CLIENT ALERT: IRS Issues Sample Code § 83(b) Election Form
Section 83(a) of the Internal Revenue Code (the “Code”) provides generally that if, in connection with the performance of services, property is transferred to a service provider, the excess of the fair market value of the property so transferred (determined without regard to any restriction other than a restriction which by its terms will never lapse) as of the first time that the service provider’s rights in the property are vested, i.e., 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 taxable year in which vesting occurs. Income attributable to property that is not vested upon grant is included in income when the property vests (i.e., is either transferable or no longer subject to a substantial risk of forfeiture).
Code § 83(b), however, permits the service provider to elect to include in gross income the excess (if any) of the fair market value of the property at the time of transfer over the amount (if any) paid for the property, as compensation for services when the property is not vested upon grant. If a Code § 83(b) election is made, any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services. Thus, the value of the property with respect to which this election is made is included in gross income as of the time of transfer, even though such property is substantially nonvested (under the tax laws) at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested.
Under Code § 83(b)(2), an election made under Code § 83(b) must be filed with the Internal Revenue Service no later than 30 days after the date that the property is transferred to the service provider. Under Treas. Reg. 83-2(c), an election under Code § 83(b) is made by filing a copy of a written election with the Internal Revenue Service office with which the person who performed the service files his or her return. In addition, the person who performed the services is required to submit a copy of such election with his or her income tax return for the taxable year in which such property was transferred and must also submit a copy of the Code § 83(b) election to the person for whom the services were performed.
If property for which a Code § 83(b) election was filed is forfeited while substantially nonvested, the forfeiture is treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of (1) the amount paid (if any) for such property, over (2) the amount realized (if any) upon such forfeiture. If such property is a capital asset in the hands of the taxpayer, the loss is a capital loss.
The IRS recently promulgated Revenue Procedure 2012-29, 2012-28 IRB 49. This revenue procedure provides a sample election form (see attached) that may be used, although its use is not mandatory. The model election form is annotated, indicating the information that must be furnished. While the IRS model form is very similar to forms used currently by most corporations, we recommend that corporate clients use the IRS model form in the future.
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