Are sales under a 10b5-1 plan that are made to sell-to-cover for RSU vests exempt from short-term profit rules? Seems unreasonable that sales under this kind of plan would be subject to short swing liability, but can’t find anything to confirm that sentiment. Thanks.

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My understanding is that the gains on the sell to cover transactions are still taxable, but that those sales typically generate none to very little gains (from the time of vesting to the sale very little time has passed and so theres little to no fluctuation in value), so in reality, no actual income is generated. It is reasonable that gains on these sales are also taxed. As a similar example... in sweepstakes and game shows when cash prizes are given in addition to noncash prizes to cover the tax on the noncash prize, the cash prize is still taxable. Another example, when employers give employees additional pay to pay their taxes, that pay is also taxable. It's slightly circular, and you can't really zero it out, but it's still income to you even though it's designated to pay tax.

Sorry - my comment below was intended to reply to this!

I definitely think it’s taxable, I’m just wondering whether the transaction would be considered exempt under Section 16b such that there wouldn’t be short swing profit liability (and then they’d have yo disgorge benefit and also likely see a plaintiff bar claim).

Hmm yeah I don't think that's exempt. I agree it should be. If they transfer them to the issuer, then it is exempt though. Can the plan administrator do that?

If the grant and withholding right is approved in accordance with 16b-3(e), the withholding is generally considered exempt. It’s cleanest cut when the withholding is automatic (see last sentence of Section 16 and Related Rules and Forms C&DI, Q. 123.16 for an explicit statement to this effect), but courts have repeatedly extended the exemption to elective features. Romeo & Dye’s deskbook should cover this in more detail if you can get your hands on a copy.

Romeo and Dye dude. Don't ask this here.

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