Replies to post #100977 on Biotech Values

[biomaven0]

Because the shares are granted, there is ordinary income at the time the are received. The IRS treats granted shares as if the company gave you cash and ypu then bought the shares.

For shares that may not vest, this occurs at the moment they are reasonably likely to vest (I forget the exact language).

Thus, the execs all had a tax liability, but could not sell the shares on the open market because they were restricted.

This is all muddled.

There is never taxation until there is no longer any substantial risk of forfeiture (Sec 83). So here there was no tax at grant, but as soon as the shares vested there was a tax liability. Many companies allow some portion of the shares to be withheld to cover the tax liability, but this is still deemed a sale for insider reporting purposes.

The situation you described typically happened with ESPP shares or ISO's - there there is no tax at exercise, but there is alternative minimum tax. So people didn't sell on exercise, got whacked with AMT and had a huge tax bill, and then later sold at a loss in a later year, but got only an capital gains loss instead of an ordinary income deduction. It could also happen if someone made an 83(b) election to be taxed at grant and then sold at a loss, but that is very rare in a public company.

Peter