(This was a longer post but I have abbreviated it to simplify it.)
Right now there is no guidance from the IRS which expressly countenances electronic signatures on 83(b) elections.
This is unfortunate. I would recommend the new administration issue guidance right away which countenances electronic signatures on 83(b) elections to remove any uncertainty about this. This would make life easier for founders, who are already given too short of a period of time to make their 83(b) elections.
If Congress really wanted to get serious about fixing Section 83(b), they could “reverse” the presumption. Meaning, if no tax was due on the issuance of the shares, because the founder paid FMV for the shares–no election would be required to be filed–even if there was vesting on the shares.
It doesn’t make sense, if you pay FMV for the shares, that you should have to file an 83(b) election simply because you have vesting on your shares. But, alas, that is the law as it currently stands.
In summary, here are three ideas for Congress and/or the administration to fix 83(b) elections:
- Allow electronic signatures
- Extend the 30 days to something a lot more reasonable, like 180 days.
- Reverse the presumption.
This is a bit misleading. The discussion begins with vesting in connection with service providers and ends with vesting of founder shares. Founders do not subject themselves to vesting for tax reasons. They subject themselvws to vesting so they their co-founders and investors can have comfort that they will continue to earn equity only so long as they continue to contribute to the company. Want to avoid tax issues? Grant the shares outright upfront and subject them to a repurchase option of the company pursuant to a separate stock restriction agreement at some later date. Under this scenario there will be no tax consequence as the repurchase right (the “risk of forfeiture” under the rule) falls away).
The existing rule makes a lot of sense in connection with service providers as well. Changing the rule would require the service would require the service provider to pay full value for all shares of stock granted, even if the conditions of their vesting failed and consequently they would never receive the shares. That is, in the example, if 6 quarters of work were expected to be rendered, the company would grant 60,000 shares (10,000 per quarter) on the first day. The service provider would either have to pay the fair market value of these shares upon receipt or pay tax on that value (you have to pay tax when you receive your paycheck or other things of value that constitute income). This is well and good if shares can be said to be worth $.0001/share.. what if they are shares of google? Do you want to pay fmv for $10m of shares (or pay tax on that value) when those shares might never become yours? What if the service provider quits after 2 months? Whatever she paid for those shares, or any tax paid, will not be refunded. If the proposal is to change 83(b), where would you draw the line? Should the default rule really be you pay all at once up front for something you may never receive? The question is not as simple as this post makes it out.
Allowing electronic signatures of 83(b) elections is pretty simple.