The IRS recently adopted final regulations that eliminate the requirement that taxpayers who have made an election under Code Section 83(b) with respect to receipt of restricted property file a copy of that election with their federal income tax return for the year the property was transferred. However, the requirement that a copy of such election be filed with the IRS within 30 days of transfer of restricted property continues to apply.
Under Code Section 83, if property (e.g., stock, LLC interests, partnership interests) is transferred to a service provider (e.g., employee, director, consultant) and that property is restricted for purposes of Code Section 83 (i.e., it is both subject to a substantial risk of forfeiture and non-transferrable), then, unless a timely Code Section 83(b) election, the fair market value of that property (less any amount paid for the property) at the time of vesting will be taxed as compensation income to the service recipient at the time of vesting.
However, if the service provider makes a timely Code Section 83(b) election, then the fair market value of that property (less any amount paid for the property) at the time of transfer will be taxed as compensation income to the service recipient at the time of transfer. In the event the restricted property has increased in value as of any subsequent vesting date, no portion of that increase is taxed as compensation income, but will be taxed to the service provider as capital gain (or loss) (either long-term or short-term, depending on the holding period) upon a later sale of the property.
To make a Code Section 83(b) election, the service provider must file a copy of the election with the IRS within 30 days after the date the property is transferred to the service provider and must also provide a copy to the service recipient (e.g., the employer). Prior to the adoption of these final regulations, the service provider was also required to file a copy of the election with his or her federal income tax return for the year of property transfer.
In our ever-increasingly paperless world, many taxpayers have found it difficult to file the Section 83(b) election electronically because many electronic tax form filing platforms do not accommodate the attachment of an electronic copy of the election. In light of the IRS’ goal to have taxpayers file as many tax returns as possible electronically, the IRS determined that eliminating the requirement to file the Code Section 83(b) election with the tax return would be a step towards meeting that goal.
The new final regulations apply for all transfers of restricted property made after January 1, 2016. The IRS did note in the preamble to the new final regulations that taxpayers remain subject to general IRS recordkeeping requirements and must maintain documentation sufficient to show any amount paid for the property upon receipt and to support the tax treatment as reported by the taxpayer.