By making a Section “83(b) election,” an employee can defer until sale the tax associated with the receipt of restricted stock as well as convert ordinary income on the stock to capital gain. Consequently, the consequences of missing the deadline for the election are fairly dramatic. The Section 83(b) election must be filed with the IRS within 30 days of receipt of the stock. With such a short timeline, as you might expect, these elections sometimes are missed.

Simply canceling and re-issuing the restricted stock would likely not be respected by the IRS absent some change in terms and circumstances with respect to such stock. See CCA 199910010. However, depending on the circumstances, there may be ways to mitigate the adverse tax consequences of a missed 83(b) election.

  1. The restricted stock grant could be canceled and stock options (in particular
    incentive options), or a profits interest (maybe with a catch up) in the case of a partnership, could be issued in substitution. Assuming that the employee makes a qualifying disposition of the incentive stock options, it may be possible to achieve economic and tax results substantially identical to that of the restricted stock with the 83(b) election.
  2. The terms of the restricted stock grant could be amended to make the restricted
    stock transferable (free from vesting restrictions). This would cause the stock grant to be taxable to the recipient at the time of that amendment. Limiting the permitted transferees to a few key shareholders may reduce the loss of retention incentive.
  3. Another alternative would be to eliminate the vesting restrictions. While this
    addresses the tax concerns of the missed election, it does not address loss of the retention incentive. It may be possible to impose vesting restrictions at some later date however, that would require the cooperation of the employee and a business reason for imposing those restrictions that the IRS would respect.
    Bottom Line: All may not be lost if an 83(b) election is missed. There are some potential actions that could be taken to mitigate the tax consequences without loss of the retention incentive.

Bottom Line: All may not be lost if an 83(b) election is missed. There are some potential actions that could be taken to mitigate the tax consequences without loss of the retention incentive.

“Remember, today is the tomorrow you worried about yesterday.” – Dale Carnegie