Theranos Case Analysis

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This commentary is for the purpose of discussing the back story of Ms. Holmes’s personal stake and the related accounting implications.
Theranos Inc. (Theranos or the Company) is a privately held health technology company based in Palo Alto, California. The Company is well known for the marketing effort on the blood tests technology. Ms. Holmes, founder and CEO of Theranos, became a youngest self-made female billionaire in the world due to a $9 billion valuation of Theranos in 2015. However, in 2016, the blood tests technology has been criticized for not being scientifically peer reviewed. In exchange for a promise (from its investors) not to sue the Company or its executives, Theranos seeks to trade Ms. Holmes’s
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Section 83 (b) is only permissible for AMT purposes but not ordinary income tax purposes. 1 (IRS gave the final ISO regulations in 2004. 2) With the early exercise option, Ms. Holmes would receive back restricted stocks with the same vesting schedule as the original option. If Ms. Holmes meets both ISO holding periods, she will pay tax on the entire spread between the sale price and the exercise as long-term capital gain. If a “disqualifying disposition” occurs, by making the election of Section 83 (b) within 30 days following exercise, Ms. Holmes would benefit from reducing AMT income.
However, Ms. Holmes still has a risk of losing money if she exercised the ISO early and the stock price decreases. Smart as Ms. Holmes is, she set up an agreement with the Company to exercise the options without having to pay upfront. When the stock price goes down, Ms. Holmes can simply return the shares. By doing so, Ms. Holmes successfully avoids the risk from the declining of the stock price.
In conclusion, Ms. Holmes was trying to reduce the tax obligation when the stock price goes up and to avoid loss when the stock price goes down.
What are the accounting implications of this transaction?
Analysis and Conclusion:
The Company issued Ms. Holmes ISOs. ISOs ordinarily do not result in a tax deduction for employer therefore the tax effects from these awards will not be recorded unless a disqualifying
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