IRS Releases Section 83(b) Election Form

The U.S. Internal Revenue Service (“IRS”) has released Form 15620 for taxpayers to use when making an election under Internal Revenue Code Section 83(b) (“Section 83(b) election”).

Background

Section 83 generally provides that the transfer of property to a service provider (such as an employee or independent contractor) in connection with the performance of services is a taxable event. If the service provider receives substantially vested property, the service provider is required to include in gross income for the year of receipt, the excess, if any, of the fair market value of the property at the time of receipt, over the amount, if any, the service provider pays for the property.

However, if the service provider receives substantially nonvested property, the amount to be included in gross income will be determined based on the fair market value of the property at the time the property becomes substantially vested (instead of at the time of receipt) and such amount is includable in gross income at such time (instead of for the year of receipt).  That is, unless the service provider makes a Section 83(b) election, which permits the service provider to measure the amount of gross income at the time, and include it for the year, of receipt notwithstanding that the property is substantially nonvested at such time.

If the taxpayer wants, or is required by the service recipient, to make a Section 83(b) election, the election must be filed with the IRS no later than 30 days after the date that the property is transferred to the service provider. If the thirtieth day following the transfer of property falls on a Saturday, Sunday or legal holiday, however, the election will be considered timely filed if it is postmarked by the next business day.

The Section 83(b) election is made by filing the election with the IRS office with which the person who performed the service files his return. The service provider is also required to provide a copy of the Section 83(b) election to the service recipient.

Takeaways

The release of IRS Form 15620 is a welcome development. Although the Treasury regulations set forth the information that must be included in the election form and the IRS previously provided taxpayers with a sample election form in Revenue Procedure 2012-29, the IRS-issued form will help standardize and simplify the Section 83(b) election process.

For now, the instructions to IRS Form 15620 do not explicitly require taxpayers to use the Form when making a Section 83(b) election. However, the election must still be mailed to the IRS no later than 30 days following the date of transfer (with a copy to the service recipient). Electronic filing is expected at some point in the future for those using the IRS’s form.

Taxpayers must carefully consider the consequences of making a section 83(b) election, as it may not be revoked without the IRS’s consent. Moreover, the Treasury regulations provide that such consent will only be granted in very limited circumstances, and a mistake as to the value of the of property (or a subsequent decline in value) will not be considered grounds for revocation.