Final regs have been issued that remove the requirement that a taxpayer making a Code Sec. 83(b) election file a copy of the election with the taxpayer’s return for the year of the Code Sec. 83 transfer. The final regs track proposed regs issued in 2015.
Take away. Code Sec. 83(b) provides an election to treat nonvested property as if it were not subject to a substantial risk of forfeiture (SRF). The election must be made and filed with the IRS within 30 days after the property is transferred.
If property is transferred to a service provider or other person in connection with the performance of services, the value of the property (minus any amount paid) is included in the service provider’s income when the property vests. The income is compensation income. Vesting generally requires that the property not be subject to an SRF. If property is subject to an SRF, its value is not taxed to the service provider (employee or independent contractor) until the property vests. Once the property vests, any subsequent appreciation realized on the sale of the property is treated as capital gain, not as ordinary income. However, if the property is forfeited while it is nonvested, the forfeiture is treated as a sale or exchange at a loss, based on the amount paid for the property (not the amount included in income) over any amount realized on forfeiture.
The final regs eliminate the requirement to file the election with the return. The IRS explained that the elections are scanned by the Service Center receiving the election, and an electronic copy of the election is generated. Creation of an electronic copy of the election eliminates the need for a taxpayer to submit a copy of the election with the taxpayer’s return.
The final regs apply to property transferred on or after January 1, 2016. For transfers of property on or after January 1, 2015 and prior to January 1, 2016, taxpayers may rely on the proposed regs, the IRS explained.
Taxpayers must maintain sufficient records to show the original cost of the property and to support the tax treatment of the property transfer reported. A copy of any election must be kept until the period of limitations expires.