IRC 83 c(3) defers tax liability on vesting of RSUs and Restricted stock

Below is a link to the Internal Revenue Bulletin: 2005-32 of August 8, 2005

Below is a paragraph from the above Bulletin:

"Under section 83(c)(3) of the Code and section 1.83-3(j) of the regulations, if the sale of property at a profit within six months after the purchase of the property could subject a person to suit under section 16(b) of the Exchange Act, 15 U.S.C. ยง 78p(b), the person's rights in the property are treated as subject to a substantial risk of forfeiture, and as not transferable, until the earlier of (1) the expiration of such six-month period, or (2) the first day on which the sale of the property at a profit will not subject the person to suit under section 16(b). Because, when enacting section 83(c)(3), Congress decided that the only provision of the securities law that would delay taxation under that section would be section 16(b), potential liability for insider trading under Rule 10b-5, for example, does not cause rights in property taxable under section 83 to be substantially nonvested."


This means that if an insider purchased shares on Jan 1, 2017 and vested in RSUs of the same company on April 1, 2017 at a time when the stock price was substantially higher than when purchased, the income calculation and tax liability from the RSUs vesting is delayed until 6 months after the purchase. This assumes that the stock remained above the price of the purchase and the insider remained an insider for the 6 months.

The effect of this IRC 83 c-3 is that when there is a market purchase of shares prior to vesting or exercises, when the stock is higher than the purchase price, the tax liability is delayed past the vesting date or exercise date.

Most attorneys and CPAs do not understand IRC 83 c-3 and deny the statement in the Bulletin. Some attorneys do understand IRC 83 c-3, and the link above but still attempt to deceive courts and their clients about its meaning. This is the case even though the Ninth Circuit Court of Appeals in Strom v. U.S. ruled that there is the delaying of the tax liability under the circumstances above.

John Olagues

Edited Mon, Oct 9, 2017 7:37 PM

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