The New 83(b) Form: Implications for Intermediary Holding Companies

In November 2024, the IRS published Form 15620, Section 83(b) Election, raising important questions about the proper procedure for making a Section 83(b) election, particularly for partnership interests issued by intermediary holding companies.  

Section 83(b) and Partnership Interests

By way of background, it is common in certain industries to issue a partnership interest to employees to incentivize performance. Usually, the interest vests over time to protect the employer in the event the employee is terminated or leaves. From an income tax perspective, the receipt of property for services is generally taxable unless there is a substantial restriction of forfeiture (i.e., vesting), in which case the taxation occurs as the restriction is lifted.  

Code Section 83(b) allows the service provider to make an election to recognize the value of the interest at the time of grant rather than when the interest vests. This can be advantageous because the value at the time of the grant is usually lower than when the interest vests and because the service provider is more likely to recognize capital gain rather than ordinary income. 

Treasury Regulation 1.83-2 prescribes the manner in which to make a Section 83(b) election. Among other requirements, the election must be made by written statement within 30 days of receipt of the property.  Revenue Procedure 2012-29 provides a sample election for taxpayers to follow, and now Form 15620 may also be used. 

The Safe Harbor for Profits Interests (Rev. Procs. 93-27 & 2001-43)

Revenue Procedure 93-27 established a safe harbor under which the IRS generally will not treat the receipt of a profits interest in a partnership as a taxable event. The interest may not be disposed of within two years of receipt, be an interest in a publicly traded partnership, or be related to a substantially certain and predictable stream of income. 

Rev. Proc. 2001-43 clarified and expanded this safe harbor by allowing partnerships to treat the grant of a profits interest as non-taxable even if the interest is unvested at the time of the grant,  provided the partnership and the service provider both treat the service provider as the owner of the partnership interest from and after the grant date, allocate the distributive share of tax items to the interest, and neither the partnership nor its partners deduct any amount as compensation for the fair market value of the interest. This effectively eliminates the need for a formal Section 83(b) election. 

Why Protective Section 83(b) Elections Matter

However, due to the complexity of partnership structures, potential for IRS scrutiny, and magnitude of the impact on taxation of the interest, practitioners often recommend making a protective Section 83(b) election even when the safe harbor appears to apply. A protective election serves as a fallback if the IRS later determines that the interest was not a qualifying profits interest and should have been taxed at the time of grant. 

IRS Form 15620 and the Service Recipient

In addition to the information required under the regulation, line 9 of the new Form 15620 requests the “Name, TIN, and address of the service recipient.” However, this question might confuse practitioners because of the variety of situations in which profit interests are granted. 

For example, assume a development business desires to grant several of its employees an interest in company profits. The profit interest each employee will receive varies by project. To accommodate, a separate employee vehicle is organized to hold the employee interest in each of the project entities. The employee vehicle will be taxed as a partnership, and each employee will own an equity interest therein classified as a profits interest. 

Questions arise. Is the service recipient the operating partnership, the employee vehicle, or the employer? Is the service provider considered the employee vehicle, the employee, or the employer?   

The Impact of ES NPA Holding v. Commissioner

These questions may not have not been directly addressed by the IRS. However, it is possible that the new Form 15620 and line 9 thereon were issued in response to the Tax Court’s decision in ES NPA Holding v. Commissioner, T.C. Memo 2023-55, and to help clarify. The case addressed the eligibility of an interest in an intermediary partnership to qualify under the safe harbor. That is, the interest recipient provided services to an entity other than the issuer of the interest. The court ultimately concluded that the intermediary interest qualified as a profits interest eligible under the safe harbor. 

While the Tax Court’s broad interpretation of the safe harbor encourages service providers, it did not address the taxation of the interest received by the intermediary partnership. In the above example, should, or can, the intermediary employee vehicle make its own Section 83(b) election?

Practical Considerations Regarding Form 15620

More recently, in April 2025, the IRS revised Form 15620. In the revision, the line 9 information being requested is listed as optional. The instructions in Regulation Section 1.83-2 for making the election have not been updated. Thus, it is reasonable to conclude that an election via written statement would still be valid.  

Understanding the nuances of Form 15620 and Section 83(b) elections is crucial for businesses utilizing partnership interests in their compensation structures. Our team specializes in providing guidance on equity compensation and partnership taxation. Contact us for a consultation to discuss your specific situation.