Proposed Regulations Eliminate Need to File IRC Section 83(b) Election with Individual Income Tax Return

BACKGROUND

Section 83(b) provides in general that if in connection with the performance of services property is transferred to the person performing the services, the excess of the fair market value of the property as of the first time the transferee’s rights in the property are transferable and not subject to a substantial risk of forfeiture, whichever occurs first, over the amount of any paid for the property is included in the service provides gross income for such taxable year.  An example of substantial risk of forfeiture would be where the service provider has to remain in the employment of the employer for five years before ownership of the stock vests so if the employee leaves before that time he or she forfeits the shares.  Under IRS Section 83 the service provider in the preceding sentence would not have to include the value of the shares in gross income until the restrictions lapse at the end of five years.  At that point the value of the shares at the end of the five year period would be included as ordinary income.  This would also start the holding period for the shares.

tax icon         Under IRC Section 83(b), the taxpayer can make an election to include the value of the shares in income in the year received even though they are subject to a substantial risk of forfeiture.  The advantage of doing this is that the value of the shares in the year received might be substantially less than they will be when the restrictions lapse.  Any appreciation after the year received will be taxed as capital gains.

A Section 83(b) election must be filed with the IRS no later than thirty (30) days after the date on which the property is transferred to the taxpayer.  The election is made by filing a copy of the written statement with the IRS office with which the person who performed the services files his or her return.  In addition, the person who performed the services is also required to submit a copy of such statement with his or her income tax return for the taxable year where such property is transferred.  A copy must also be given to the employer by the employee.

Taxpayers wishing to electronically file their annual income tax return could not do so because of the requirement that the Section 83(b) election be attached to the return.  The IRS has been encouraging taxpayers to file returns electronically and the Proposed Regulations to remove this obstacle to e-filing.  The Proposed Regulations eliminate the requirement that a copy of the Section 83(b) election be submitted with the individual’s tax return for the year the property is transferred.  The IRS explained that Section 83(b) elections filed within the thirty (30) period are scanned and an electronic copy of the election is generated.  This eliminates the need for the taxpayers to submit a copy with their tax return.

The effective date of the proposed regulations would be to property transferred on or after January 1, 2016.  However, the IRS said the taxpayer may rely on these Proposed Regulations for property transferred on or after January 1, 2015.


 


Michael A. KulzerMichael A. Kulzer
is the founding shareholder of the firm and earned his J.D. degree at the Rutgers University School of Law, where he was awarded the Prentice Hall Award for outstanding performance in the area of taxation. He earned his LL.M. in Taxation at New York University. Mr. Kulzer’s particular areas of expertise include estate planning, corporate taxation and business planning.