Discussion Question

FACTS

Start-Up Corporation issues 100,000 shares of stock to CEO. CEO pays $1 per share, which is determined to be the FMV at the time of transfer. If CEO does not complete 3 years of service with Start-Up, he will forfeit the shares back to Start-Up and will be paid the lesser of $1 per share or the FMV as of the date of forfeiture. The stock has a legend stating that it is not transferable and is subject to an employment agreement.

When CEO completes 3 years of service, the FMV of the stock is worth $100 per share.

CEO sells his shares for $150 per share 2 years after vesting pursuant to a change in control

QUESTIONS

1. Is the issuance of stock to CEO considered in connection with the performance of services?
2. Is there a transfer?
3. Is the stock transferable?
4. Is there a substantial risk of forfeiture?
5. What are the tax consequences if CEO does not make an 83(b) election on:
   1. Date the CEO receives the stock?
   2. Date when three years of service are completed?
   3. Date of sale?
6. If the CEO does make an 83(b) election, what are the tax consequences on:
   1. Date the CEO receives the stock?
   2. Date when 3 years of service are completed?
   3. Date of sale?

7. What if CEO had forfeited the shares by voluntarily terminating his employment with Start-Up in the second year when the FMV of the stock was 75 cents per share and:
   1. no 83(b) election was made?
   2. an 83(b) election was made?

8. What if CEO had forfeited the shares prior to vesting when the FMV of the stock was $2 per share and:

1. no 83(b) election was made?
2. an 83(b) election was made?

8. What does this example tell you about when you should make an 83(b) election?