REITs Executive Compensation Guide

In contrast, though it is rare, if an award is granted in the form of a restricted capital interest (that is, an interest that does not qualify as a “profits interest”), the stakes are raised, with the tax consequences and risks of filing a Section 83(b) being similar to those noted above with respect to restricted stock. Additionally, filing a Section 83(b) election on a restricted capital interest will cause the holder to be treated as a partner for tax purposes as of the grant date, bringing with it all the attendant complexities of being a tax partner. Finally, it is also worth noting that Section 83(b) elections are disregarded under Section 280G of the Code. Consequently, if restricted stock or profits interests vest in connection with a CiC or related employment termination, the fact that a Section 83(b) election was filed will not prevent the vesting of the restricted stock or profit interest from potentially constituting a parachute payment.

On the other hand, Section 83(b) elections are almost always filed in connection with the receipt of LTIP units or other partnership interests that are intended to qualify as “profits interests” for tax purposes. Although the IRS states in Rev. Proc. 2001-43 that it will not treat the vesting of a profits interest that satisfies the conditions set forth in Rev. Proc. 93-27 and Rev. Proc. 2001-43 as a taxable event and, therefore, the taxpayer need not file a Section 83(b) election, Section 83(b) elections are, nevertheless, almost always filed. The reasons for filing are: (1) the potential that the safe harbor provided in Rev. Proc. 2001-43 may be lost if the conditions therein are not satisfied (e.g., if the interests are disposed of within two years of issuance); and (2) it is generally believed that there is little to no risk in filing the election, since the taxpayer will take the position that the value of a profits interest at the time of the grant is zero and, based on current tax laws, it is generally believed that value is unlikely to be challenged even if Rev. Proc. 2001-43 is not applicable. This is true even when the interest would otherwise be treated as vested for purposes of Section 83 of the Code at the time of grant (e.g., where there are no time-based or performance-based vesting conditions imposed on the interest), but there is a potential for the interest to be forfeited or for less than fair value to be paid pursuant to a punitive call right (e.g., upon a for-cause termination or pursuant to a clawback policy).

39 | 2023 Guide to REIT Executive Compensation