IRS (Finally) Issues Sample Format for Making Section 83(b) Elections

Late in June the Internal Revenue Service (IRS) issued Revenue Procedure 2012-29, which provides a model form that employees and independent contractors may use to make an election to be taxed under Internal Revenue Code section
83(b) with respect to the receipt of restricted property (typically restricted stock in a company or a restricted equity interest in a non-corporate entity).

Background 

Section 83(b) permits taxpayers to change the tax treatment of transfers of restricted property they receive. Employees or independent contractors 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 minus 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, an employee or independent contractor 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 capital gains or losses (assuming the property is held as a capital asset).  

However, if the fair market value of the restricted property declines in the time period from its receipt by the employee to its vesting date, there is a risk that the employee will have paid more income tax based on the fair market value on the transfer date than he would have been obligated to pay at vesting.  Further, if an employee who made a section 83(b) election forfeits the property under the terms of the agreement with the employer, recovery of the tax paid at the time the election was made is not allowed.

Mechanics 

An election to be taxed under section 83(b) must be filed in writing with IRS service center with which the employee files her/his annual Form 1040 no later than 30 days after the date of the transfer of the property and s/he must provide a copy of the election with the employer from whom the property was transferred.  This may now be done using the IRS’s new model form, which 

  For a copy of the model election form, please click here. 

Conclusion 

While the IRS had previously provided guidelines for the information required to make a valid section 83(b) election, the new model election finally provides certainty for taxpayers making the election that their election will be valid if properly completed and filed in a timely manner with the IRS.