In Revenue Procedure 2012-29, the Internal Revenue Service (the “IRS”) provides sample language that may be used (but is not required to be used) for making an election under section 83(b) of the Internal Revenue Code (the “Code”). Also, the Revenue Procedure provides examples of the income tax consequences of making such an election.
Section 83(a) of the Code provides, generally, that if in connection with the performance of services, property is transferred to the service provider, then the fair market value (the “FMV”) of the property is included in his/her gross income as of the first time that the service provider’s rights in the property are transferable to another person or are not subject to a substantial risk of forfeiture, whichever occurs earlier. Section 83(b) of the Code, and Treas. Reg. Sec. 1.83-2(a), generally permit the service provider to elect to include in gross income the FMV of the property at the time of transfer to him/her (e.g., instead of waiting until a substantial risk of forfeiture no longer exists). Why would you make the election? The FMV of the property is likely to be less at the time of transfer than later on when the property value would otherwise be included in gross income under section 83(a), so income taxes can be saved by making the section 83(b) election.
Under section 83(b)(2), 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 that the property is transferred to the service provider. Under Treas. Reg. Sec.1.83-2(c), an election under section 83(b) is made by filing a copy of a written statement with the IRS office with which the service provider files his/her return. In addition, the service provider is required to submit a copy of such statement with his or her income tax return for the taxable year in which such property was transferred. Treas. Reg. Sec. 1.83-2(d) requires the service provider to submit a copy of the section 83(b) election to the service recipient. Under Treas. Reg. Sec. 1.83-2(e), the election must be signed by the service provider, indicate that an election is being made under section 83(b) and contain certain information specified in the regulation. The sample language in the Revenue Procedure (modified as needed since this language specifically relates to transferred common stock) can be used to make a section 83(b) election.