IRS Issues Proposed Regulations Eliminating Requirement That Service Provider File Copy of Section 83(b) Election with Tax Return

On 7/17/2015, the IRS issued proposed regulations regarding the Section 83(b) election.  Under the general rule of Section 83(a), if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of the fair market value of the property as of the first time that the transferee’s rights in the property are transferable or not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount (if any) paid for the property, is included in the service provider’s gross income for the tax year which includes such time.  Under, Section 83(b) and Reg. 1.83-2(a), however, the service provider is permitted to elect to include in gross income, as compensation for services, the excess (if any) of the fair market value of the property at the time of the transfer over the amount (if any) paid for the property (rather than when the property is transferable or no longer subject to a substantial risk of forfeiture).

Section 83(b)(2) provides that an election made under Section 83(b) must be made in accordance with the regulations thereunder and must be filed with the IRS no later than 30 days after the date on which the property is transferred to the service provider.  Reg. 1.83-2(c) provides that a Section 83(b) election is made by filing a copy of a written statement with the IRS office with which the person who performed the services files his or her return.  Additionally, the person who performed the services is required to submit a copy of the Section 83(b) election with his or her income tax return for the tax year in which such property was transferred.  Reg. 1.83-2(d) also requires that the person who performs the services submit a copy of the Section 83(b) election to the person for whom the services were performed.

The preamble to the proposed regulations provide that it has come to the IRS’s attention that many taxpayers who wish to electronically file (e-file) their annual income tax return have been unable to do so because the requirement in Reg. 1.83-2(c) that they submit a copy of their Section 83(b) election with their income tax return.  Commercial software available for e-filing income tax returns does not consistently provide a mechanism for submitting a Section 83(b) election with an individual’s e-filed return.

The preamble goes on to provide that the IRS has encouraged taxpayers to file returns electronically and wants to continue to do so.  Therefore, the IRS wants to eliminate the requirement under Reg. 1.83-2(c) that a copy of the Section 83(b) election be submitted with an individual’s tax return for the year the property is transferred.  The IRS notes in the preamble that Section 83(b) elections are already scanned by the Service Center receiving the election, thereby creating an electronic copy of the election.  The creation of this electronic copy of the Section 83(b) election eliminates the need for a taxpayer to submit a copy of the Section 83(b) election with his or her individual tax return.

The proposed regulations specifically remove the second sentence of Reg. 1.83-2(c) of the existing regulations so as to eliminate the requirement that taxpayers submit a copy of the Section 83(b) election with their tax return for the year in which the property subject to the election is transferred.

The regulations under Section 83 are proposed to apply as of 1/1/2016, and would apply to property transferred on or after that date.  Additionally, taxpayers may rely on the proposed regulations for property transferred on or after 1/1/2015.

About the Author:

Stephen R. Looney is the chair of the Tax department at Dean Mead in Orlando. He represents clients in a variety of business and tax matters including entity formation (S and C corporations, partnerships, and LLCs), acquisitions, dispositions, redemptions, liquidations, reorganizations, tax-free exchanges of real estate and tax controversies. His clients include closely held businesses, with an emphasis on medical and other professional services practices. He is a member of the Board of Trustees of the Southern Federal Tax Institute, as well as former Chair of the S Corporations Committee of the American Bar Association’s Tax Section. He is Board Certified in Tax Law by the Florida Bar, as well as being a Certified Public Accountant (CPA). He may be reached at slooney@deanmead.com.