AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
Restricted Stock of Public Company in lieu of compensation
Posted by: VickiSantos, April 7, 2009 05:37AM
Interesting new thing (for me at any rate). Client has received Restricted Shares of a publicly traded company in lieu of compensation. I have to assume that the FMV (readily ascertainable since it's publicly traded) of the shares on the date of issue would be income to him as SE income, but does the fact that they're Restricted matter? Or, is there any other caveat of which I should be aware?

Thanks . . .

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: grberry, April 7, 2009 06:46PM
In general, restricted shares (or equivalent units) are income on the day they vest, at the FMV on that date. See [www.fairmark.com] (the general equity compensation page) for the basics and [www.fairmark.com] (the vesting page) for when vesting occurs.

If the shares will vest and still be subject to permanent restrictions then they might affect the fair market value, but such conditions would be rare. See [www.fairmark.com] for discussion.

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: VickiSantos, April 7, 2009 06:54PM
Ok, but these aren't shares for vesting or options. These are restricted shares that were just handed to a guy who did some consulting, in lieu of cash. They are not part of an employee plan or other stock plan of the company.

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: Kaye Thomas, April 7, 2009 07:29PM
We need to know what you mean by "restricted." If his right to retain the shares is subject to a condition, such as a requirement to continue providing services to the company, the shares may be restricted in a way that prevents them from being considered vested for tax purposes, even if they are not part of an employee plan. If the only restriction is a waiting period until he can sell the shares, such as may apply under Rule 144 (a rule of securities law, not a tax rule), the shares may be considered vested for tax purposes (and therefore taxable) even though he isn't in a position to sell them.

Kaye Thomas
Fairmark.com

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: VickiSantos, April 7, 2009 07:40PM
Unfortunately I know very little about the details. Here is the sum total of what I know:

*Client performed some consulting work for the company, is not an employee.

*In return for services performed, he was given 86,666 shares of stock of the company.

*On the certificate itself it says: "144-Restricted Shares: The shares represented by this certificate have not been registered under the Securities Act of 1933 (the "Act"), and are Restricted Securities as that term is defined in Rule 144 under the Act and requires written release from either issuing company or [...can't read the copy I have...] ... legend removal"

SO . . . perhaps I need more info from him as to under what conditions he will be allowed to sell the shares on the open market?

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: Kaye Thomas, April 7, 2009 07:51PM
It looks like he's a non-affiliate holding Rule 144 restricted shares, meaning he can't sell in the market until he's held the shares six months. Assuming no other restriction that would prevent the shares from being considered vested, he's taxable on the value of the shares as of the date he received them. He can't claim a discount because of the Rule 144 restriction, even if the shares lose value during the required waiting period.

Kaye Thomas
Fairmark.com

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: VickiSantos, April 7, 2009 08:03PM
THANK YOU for the assistance. My guess is there is additional service required for him to be able to trade them, but I will solicit more info.

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: VickiSantos, April 7, 2009 08:13PM
So, the situation is that he received the shares at a time the liquidity of the company was in some doubt, and he opted for accepting these restricted shares as opposed to just writing off the receivable.

The restriction was placed on the shares by the company, and there isn't a time limit or any other event that will trigger his being able to sell the shares other than the company saying "ok, you can sell them now." The 'deal' is supposed to be that the company will release the restriction if/when the company becomes solvent/liquid enough.

That all sounds more to me like he isn't really vested in the shares, and thus has no taxable event at the moment. . . ???

Re: Restricted Stock of Public Company in lieu of compensation
Posted by: Kaye Thomas, April 8, 2009 01:23AM
It doesn't sound that way to me at all. We know there's a Rule 144 legend on the shares. Whoever told you there isn't a time limit that will trigger his ability to sell these shares is misinformed. He may need an opinion letter from company counsel to sell the shares, but that will be granted upon request after the six months have passed. In any event, the nonsense about being able to sell only when the company says it's okay to do so would not prevent the shares from being considered vested for tax purposes. You haven't said anything that would indicate the shares are subject to a substantial risk of forfeiture, and if there's no SRF, the shares are vested.

Kaye Thomas
Fairmark.com



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