An Open Letter to IRS Commissioner Werfel on TikTok's Pre-IPO RSU Restrictions

The following is an adaptation of a letter I prepared requesting an IRS investigation of the tax implications of ByteDance's employee stock program. Thank you to my network for sending me so many helpful comments and improvements—the final letter has been sent. ??

ByteDance's stock program has triggered a 100% tax liability for all participating employees. It bases the liability on a fluctuating Fair Market Value (FMV) that’s differentiated not by the company's valuation but by the participant’s employment status. In addition, despite ostensibly removing performance vesting restrictions, ByteDance has imposed discretionary “Pre-IPO Restrictions” that have the same restrictive effect as performance vesting; and ByteDance continues to remind employees of restrictive covenants (including perpetual non-disparagement provisions) that violate public policy.? ByteDance’s behavior has significant implications for thousands of TikTok employees in the United States and, among other things, violates the IRS's "Constructive Receipt" doctrine under IRC § 451.

IRS Publication 538 describes the application of the Constructive Receipt doctrine, specifying that income is recognized when it is unconditionally credited to an account or made unequivocally available. This principle is particularly pertinent in ByteDance's share buyback program because, as I explain below, ByteDance admits that its current restrictions and policies impede participants' ability to realize the shares' income.?

ByteDance issued W-2s to all RSU participants in 2023 based on income that ByteDance calculated from an FMV of $158 per share. Immediately after sending payslips based on this FMV of $158/share, ByteDance reduced the FMV that it applied to ex-employees, like myself, to $128/share while increasing the FMV for current employees to $160/share. ByteDance views FMV not as a measure of the company’s fair market value but as a measure of the participant’s employment status. Additionally, ByteDance rolled out new trade restrictions, set strict buyback quotas, disallowed secondary sales, and imposed perpetual non-disparagement covenants that render the RSUs illiquid.

Pursuant to the Award Documentation, the shares that vested RSUs settle into are subject to transfer restrictions (the “Pre-IPO Restrictions”) until an IPO (as defined in the applicable Award Agreement), if ever, and the expiration of any applicable lock-up period in connection with such IPO.

My correspondence with ByteDance on this point provides evidence of its deceptive practice. In July of? 2023, I presented ByteDance’s general counsel, Erich Andersen, with an offer from Setter Capital, a secondary broker, to sell 100% of my RSUs.? The Setter offer was based on an FMV of $158/share—the same FMV that ByteDance reported to the IRS.? ByteDance refused to authorize the secondary sale and clarified that it would only authorize itself as the purchaser of any shares at quotas that ByteDance determines. ByteDance only purchased about 20% of my shares and it based it not on the FMV of $158/share, but on an arbitrarily low FMV for ex-employees of $128/share. ByteDance explained,

"Pursuant to the Award Documentation, the shares that vested RSUs settle into are subject to transfer restrictions (the “Pre-IPO Restrictions”) until an IPO (as defined in the applicable Award Agreement), if ever, and the expiration of any applicable lock-up period in connection with such IPO. The Pre-IPO Restrictions may be waived with the Committee’s (as defined in the Plan) or its delegate’s (i.e., the Company’s) prior written consent. However, any such consent is solely within the Committee's or its delegate’s discretion; no Recipient is entitled to such consent.

The Award Documentation also provides, in substance, that upon any attempt to transfer, assign, or otherwise dispose of any Restricted Share Unit or any related right or privilege in violation of the Award Documentation, the grant of Restricted Share Units and the related rights and privileges shall immediately become null and void. We reserve the right to take further actions in accordance with the Award Documentation."

See Email from ByteDance dated Aug 3, 2023.

ByteDance's communication emphasizes unspecified? “Pre-IPO Restrictions” and states that these assets are not unconditionally accessible to the participants. ByteDance informed me that “no Recipient is entitled to such consent,” and some “Committee” decides participants’ access to the value of these shares.? ByteDance threatens, “We reserve the right to take further actions in accordance with the Award Documentation.”? These “further actions” threaten the clawback of all RSUs and the return of title to ByteDance as a penalty under its so-called Section 11 clause, which is found in all employees’ RSU terms and conditions.? ByteDance’s punitive measures include perpetual non-disparagement obligations and obfuscated one-year non-compete and non-solicitation covenants, as I’ve described previously in prior articles Silenced Voices and You Didn't Receive a Buyback Invitation?

We reserve the right to take further actions in accordance with the Award Documentation.

ByteDance’s admission of its arbitrary “Pre-IPO Restrictions” and its threat of punitive “further actions” emphasizes the inaccessibility of these assets to the participants; moreover, this kind of behavior reinforces the need for investigation by the Department of Treasury. Although this is a textbook case for the Constructive Receipt doctrine, many employees are unsophisticated first-time stock participants (what the SEC would characterize as “unaccredited” investors), underscoring the need for government intervention to force ByteDance to administer the program fairly and equitably, consistent with American laws.

Although individual participants are now free to hire accountants and CPAs to claim Constructive Receipt doctrine in their tax reporting, only a few participants will do so as a practical matter.? The Department of Treasury should investigate and compel ByteDance to alter its deceptive income-reporting practices. In particular, the company’s correlation of FMV with the participant’s employment status is senseless—a participant’s employment status has no bearing on the company's valuation.? Moreover, ByteDance’s imposition of unspecified additional "Pre-IPO Restrictions," coupled with the specter of punitive consequences that claw back all of the participant’s RSUs, erodes trust in the company’s ability to administer compensation fairly and equitably.

The implications of ByteDance's actions extend far beyond the immediate financial and professional harm to me or the thousands of affected employees. Foreign mega corporations like ByteDance must base their compensation policies and tax-reporting rules on American laws. I urge the Department of Treasury to consider these additional documents and investigate these matters thoroughly to ensure compliance with U.S. tax laws and protect individuals' rights against corporate overreach.