Tesla has vowed to continue its fight to restore Elon Musk's historic pay package, and failure could come with a hefty cost: the company and its CEO potentially incurring more than $100 billion in tax and accounting fees.
Delaware State Judge Kathleen McCormick recently The electric car maker's second attempt was denied Granting Musk the largest package of stock options in history — worth $56 billion at the time of the original ruling and more than $129 billion at the current stock price. It found that the overwhelming shareholder vote to re-approval the award did not go beyond its previous rejection of the 2018 deal as unfair and awarded it to a board subordinate to its CEO.
Its position left the board with a dilemma: either pursue a long and uncertain appeal to the Delaware Supreme Court, or give its CEO a new package of options.
If issued on similar terms, the new package could result in corporate accounting levies of more than $50 billion, and separately impose a punitive tax rate of up to 57 percent on Musk's shares, resulting in a huge tax bill.
In April, Tesla He warned shareholders that reissuing a new batch of stock options entitling Musk to buy the same 304 million shares would result in a compensation-related accounting charge of more than $25 billion, given that the company's valuation was much higher than it was in 2018. That's compared to $2.3 billion original 2018 award fee.
These calculations were based on a stock price of $175 on April 1, when Tesla's market value was $558 billion. Since then, the stock price has more than doubled to $425, giving Tesla a valuation of $1.3 trillion, much of it due to investor enthusiasm for Musk. A new relationship with President-elect Donald Trump – Which means that the accounting fees could be doubled by a similar amount.
Less known are the potential tax implications of Muskwhose net worth recently rose to more than $400 billion — the first person to reach that level of wealth.
If Tesla wins its appeal, which must be filed within 30 days of the Dec. 2 ruling, Musk will pay the standard 37 percent federal tax rate for the stock compensation when he exercises his 2018 options, which he is not obligated to do. Until 2028.
If the Delaware Supreme Court declines to overturn the original ruling and the Board chooses to issue a new plan with similar terms, the options will actually be granted “in the money,” because the financial goals have already been achieved.
“It's very simple. If you give options 'in the money,' which they clearly are now, all kinds of bad things happen,” Schuyler Moore, a tax partner at the law firm Greenberg Glusker in Los Angeles, told the Financial Times. “That is why they are trying so hard to ratify the original agreement. If they re-grant it now, there will be hell to pay taxes.
When created in 2018, stock options were conditional on ambitious goals — such as growing revenue 15 times and valuation 12 times — which Musk has achieved by 2023.
At the time the package was granted, the options were “out-of-the-money” and unexercisable, and thus eligible for exceptions in the part of the tax code known as 409A, which governs deferred compensation.
The rule was introduced in 2005 after Enron executives rushed to cash out vested stock they had received as part of their compensation plans before the company went bankrupt.
McCormick's decision to cancel Musk's plan in January voided his options, which no longer existed from a tax perspective.
Trying to award a new deal on the same terms now could violate Section 409A, which “results in the immediate taxation of the full value of the deferred compensation on the date it vests, long before the deferred compensation would be taxed under normal rules,” Moore said. .
“To make matters worse, Section 409A would impose an additional 20 percent tax on ad valorem,” Moore wrote in an article in the influential Tax Notes Federal magazine. “The damage is done on the date of grant.”
This means that Musk will immediately be liable for a 57 percent income tax on the difference between the strike price and the current value of the stock, whether he chooses to exercise the options or not. At Wednesday's closing price of $425 and the strike price of $23.34 set in 2018, the difference would be $122 billion, meaning a tax bill of roughly $70 billion.
“The tax issue here is straightforward. If you give him the same non-409A-compliant package now, you face income tax acceleration at the point of receipt rather than when it is exercised, with the penalty rate at the top,” said Bradford Cohen, tax partner at Giver Mangels. “Butler and Mitchell.” “It can be a very costly and unfortunate mistake.”
Even for Musk, the richest man in the world, that would be surprising. In early 2022, the billionaire posted on X that he “paid the most taxes ever in history for an individual last year” in response to a letter saying he owed the IRS $11 billion in 2021.
“The only sure way Musk can avoid these problems is… We have successfully appealed (the decision), because it should then be declared invalid,” Moore said. “A lot will depend on those attempts.”
Although Musk chose not to exercise his portfolio when he was entitled to do so last year, Moore said “having options is powerful and valuable,” because they act as a deterrent to potential acquirers or activists. Musk can also borrow against their implied value, as long as he doesn't grant a lien on the options.
The board has another way to help Musk avoid the 20 percent surtax, but it's still expensive. Directors could give him 304 million Tesla shares, worth $129 billion at the current price, which would be subject to a benchmark price of 37 percent, or about $48 billion.
When McCormick was asked about the issue during a hearing in August, Tesla's lawyer also raised the possibility that a potential higher personal tax rate could result in Musk receiving a larger package to offset the cost of his taxes.
“Ultimately, since we know how the economy works, you're likely to pay him more. If he has a number he wants and it's taxed, it will be passed on (to shareholders),” said Rudolf Koch of Richards Leighton & Wenger.
Furthermore, if Musk were to flood the market by selling that much stock at once to cover the tax, he would risk causing the stock price to plummet.
The company still has to bear the accounting fees. If payment negotiations start up again, Musk may not agree to a five-year post-exercise lock-in period during which he cannot sell, a feature of his 2018 package.
Musk previously raised the prospect of pulling out of the electric car maker, and the board argued that the compensation plan was a key way to retain the mercurial billionaire's commitment.
In January, he posted on the website .
Tesla did not immediately respond to a request for comment.
