Restricted stock reporting

[drc34718]

I have a question on reporting restricted stock..

Client apparently has restricted stock for which the 83(b) election was not made. I have the price at which the various options were granted from 2002 through 2004. In July of 2005, the company went public.

I have the price of the options as provided by the company and I have the FMV of the stock provided by the company.

The stock appears to be in two components..one is the deferred compensation options that she received, through payroll deductions, from 2002 through 2004. There are also additional shares that are called "Portfolio purchase options" by the company towhich my client did not acquire through payroll deductions, but to which the company imputed W-2 income.

I am being told that this is all considered restricted stock to which no 83(b) election was made. Confirmed with client that the election was not made. Since we are dealing with restricted sotck, there is a reporting requirement in 2005 that will create income to my client based on the difference between the option prices and the FMV price. IT is also my understanding that AMT will probably rear it's ugly head in this one.

My question to the forum is to the reporting of the restricted stock..is this done through Schedule D or some other form? Cannot quite determine..And if I am correct in my assumption, my cost basis of the stock when sold will now be the FMV?

Any comments appreciated..

Thanks

Dale Cooper

[Bees Knees]

Regardless of what you call it, deferring gain on a stock option is the deferring of ordinary income from compensation. The taxpayer gets stock from the company at a reduced price because the taxpayer is perfoming services for the company, and the company is offering its stock as a form of fringe benefit.

The question is when does the income from this form of deferred compensation get taxed? It eventually has to get taxed as W-2 income, but how much and when is it W-2 income verses Schedule D capital gains?

You are generally going to have some of it taxed as W-2 wages before the rest is taxed as a capital gain on Schedule D. The ONLY exception to this principal is when a Statutory Stock Option meets the holding period requirement - where the stock is held for at least two years from the grant date and for at least one year from the exercise date. That is the only situation I am aware of where you can by-pass the W-2 ordinary income recognition. If it is not a Statutory Stock Option meeting these holding period requirements, then you somehow have to first recognize ordinary income on the W-2 before you can get any capital gain treatment on Schedule D.