Section83
Issue: What is the federal income tax treatment of dividends paid on substantially nonvested stock transferred to an employee in connection with the performance of services if the employee makes an election under section 83(b) of the Internal Revenue Code?
this Rev Ruling provides the example situation where on May 3, 1982, X, a corporation, established a restricted stock plan for the benefit of certain key employees in connection with services rendered to the corporation. The terms of the plan are such that at the time the corporation's stock is transferred to the employee the stock is subject to a substantial risk of forfeiture within the meaning of section 83(c)(1) of the Code and is not transferable within the meaning of section 83(c)(2) of the Code. All dividends earned on the restricted stock are paid to the employee. As a condition of receiving the stock, the employee is required to make the election provided under section 83(b) of the Code to include in gross income, for the taxable year the stock is transferred, the excess of the fair market value of the stock at the time of transfer over the amount paid for the stock.
On May 4, 1982, X transferred X's restricted stock pursuant to the plan to A, an employee of X. A made a proper election under section 83(b) of the Code.
A's stock under the plan earned $30 of dividends and such amount was paid to A in 1982.
The IRS indicates that if A had not made the election under section 83(b), the dividends would have been treated as a compensation payment by X to A. Because A made the 83(b) election, however, the IRS concludes that the dividends are taxed as dividends to A.
See http://www.taxlinks.com/rulings/1983/revrul83-22.htm for a full copy of this Rev. Ruling.
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