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IRS Eliminates Requirement to Submit Copy of Section 83(b) Elections with Tax Return

The Internal Revenue Service adopted final regulations that no longer require taxpayers who have made Internal Revenue Code §83(b) elections to attach a copy of the election to their annual federal income tax return.

Under §83, restricted stock granted in connection with the performance of services generally becomes taxable as ordinary income compensation when it is no longer subject to a substantial risk of forfeiture and is freely transferable. Section 83(b) and Treasury Regulation §1.83-2(a) permit a taxpayer who has received compensatory restricted stock or other property subject to a substantial risk of forfeiture to make a special election to include in gross income in the year of receipt, any excess of the fair market value of the property at the time of transfer over the amount (if any) paid for the property. Making such an election “closes” the compensation element of the grant, and therefore, future vesting would not be taxable and future sale or transfer generally would generate capital gains and not ordinary income.

In accordance with Treas. Reg. §1.83-2(c), the taxpayer must file a written statement of the election with the IRS no later than 30 days after the date of transfer. In the past, the taxpayer was also required to attach and submit a copy of the §83(b) election with the taxpayer’s income tax return for the year in which the property was granted.

In late July, the IRS released final regulations to amend Treas. Regs. §1.83-2(c) to no longer require taxpayers to submit a copy of the written statement of election with their income tax return covering the year of transfer. In the preamble to the proposed regulations, the IRS explained that the submission of the copy of the election was no longer necessary, given that IRS personnel electronically scan the first filing of the election statement, and acknowledged that most commercial tax preparation software does not permit electronic submission of a copy of an §83(b) election.

The final regulations apply to property transferred on or after January 1, 2016. For property transferred on or after January 1, 2015, taxpayers are permitted to rely on the proposed regulations, which were adopted without change.

Taxpayers remain subject to general recordkeeping obligations when making §83(b) elections, and should continue to use certified mail, return receipt requested, to have proof of timely filing, and to keep copies of their elections and receipts in a safe place for the duration of the statute of limitations.

© 2019 Proskauer Rose LLP.

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About this Author

Joshua Miller, Employment Attorney, Proskauer Rose Law FIrm
Partner

Joshua Miller is a partner in the Tax Department, resident in the Washington, DC office, whose practice covers both executive compensation as well as employee and equity issues in corporate mergers and acquisitions.

202-416-5828
Gabriela Ahdoot, Proskauer Law Firm, Employee Benefits and Tax Law Clerk
Law Clerk

Gabriella Ahdoot is a law clerk in the Tax Department and a member of the Employee Benefits, Executive Compensation & ERISA Litigation Group.

In the executive compensation area, Gabriella represents senior executives, corporations and compensation committees in a wide range of executive compensation matters, including drafting securities filings, equity plans, and award and severance agreements.

In the employee benefits area, Gabriella represents multi-employer benefit plan clients on a variety of tax and benefits issues, including plan administration, design, qualification and reporting requirements. She also provides advice with respect to ongoing regulatory, legislative and legal compliance matters.

212-969-3142