On June 30, 2016, Kelso Inc., a calendar year corporation, issued 2,000 shares of its publicly traded stock as compensation to its employee, Nick Penn. On date of issuance, the stock's fair market value was $13,500. Under the terms of his employment contract, Mr. Penn couldn't dispose of the stock before February 1, 2020, and if he terminated his employment with Kelso before that date, he had to forfeit the stock back to Kelso. On February 1, 2020, the fair market value of the 2,000 shares was $20,000. Which of the following statements is true?

Question

Quizplus · Accepted Answer

CA) If Mr. Penn elected to recognize income with respect to the restricted stock in 2016 (by making an 83(b) election), Kelso Inc. would be allowed to deduct the fair market value of the stock ($13,500) as employee compensation in 2016. This is because for tax purposes, the compensation expense is recognized when the income is recognized by the employee.C) If Mr. Penn did not make an 83(b) election, the income would be recognized when the restrictions lapse in 2020, and Kelso Inc. would be allowed to deduct the fair market value of the stock at that time ($20,000) as employee compensation. This is because the tax deduction for the employer corresponds with the timing of the income recognition by the employee.