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$3,260,998,14 the excess of the vested and nonvested stock’s FMV
over its exercise price on the date of exercise.15
There is no dispute section 421 applies to the grant and
exercise of option No. 117 and that no income for regular income
tax purposes was recognized in 2000 from the exercise of ISOs.
There also is no dispute that petitioner’s section 83(b) election
complied with the procedural requirements set out in section
1.83-2, Income Tax Regs.16 Petitioner contends, however, the
section 83(b) election was invalid as to the nonvested Ariba
stock because the nonvested shares were not legally transferred
to him, which results in his not having to recognize as AMTI the
excess of the FMV of the nonvested stock on the date of
exercise over the exercise price until the underlying shares
vested; i.e., the substantial risk of forfeiture lapsed.
14 $3,264,000 (total FMV) - $3,002 (total exercise price) =
$3,260,998.
15 When a sec. 83(b) election is made, the taxpayer is
betting that the value of the stock will continue to appreciate.
The purpose of making a sec. 83(b) election is to accelerate
recognition of ordinary income when the stock’s FMV is
comparatively low, thereby eliminating the chance of having to
recognize a larger amount of ordinary income when the stock is no
longer subject to a substantial risk of forfeiture. But, the
election can backfire if the stock depreciates rather than
appreciates over that period or if the stock is forfeited, in
which event sec. 83(b) bars the deduction of the amount
previously recognized as income. Having gambled and lost,
petitioner now wants to invalidate his own election.
16 Petitioner abandoned his argument that he revoked his
sec. 83(b) election pursuant to sec. 1.83-2(f), Income Tax Regs.
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