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Date:   Wed, 31 Aug 2005
From:   Susan

Dear Mike:

An officer of a closely-held corporation is granted an option to purchase 1,500 shares (50% of the outstanding stock) in the corporation, which has a history of losses at 1¢ per share. He fails to file the Section 83(b) election and report the income.

Can the 83(b) election be filed late, together with an amended income tax return for 2003? Does the Section 83(b) election even apply when the option relates to 50% of a company's stock?

Thank you for your help if you have time.

Susan

Answer

Date:   Wed, 12 Oct 2005

Hello Susan,

First, if the shares were vested when the option was exercised, no election is required. The transaction is taxable on the date of exercise of the option, assuming the option was a non- qualified stock option. Section 83 applies any time property is paid in exchange for services. The Section 83(b) election can be made when the property received was nontransferable and subject to a substantial risk of forfeiture.

Once the time period has passed to make a timely election (30 days after receiving the property/exercising an NQO), the opportunity is lost. No late election is allowed.

If the election isn't made, ordinary income is reported for the excess of the fair market value of the stock over the option price when the stock becomes vested.

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.