IRS Proposes Changes to Requirement to File Section 83(b) Election with Form 1040

The IRS issued proposed regulations on July 16 eliminating the requirement to file a copy of an Internal Revenue Code (“IRC”) section 83(b) election (“83(b) election”) with the individual’s Form 1040.  This will affect individuals who receive restricted property from an employer (typically restricted stock or other equity) in connection with the performance of services and make a valid 83(b) election.

Background

IRC Section 83(b) permits taxpayers to change the tax treatment of transfers of restricted property they receive in exchange for services. Individuals choosing to make a section 83(b) election are electing to include the fair market value of the property at the time of the transfer less the amount paid for the property (if any) as part of their income in the year of receipt (without regard to the restrictions). They will be subject to required tax withholding by the employer at the time the property is received. In addition to the immediate income inclusion, a section 83(b) election will cause the property’s holding period for purposes of capital gains treatment to begin immediately after the property is transferred. Consequently, individuals who made a section 83(b) election will not be subject to income tax when the property vests (at the time the related restrictions lapse) regardless of the fair market value of the property at the time of vesting and will not be subject to further tax until the shares or other property are sold. Subsequent gains or losses in the fair market value of the property will be treated as capital gains or losses (assuming the property is held as a capital asset).  

Mechanics

A written election to be taxed under IRC section 83(b) must be filed in writing with the IRS service center with which the employee files his annual Form 1040 no later than 30 days after the date of the transfer of the property. Taxpayers must also provide a copy of the election to the employer from whom the property was transferred. Prior to the issuance of the proposed regulations, employees were required to file a copy of the 83(b) election with their Form 1040 for the year to which the election applied.

Proposed Regulations

In its proposed regulations, IRS indicated that the requirement under IRC section 83(b) to include a copy of the election with the individuals’ Form 1040 is an obstacle to filing the Form 1040 electronically. Under the proposed regulations, individuals will no longer be required to attach a copy of the 83(b) election to their Form 1040. Rather, the 83(b) election filed with IRS as described above will be scanned by the IRS service center that receives the election and kept by the IRS electronically.

The proposed regulations would be effective January 1, 2016 and would apply to transfers of property after that date. However, IRS stated that taxpayers may rely on the proposed regulations for property transferred on or after January 1, 2015.