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include that nullity in his taxable income for that year by filing such an election with the IRS within
30 days of his purchase of the stock.
In situations in which there is little difference between the value of stock and the amount an
employee will pay for it (e.g., in start-up companies when stock has little initial value), a grant of
restricted stock accompanied by an 83(b) election may be preferable to the grant of an ISO, since it
avoids the alternative minimum tax, which may be imposed upon exercise of an ISO.
Vacation Home
Morris has much reason to congratulate himself on successfully acquiring the plastics molding
operation as well as securing the services of Brad through an effective executive compensation
package. In fact, the only real disappointment for Morris is that the closing of the deal is scheduled to
take place during the week in which he normally takes his annual vacation.
Some years ago, Morris purchased a country home for use by his wife and himself as a weekend
getaway and vacation spot. With the press of business, however, Morris and his wife have not been
able to use the home except on occasional weekends and for his two-week summer vacation each year.
Morris always takes the same two weeks for his vacation so he can indulge his love of golf. Each year,
during those two weeks, the professional golfers come to town for their annual tournament. Hotels are
always booked far in advance, and Morris feels lucky to be able to walk from his home to the first tee
and enjoy seeing his favorite sport played by some of the world‟s best.
Some of Morris‟s friends have suggested that Morris rent his place during the weeks that he and his
wife don‟t use it. Even if such rentals would not generate much cash during these off-season periods,
the income might allow Morris to deduct some of the expenses of keeping the home, such as real
estate taxes, mortgage payments, maintenance, and depreciation. Morris can see the benefit in that,
since the latter two expenses are deductible only in a business context. Although taxes and mortgage
interest are deductible as personal expenses (assuming, in the case of mortgage interest, that Morris is
deducting such payments only with respect to this and his principal residence and no other home), the
previously mentioned limits on the use of itemized deductions make the usefulness of these deductions
questionable.
However, in addition to the inconvenience of renting out one‟s vacation home, Morris has
discovered a few unfortunate tax rules that have dissuaded him from following his friends‟ advice.
First of all, the rental of a home is treated by the tax code in a fashion similar to the conduct of a
business. Thus, Morris would generate deductions only to the extent that his expenses exceeded his
rental income. In addition, to the extent he could generate such a loss, the rental of real estate is
deemed to be a passive activity under the Internal Revenue Code, regardless of how much effort one
puts into the process. Thus, in the absence of any relief provision, these losses would be deductible
only against other passive income and would not be usable against salary, bonus, or investment
income.
Such a relief provision does exist, however, for rental activities in which the taxpayer is actively
involved. In such a case, the taxpayer may deduct up to $25,000 of losses against active or portfolio
income, unless total income (before any such deduction) exceeds $100,000. The amount of loss that