years after the grant dates and more than two years after the exercise dates, you will qualify for long-term capital gains reporting for regular tax purposes.

Since you didn't make the election, you should report ordinary income for the excess of the fair market value of the stock on the vesting date over the option price as the shares vest on your AMT schedule. The holding period for the shares on the AMT schedule will be based on the dates the shares vest. You have a mess on your hands.

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.