California ~ Personal Income Tax: Taxpayer’s IRC 83(b) Election Was Valid Election

The California State Board of Equalization (BOE) rejected a taxpayer’s attempt to recharacterize his IRC §83(b) election to recognize the income on the transfer of his incentive stock options as invalid in an attempt to reduce the amount of his California personal income alternative minimum tax (AMT) liability for the tax year at issue. The taxpayer had unsuccessfully argued before the Ninth Circuit Court of Appeals that his IRC §83(b) election was invalid because his acquisition of nonvested shares was not a transfer of “property” under the governing statutory or regulatory law. The BOE followed the Ninth Circuit’s reasoning that “the mere fact that an asset is subject to a substantial risk of forfeiture is no justification either for excluding it from the definition of “property” and the coverage of IRC §83 or for invalidating an otherwise valid §83(b) election.” Similarly, the BOE followed the Ninth Circuit’s determination that IRC §83(b) specifically prohibited the taxpayer from making a claim of right deduction for the forfeiture of his nonvested shares. Finally, the BOE also rejected the taxpayer’s attempt to claim an alternative tax net operating loss carryback for the subsequent AMT capital losses he sustained on the forfeiture of his nonvested shares in the following year and on the third-party sale of his vested shares in the year thereafter. The Ninth Circuit held, and the BOE concurred, that AMT losses are subject to the limitations in IRC §172(d), which work to exclude net capital losses from the computation of net operating losses, and IRC §1211(b), which limits excess capital loss deductions. Furthermore, California did not allow NOL carrybacks during the tax year at issue.

Kadillak, California State Board of Equalization, No. 536353, December 14, 2011 (released March 26, 2012), ¶405-611

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Wolters Kluwer Tax and Accounting

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