Page 490 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)
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476               The Complete Guide to Executive Compensation


                                         Award            Vest            Sell
                   Time Lapse            Today        Three years      Five years

                   Stock price
                   • Fair market value    $100            $130           $160
                   • Share price           —               —              —

                   Individual
                   • Ordinary income       —              $130            —
                   • Long-term capital     —               —              $30
                    gains

                   Company
                   • Tax deduction         —              $130            —
                   • Expense*                             $100            —
                  * Accrued over period of vesting
            Table 8-55. Cliff vesting on three-year restricted stock
               As was discussed in Chapter 3, the individual can elect to pay the tax on the value of the
            restricted property at time of award (i.e., $100 not later than 30 days after date of transfer)
            rather than waiting for the restriction to lapse. This is a Section 83(b) election, referring to the
            section in the Internal Revenue Code. Doing so makes the cost basis for later LTCG $100,
            and the LTCG tax payable on a $60 gain ($60   $100). The downside of this action is that
            if the individual does not satisfy the vesting requirement and therefore does not receive the
            stock, the person forfeits the tax amount, as it cannot be claimed as a tax deduction. Needless
            to say, one must be very confident of receiving the stock and that the value of the stock at that
            time will be greater than today. This is illustrated in Table 8-56.


                                         Award            Vest            Sell
                   Time Lapse            Today        Three years      Five years
                   Stock price
                   • Fair market value   $100            $130            $160
                   • Share price          —               —              $100

                   Individual
                   • Ordinary income     $100             —               —
                   • Long-term capital
                    gains                 —               —               $60
                   Company
                   • Tax deduction       $100             —               —
                   • Expense*             —              $100             —

                  * Accrued over period of vesting
            Table 8-56. Section 83(b) election on three-year cliff vesting stock
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