IRS Changes Filing Requirements of Section 83(b) Elections

Individuals who make Section 83(b) elections are no longer required to file a copy of the written election statement with their income tax returns.

Section 83 of the Internal Revenue Code of 1986 (the “Code”) taxes service providers on the receipt of property, including stock, for services. Under current law, the receipt of stock that is subject to a substantial risk of forfeiture such as a vesting provision is taken into income as the restrictions lapse, or as the stock “vests”.[1] If the stock appreciates between the time of grant and date of vesting, it will be treated as having been transferred to the service provider at a value higher than the price paid, which is a taxable event for the recipient. Section 83(b) of the Code allows a service provider to avoid this harsh result by electing to treat the issuance of non-vested shares as a transfer of the shares at the time of grant or issuance, rather than later when the shares vest. Thus, the compensation element in the transaction closes, and there is no further tax event when the shares vest. This election is referred to as a section 83(b) election. The section 83(b) election must be in writing, signed by the taxpayer, and filed within thirty days of the date of issuance.[2] Existing regulations under Section 83 also requires the taxpayer to submit a copy of the election with her income tax return for the taxable year in which the property is transferred.[3]

New regulations issued on July 25 (T.D. 9779) remove the second sentence in Section 1.83-2(c) of the existing regulations. Accordingly, under these final regulations, a taxpayer is no longer required to file a copy of a section 83(b) election with the taxpayer’s income tax return. This change eases the filing obligation for nonresident aliens who receive property in the US in connection with the performance of services, and who make section 83(b) elections to report income in the year of the transfer. Previously, they would have to file the election along with an income tax return, even if they were not otherwise required to file US tax returns.

These regulations apply to property transferred on or after January 1, 2016. For transfers of property on or after January 1, 2015 and prior to January 1, 2016, the preamble to the proposed regulations provides that taxpayers may rely on the guidance in the proposed regulations (which is identical to the guidance contained in these final regulations).

Taxpayers shall be reminded that the new regulations do not change the requirements under Section 83(b) to file the election with the IRS no later than thirty days after the date of the transfer. Taxpayers shall maintain sufficient records to show the original cost of the property and to keep a copy of any section 83(b) election until the period of limitations expires for any return with respect to which the income inclusion or basis of the property is relevant.

[1] 26 U.S.C. §83(a).

[2] 26 U.S.C. §83(b).

[3] 26 CFR 1.83-2(c).

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Roger Royse

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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