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IRS Removes Requirement to File Copy of Code Sec. 83(b) Election with Returns.

(Parker Tax Publishing August 10, 2015)

With regard to property transferred in connection with the performance of services, the IRS has issued proposed regulations eliminating the requirement to file a copy of a Code Sec. 83(b) election with returns, noting that taxpayers may find it difficult to comply with the requirement when e-filing. Taxpayers may rely on the proposed rules for property transferred on or after January 1, 2015. REG-135524-14.

A taxpayer may elect, under Code Sec. 83(b) to include in gross income, for the tax year in which the property is transferred, the excess of the fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction that by its terms will never lapse) over the amount paid for the property. The taxpayer may make this election even if he or she paid full value for the property at the time of the transfer, and thus realized no bargain element in the transaction.

Under Reg. Sec. 1.83-2(c), the Code Sec. 83(b) election is made by filing a copy of a written statement with the IRS office where the service provider files a 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.

In recent years, it has come to the attention of the IRS that many taxpayers who wish to electronically file (e-file) their annual income tax return have been unable to do so because of the requirement in Reg. Sec. 1.83-2(c) that a copy of the Code Sec. 83(b) election be submitted with the taxpayer's income tax return. As commercial software available for e-filing income tax returns does not consistently provide a mechanism for submitting a Code Sec. 83(b) election with an individual's e-filed return, an individual who has made such an election would be unable to e-file his or her income tax return in compliance with the regulation and would have to paper file his or her return to comply.

In order to remove this obstacle to e-filing an individual tax return, the proposed regulations would eliminate the requirement under Reg. Sec. 1.83-2(c) that a copy of the Code Sec. 83(b) election be submitted with an individual's tax return for the year the property is transferred.

Taxpayers are still required under Code Sec. 83(b)(2) to file a Code Sec. 83(b) election with the IRS no later than 30 days after the date that the property is transferred to the service provider, which will provide the IRS with the original election. Because Code Sec. 83(b) elections are scanned by the service center receiving the election, an electronic copy of the election is generated which eliminates the need for a taxpayer to submit a copy of the Code Sec. 83(b) election with his or her individual tax return.

Practice Tip: Although taxpayers no longer need to file a copy of their Code Sec. 83(b) election with their returns, they should still keep any such elections on record until the period of limitations expires for the return that reports the sale or other disposition of the property.

If adopted the proposed regulations would be effective January 1, 2016, and would apply to property transferred on or after that date. Taxpayers may rely on the proposed regulations for property transferred on or after January 1, 2015.

For a discussion of Code Sec. 83(b) elections, see Parker Tax ¶ 124,525. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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