The NASPP Blog

With the FASB and the SEC issuing significant announcements impacting stock and executive compensation, it only seems right that we should also be dealing with changes to the tax regs impacting stock compensation.  Luckily the IRS has obliged with a proposed amendment to the procedures for filing Section 83(b) elections.

Background

I’m going to assume that you all know what a Section 83(b) election is and when it would be filed.  If not, read the discussion of “Early Exercise” in the NQSO Portal and the discussion of “Section 83(b) Elections for Restricted Stock Awards” in the article “Taxation of Restricted Stock Awards,” available in the Restricted Stock Portal.

Previously, award and option holders wishing to file a Section 83(b) election had to mail the election to their IRS service center within thirty days of the triggering transfer (a grant of restricted stock or exercise of an unvested option) and also include a copy of their election with their tax return for that year.  With the IRS now encouraging taxpayers to file their returns electronically, the requirement to include a copy with your tax return has turned out to be problematic. Many (dare I say all?) of the systems used to electronically file returns with the IRS simply don’t have the capability of including a copy of a Section 83(b) election, forcing taxpayers to file on paper—a situation in which everyone, both the IRS and the taxpayer, loses.

Recent Developments

Last year, in PLR 201438006, the IRS ruled that a Section 83(b) election is valid even if the taxpayer fails to include a copy of the election with his/her tax return for the year (see my February 3, 2015 blog entry, “Grab Bag“).  This ruling was to avoid giving taxpayers an opportunity to rescind their election by simply failing to include the copy with their tax return but it also steered us on a course for the recently proposed amendment (if the election is valid without including a copy with your return, why is the copy necessary).

Proposed Amendments

The proposed amendment would simply eliminate this requirement altogether. There’s really no need for it; as the IRS notes in the preamble to the proposed regs, they already have the original and they scan that for their records upon receipt of it.  The requirement to file the copy with your tax return is an anachronism, harkening back to a day before electronic forms and scanners were commonplace.

The IRS does note that taxpayers should keep a copy of the election in their records until the statute of limitations expires for the return on which the sale of the shares subject to the election is reported.

The proposed regulations would apply to all stock transferred (grants of restricted stock and exercises of unvested stock options) on or after January 1, 2016 but taxpayers can rely on them for stock transferred in 2015.

– Barbara