An Open Letter to ByteDance Regarding The Tax Email

Dear ByteDance,

I am writing in response to your recent email regarding taxes that you have sent to me and everyone who has requested a correction of the W2. Despite your response, I am filing Form 4852, per the process outlined in 26 CFR § 31.6051-1. This rule requires that I contact ByteDance to request a correction, but no further correspondence is necessary to file a corrected tax form. However, I feel compelled to address the misinterpretation of the tax law in your email. I am publishing my response in an open letter to benefit thousands of current and former employees in a similar situation.

1. Your email fails to consider the RSU transfer restrictions

Your email fails to consider the transfer restrictions on the RSUs specified in Section 83(a)(1), which states that the fair market value of transferable property, that is, taxable only to the extent that the RSU is (a) transferable or (b) not subject to "substantial risk of forfeiture." Specifically, Section 83(a)(1) says, “the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier." As you have repeatedly informed us, and as I'll demonstrate in this open letter, the shares are not transferable, they cannot be pledged or assigned, and the RSUs are subject to forfeiture.

2. Your email fails to consider Treas Reg. 1.451-2

Your email also fails to account for Treasury Regulation 1.451-2, which states that "income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions." Treasury Regulation §1.451-2(a) addresses the question of RSUs, stating, "Thus, if a corporation credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt."

ByteDance's purported "settlement" was what the IRS calls out in 1.451-2 as the "mere crediting on the books" of the shares and does not render them transferable, assignable, or free of substantial restriction—and therefore, they are not taxable. ByteDance repeatedly uses "settlement" as if it had legal meaning, but "settlement" is not a concept in Treasury Regulation §1.451-2 or the tax code. The records that we have of shares that are available on the ESOP servers in China are not taxable compensation. The RSUs may later be considered compensation (they will hopefully!) reach that point at "some future date," and if they are "transferable" then it can be taxed as income. But as of today, to quote the law one more time, if "the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt." The taxability of RSUs is explicitly described this way in §1.451-2.

3. ByteDance constantly reminds employees about restrictions

All former employees have received an email notice that the ByteDance shares are subject to significant restrictions and risk of forfeiture (e.g., for violation of non-disparagement clauses) and cannot be "pledged, transferred or assigned." This notice that ByteDance sends to everyone reminds them of the restrictions on transfer and the risk of forfeiture found in the RSU terms in Section 11. These restrictions and risk of forfeiture are relevant for taxability under Section 83(a)(1) or Treasury Regulation 1.451-2.

4. Employees should not shoulder the burden of ByteDance's tax strategy

The company is attempting to claim a multi-billion dollar tax deduction for compensation expenses in 2023 by assigning tax liability to all RSU holders while, at the same time, shifting this tax burden to those same RSU holders who are subject to ByteDance's own substantial limitations and restrictions on the transferability and liquidity of the shares. Treasury Regulation §1.451-2 clearly and unambiguously says that income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Simply put, ByteDance cannot claim a corporate tax deduction for compensation in its tax filings if that compensation (i.e., the RSUs) is not genuinely available to the employees as income due to the "substantial limitations or restrictions" placed on it by ByteDance itself. While ByteDance's desire to preserve its private market valuations and limit the secondary trading of its shares is understandable from a business perspective, this goal is simply incompatible with treating the RSUs as taxable income to employees.

5. Potential large-scale tax fraud

ByteDance's email demonstrates egregious fraudulent misrepresentations made separately to thousands of RSU holders and the IRS. The email is based on the false premise that "[u]nder US tax law, upon settlement, employees have already acquired the economic rights of the Shares, hence Shares must be fully subject to taxation at the time of settlement." As I explained above, the concept of "settlement" is a fabrication by ByteDance; a "settlement" is not a concept used in the tax code. Most importantly, RSU holders have not "acquired the economic rights of the Shares" because you tell us in separate communications that "the RSUs and any related rights and privileges shall not be transferred, assigned or otherwise disposed of in any manner." These two statements are inconsistent.

It is a misrepresentation for you tell RSU holders that they have "acquired economic rights" to RSUs and tax them for it, but in your private correspondence and your contracts, you repeatedly tell us that the RSUs do not grant any economic rights, that it is prohibited the transfer, pledge, or assign them, and that the RSUs are perpetually subject to forfeiture.

To illustrate this, you sent me an email on August 3, 2023 denying my request for consent to sell on secondary and explicitly telling me that I do not have an economic interest in the shares because of the RSU contract terms:

"as a matter of contract law, entitlement to RSUs and the economic benefits thereof is governed by the ByteDance Ltd. Amended and Restated 2012 Stock Incentive Plan (“Plan”)"

You then explained that these contract restrictions on economic benefits may go on for many years (until an IPO):

"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."

This is why I allege that large-scale tax fraud is occurring. You are telling me and others that we must pay taxes because of the shares' economic benefit, enabling ByteDance to use this as a multi-billion dollar tax credit in 2023 to offset profits that year. But in your private emails and in the highly confidential contracts that we signed, you are telling us that the contracts restrict any economic benefit and that we may never realize the economic benefit "until an IPO . . . if ever." My April 2, 2024 letter to outgoing general counsel Erich Andersen, the most senior legal officer overseeing the program, emphasized the egregious compliance problem with these irreconcilable positions. In my opinion, ByteDance is carrying out a large-scale tax fraud involving thousands of RSU holders by misleading the employees and the IRS with the (mis)characterization of our economic interest in the RSUs.

While I am proceeding with filing a substitute Form 4852 to address my situation, ByteDance has a responsibility to promptly and comprehensively rectify this matter for all impacted employees. Failure to do so would represent a knowing and willful disregard for the explicit requirements of the U.S. tax code and Treasury regulations and ByteDance's contractual agreements with its employees regarding the restricted nature of these RSUs.