[HN Gopher] Carta's 83b Oversight: A Tax Trap for Married Startu...
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Carta's 83b Oversight: A Tax Trap for Married Startup Employees
(2023)
Author : hkhanna
Score : 120 points
Date : 2024-01-12 15:25 UTC (7 hours ago)
(HTM) web link (www.khanna.law)
(TXT) w3m dump (www.khanna.law)
| google234123 wrote:
| Has anyone ever got in actual trouble for this? I doubt...
| ghancock wrote:
| This isn't the sort of thing I expect people to "get in
| trouble" for at the time of filing. I expect that years later,
| if the startup turns out to be worth something and the taxpayer
| is audited, the auditors will go through old paperwork and
| discover a very large amount of taxes they can collect.
| kentonv wrote:
| I think we understand that an auditor could, in theory, do
| that, but the question is whether auditors do, in practice,
| do it. The IRS is not supposed to be screwing people on
| technicalities like this, and a reasonable auditor should
| conclude that the spouse obviously would have signed had they
| known they needed to. Regulation isn't interpreted by
| computers, it is interpreted by humans who can make
| reasonable adjustments for these sorts of mistakes.
|
| So, does anyone known of someone who actually got screwed by
| this in an audit? I'm sure it has happened often enough that
| at least someone out there has been audited who would be
| affected.
| cortesoft wrote:
| They would also need a court to agree with the ruling, and
| the fact that the person had no reasonable way to properly
| sign the document is likely to hold a lot of sway in court.
| google234123 wrote:
| IRS much much prefers to go after actual criminal activity.
| _hyn3 wrote:
| This is a _very_ serious issue for founders in California, Texas,
| and other community property states.
|
| Looks like Gust has the same issue:
|
| https://gust.com/blog/startup-founder-83b-election/
| quartz wrote:
| > Manually file your 83(b). Don't use Carta to do it. Instead,
| download the form from the IRS website, fill it out, and mail it
| to the IRS within the strict 30-day deadline. You'll need to get
| a signature from your spouse, too.
|
| I could be wrong but last time I checked the IRS doesn't provide
| an official form for this. It _does_ provide a sample election
| letter[1] but this sample does not include a space for a spouse
| to sign. You 'd need to include an additional line for this
| yourself in the letter you draft if you wanted it.
|
| Don't forget: if you do this yourself make sure to mail it
| certified mail with return receipt as physical evidence that it
| was delivered.
|
| A few months after delivery you can also call any IRS service
| center and ask them to verify they have the letter on file (these
| days everything is scanned into the system so any IRS person can
| find it vs. having to call the center that received it).
|
| [1] https://www.irs.gov/pub/irs-drop/rp-12-29.pdf
| swampthing wrote:
| It's important to also get the certified mail receipt
| physically postmarked by the USPS (it is possible to send
| certified mail without that). Also, it's a common best practice
| to include an additional copy of the election along with a
| self-addressed stamped envelope, and ask the IRS to date-stamp
| the copy and send it back to you.
| khzw8yyy wrote:
| If the IRS (hypothetically) doesn't have the letter on file,
| how would one go about fixing such a problem?
| renewiltord wrote:
| All example 83-b have this problem. Since there is no form and
| it's just a letter, you can just add the line and do it yourself.
| IANAL.
| jiveturkey wrote:
| Clerky's 83(b) does not have this problem.
| swampthing wrote:
| Correct! We've always included spousal signatures on 83(b)
| elections. I would say the vast majority (if not all) forms
| I've seen from good law firms have explicit places for the
| spouse to sign.
| everly wrote:
| Rough few weeks for Carta
| TimTheTinker wrote:
| Note, this only applies to "early exercise" under 83(b), which is
| exercising an option grant _prior_ to the grant vesting. More
| info: https://carta.com/blog/early-exercise-stock-options/
|
| Not all startups allow this type of early exercise. If you
| exercised ISOs/NSOs only _after_ they vested, this problem can 't
| apply to you.
| PopAlongKid wrote:
| Excellent point. Many don't understand that 83(b) only applies
| to property that has _been transferred_ but _not vested_.
| Sometime people mistake a lock-up period on selling stock as
| equivalent to not being vested -- it is not.
| chachra wrote:
| It seems to be a non-issue to me. From my attorney a few months
| back:
|
| "We follow the practice of major law firms in the venture space
| and do not include a spousal consent for the 83(b) election in
| community property states. We also confirmed with our tax
| counsel, and they confirmed our approach is advisable."
|
| No one should lose sleep over it. Spouse didn't sign off on a
| $500 payment to buy restricted stock (early startup stock), so
| IRS will come down heavily on you for material harm --- will not
| stand in court!
|
| My 2 cents anyway based on legal advice received.
| dmoy wrote:
| Do note that there are less than 10 community property states
| (but it does include CA and WA).
| PopAlongKid wrote:
| In other words, there are nine states, however that statistic
| is nearly meaningless. CA and TX alone count for about a
| quarter of the nation's population; altogether probably a
| third of the population is domiciled in community property
| jurisdictions.
|
| Also, the states of Tennessee and South Dakota have passed
| elective Community Property Laws, so even your "less than 10"
| statistic is not unquestionably accurate.
| unstatusthequo wrote:
| A situation where parenthesis make a big difference in the
| headline. This is not an 83 BILLIION dollar mistake, it's
| referring to 83(b) regulation. Just pointing that out for
| possible headline correction to de-sensationalize it.
| pnw wrote:
| 83b seems like one of the most esoteric and user unfriendly IRS
| mechanisms ever. There's no official form. There's no way to file
| it online. The recommended approach is to use certified mail
| return receipt which for most people requires a trip to the post
| office, and in my experience the IRS fails to return them
| regularly, in which case you are relying on your own records and
| your copy of the receipt for a potential tax audit many years
| down the line.
|
| You'd be hard pressed to design a more taxpayer unfriendly
| process. I thought it was great when Carta automated these
| because it's always been a friction point for myself and founders
| I've worked with.
| PopAlongKid wrote:
| >There's no official form.
|
| Very few tax elections have an "official form". Meanwhile,
| other tax elections are made all the time without even
| realizing it (for example, spouses filing a joint return are
| making an irrevocable election to do so).
|
| >You'd be hard pressed to design a more taxpayer unfriendly
| process.
|
| Obviously you don't know much about auditing partnership tax
| returns. :-)
| gamblor956 wrote:
| The IRS generally treats an 83(b) filed by _either spouse_ as
| jointly filed by the union if they file a joint tax return.
| Whether they are in a community property state or not is
| irrelevant from the perspective of _federal_ taxes because the
| _marital joint return_ already deals with this situation:
| essentially, the union is treated as a single taxpayer.
|
| (And yes, for those of you who are wondering: a federal tax
| statement/election signed by one spouse that files a joint return
| can bind both spouses for federal tax purposes...)
|
| As written, neither 83(b) nor its regulations (specifically
| 1.83-2, which outlines the requirement for the election) require
| spousal consent to an 83(b) election, because they are not the
| person earning the income. The regulations specifically state
| that the statement is filed by the "person who performed the
| services." They then pay taxes pursuant to the 83(b) election
| with the joint tax return, meaning that _both_ spouses have paid
| their federal tax liability with respect to any future sale.
|
| If this were not the case, the spouses of hundreds of thousands
| of CA tech workers would owe tens of billions of dollars in back
| taxes. It would be front page news. But it's not, because it's
| not actually how federal taxation works...
|
| Note that things get a bit more complicated if the spouses get
| divorced by the time of the sale of the stock subject to the
| 83(b) election. Because both spouses (are deemed to have) paid
| taxes on the 83(b) stock due to the 83(b) election, absent a
| prenup or postnup generally the 83(b) stock is treated as marital
| property and the proceeds are similarly marital property to be
| divided in a divorce. In a community property state, the split is
| 50/50 (I assume the same is true in non-CP states but as I've
| never dealt with this outside of CA I can't say). However, note
| that it's still irrelevant as to whether the other spouse signed
| the 83(b) election, so long as the election was made while they
| spouses still filed a joint return.
|
| TLDR: for _federal_ tax purposes, not having a spouse sign your
| 83(b) election is a non-issue, whether or not you live in a
| community property state.
| orionsbelt wrote:
| This person is a tax lawyer and this should be the top comment.
|
| It also matches what I have heard from a well-regarded tax
| lawyer that advises startups, who advises getting a spousal
| signature, but from a "why not just get it", conservative,
| belts and suspenders approach, but does not view it as needed.
|
| I'd also point out that even when employees receive a form with
| a spousal signature space included, many fail to get it signed.
| If this were an issue, it would have widespread consequences
| well beyond Carta.
| PopAlongKid wrote:
| >Note that things get a bit more complicated if the spouses get
| divorced by the time of the sale of the stock subject to the
| 83(b) election. Because both spouses (are deemed to have) paid
| taxes on the 83(b) stock due to the 83(b) election, absent a
| prenup or postnup generally the 83(b) stock is treated as
| marital property and the proceeds are similarly marital
| property
|
| Paying or not paying tax has no bearing on what is considered
| community property. It's also not clear what is "more
| complicated" about splitting marital property subject to an
| 83(b) election compared to other marital property.
| jameslk wrote:
| From our tax advisor:
|
| > The article from the Khanna Law website is incorrect. There is
| no guidance or authority that requires the spouse of the service
| provider to sign the 83(b) election. The article indicates that
| if a service provider lives in a community property state like
| California, the service provider's spouse must file the 83(b)
| election form, presumably because the spouse acquires an interest
| in the stock. But there is no guidance to that effect. Rather,
| Treasury Regulation Sections 1.83-2(a) and 1.83-2(e) are quite
| clear that only the service provider is required to sign the
| election form without regard to who will have an interest in the
| stock subject to the election.
|
| Take that for what you will. IANA/tax advisor etc.
|
| EDIT: There's also a great explanation of why this seems to be a
| nonissue by gamblor956 at the bottom of the comments, who is a
| purported tax lawyer (I'm not sure why their comment is not more
| upvoted): https://news.ycombinator.com/item?id=38972557
| khzrt wrote:
| I wouldn't take chances with the 83(b) election; extra-caution
| here pays off, just because the stakes are so high. To make
| founders' lives easier, we automated the whole process at
| file83b.com - you can prepare, sign, and file the election online
| (and include your spouse too if relevant by toggling the form).
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(page generated 2024-01-12 23:02 UTC)