RECENT LEGAL DEVELOPMENTS

New vesting restrictions are imposed on vested stock that causes the same stock shares to become unvested. Vested stock is exchanged for unvested stock of another corporation in a Code Section 368(a) (i.e., tax-free or tax-deferred) reorganization. Vested stock is exchanged for unvested stock of another corporation in a taxable stock acquisition. The first situation (re-vesting of the same shares) involved founders who are required to accept vesting conditions to obtain a new round of financing or investment. Because the imposition of vesting restrictions is on already owned stock, no transfer of property occurs for purposes Code Section 83. Therefore, no 83(b) election is needed. The transfer of property (i.e., the taxable event) occurred on the date the stock was originally granted. So the additional of a “new” vesting condition essentially has no impact.  When the “newly” unvested stock vests, the founder does not recognize compensation income under Section 83(a). In the second and third situations (unvested stock received in a tax-free reorganization or taxable acquisition),  the unvested stock is treated as having been transferred in connection with the performance of services and thus subject to Code Section 83. The shareholder can make a Section 83(b) election at the time of the transfer in order to have any subsequent gain taxed at the capital gains tax rate. Otherwise, when the stock vests the shareholder may be taxed at ordinary income tax rates on the FMV of the stock if it exceeds the “amount paid” for the stock. The “amount paid” for purposes of Code Section 83 is the FMV of the vested stock surrendered on the exchange date.