A §83(b) election allows the recipient of restricted stock to recognize income at the point when the stocks are granted, rather than upon vesting.  This would work well if the stock was not worth much and the holder had the funds to pay income tax on their value.  It would work especially well if that stock increased in value over the vesting period, because: 1) the increase in value would constitute capital gain, rather than ordinary income because the capital gains tax for long-term investments (over one year) is lower than ordinary income (at least until 2012); and 2) the tax for the increased value would not become due until the stock was liquidated, ensuring the taxpayer has the cash to pay their tax obligation. However, this would work very bad if the conditions of the restricted stock were not met, as the recipient would have paid income tax for income not ultimately received and would not receive any corrective tax treatment, except the ability to deduct the price paid, which in many cases will be nothing.

To learn more about Section 83(a) and Section 83(b) Election Letters, click here.