In what is possibly the least controversial decision ever made by the IRS, the agency has adopted its proposed amendment to the procedures for filing Section 83(b) elections, eliminating the requirement that taxpayers file a copy of the election with their tax return for the year that they make the election.
It’s Nice that We Can All Agree on Something
The amendment, which was proposed last year (see “IRS Proposes Amendment to 83(b) Election,” received no comments at all. Zip. Zero. No one requested a public hearing and no hearings were held. Cue the sound of crickets (ok, technically that’s the sound of frogs—I don’t have a video of cricket sounds). Hence the amendment was adopted with no changes from the original proposal.
Background
In the context of stock compensation, Section 83(b) elections are most frequently filed when employees exercise stock options prior to vesting. They are also sometimes filed upon grant of restricted stock. The election accelerates the taxable event for the award to the date of exercise (in the case of stock options) or grant (in the case of restricted stock). Employees wishing to file a Section 83(b) election must submit the election to their IRS service center within 30 days of the event triggering the election. Employees must also provide a copy of the election to their employer. Prior to this proposed amendment, a copy of the election also had to be included with employees’ tax returns for the year.
Now that the IRS is encouraging taxpayers to file tax returns electronically, the requirement to include the election with tax returns has proved to be problematic, since few efiling systems can attach a scanned document to the return. There was also a concern that taxpayers might be able to revoke an election after the 30-day election period by simply failing to include it with their tax return.
Effective Date
The amendment is effective for transactions occurring on or after January 1, 2016 but the IRS permitted taxpayers to rely on it for Section 83(b) elections filed in 2015. For more information, see the NASPP Alert “IRS Finalizes Amendment to Section 83(b) Election.”
More Frogs and Tax Developments
I took that frog sound video when I was visiting the Hilton Americas – Houston where the 24th Annual NASPP Conference will be held. It’s at a pond in the park across the street from the hotel. You know what else you can do in Houston besides hear the awesome sound of frogs at night? You can get an update on this and other recent tax developments directly from IRS and Treasury staffers during the session “The IRS and Treasury Speak.” Register by September 9 for the early-bird discount.
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.
It’s been a while since I posted a stock compensation grab bag. Here are a few recent developments that don’t warrant their own entry but are still worth knowing about.
HSR Filing Thresholds
Good news: now executives can acquire even more stock! Under the Hart-Scott-Rodino Act, executives that acquire company stock in excess of specified thresholds are required to file reports with the Federal Trade Commission and the Department of Justice. The thresholds at which these reports are required have increased for 2015. See the memo we posted from Morrison & Foerster for the new thresholds, which are effective as of February 20, 2015.
If you have no idea what I’m talking about, check out our handy HSR Act Portal.
Final FATCA Regs
The Foreign Account Tax Compliance Act (FATCA) requires employees to report any overseas accounts that hold specified foreign financial assets, which could be interpreted to include stock awards issued by non-US corporations. The assets (stock awards, for our purposes) are reported on IRS Form 8938 (“Statement of Specified Foreign Financial Assets”), which is filed with the annual tax return. Final FATCA regulations, released in December 2014, clarify that unvested awards, do not need to be reported on Form 8938 until they have “substantially vested” (except in the case of a Section 83(b) election).
Dodd-Frank Rulemaking Update
The SEC has pushed back its agenda of rulemaking projects under the Dodd-Frank Act. The proposed rules for clawback requirements, disclosure of hedging policies, and pay-for-performance disclosures and the final rules for the CEO pay ratio disclosure have been pushed back to October 2015 (just in the time for the 23rd Annual NASPP Conference). This is despite comments from SEC Chair Mary Joe White last fall that the SEC was pushing to issue the final CEO pay ratio rules by the end of year. That’s a big delay—from the end of 2014 to October 2015—especially given the pressure on the SEC to issue these rules.
Section 83(b) Election Update
When making a Section 83(b) election, employees are required to include a copy of the election with their tax return for the year in which the election is made. In PLR 201438006, the IRS ruled that a Section 83(b) election was valid even though the taxpayer failed to attach a copy of the election to his Form 1040. If the failure had invalidated the election, employees could effectively revoke the election by “forgetting” to include it with their tax return—and, as we all know, Section 83(b) elections are irrevocable once the deadline to file them has elapsed.
The IRS has been busy on projects related to stock compensation lately (see “Dividends and Section 162(m),” July 10, 2012, and “Section 83 Update,” June 12, 2012). Their latest project is a sample Section 83(b) filing, something Stephen Tackney and Thomas Scholz, both of the IRS, had alluded to being in the works at last year’s NASPP Conference.
Rev. Proc 2012-29 provides a sample Section 83(b) election, along with examples clarifying the tax treatment that applies when the election is filed. See the NASPP alert “IRS Issues Sample 83(b) Election Form” for more information.
A Quick Review
Section 83(b) elections can be filed by employees when they receive stock that is subject to forfeiture and transferability restrictions. The most common arrangement in which employees would receive stock like this is a restricted stock award. A less common arrangement is an early-exercise stock option, under which employees are allowed and choose to exercise prior to vesting. Normally stock acquired under these arrangements is taxed at vest; filing a Section 83(b) election accelerates the taxable event to the grant/exercise date.
The election has to be made relatively quickly–within 30 days of when the stock is transferred to the employee–and must contain specific details about the transaction for which it is made. There’s not a lot of room for error here–miss the 30-day deadline and you are out of luck.
Incomplete Filings?
I was surprised at last year’s Conference to hear that the IRS was working on a sample 83(b) election. I had assumed most companies assisted employees wishing to make the election, ensuring that their elections are complete. But, given the Rev. Proc, now I’m not so sure.
I don’t know this for a fact, but I have to believe that the IRS issued the sample election because they receive a high number of incomplete filings and this is an effort to mitigate the problem. This is an area where you may want to take action to protect your employees. I think it’s a best practice for companies to provide a form that employees can use to make the election and to review their elections before they file them, just to make sure they’ve completed the form correctly. An incomplete or incorrect filing could be a mess if the error isn’t caught before the 30-day deadline. In a worst case scenario, the entire election could be considered invalid.
Note, however, that I never recommend that companies make the election on behalf of employees. Leave the responsibility for actually submitting the election in employees’ hands so that you don’t bear any responsibility if (or should I say “when”) elections aren’t mailed on time.
I’ll never forget a stock plan administrator telling me about starting a new job and opening a drawer in the prior stock plan administrator’s desk only to find a folder filled with Section 83(b) elections that the company had promised to file on behalf of employees over the past year and that had never been mailed. It was a private company and the elections were for early-exercise options that had been exercised at grant. If they had been filed on time as the company had promised, the employees would not have recognized any compensation income on their options. It still makes me a little sick to my stomach to think about it. Don’t do that! Make the employees mail their own elections.
More at the NASPP Conference
Attend the panel, “The IRS Speaks,” at the 20th Annual NASPP Conference to hear more about this Rev. Proc. as well as other rule-making activity that the IRS has completed this year–and hear what’s on tap for next year.
Since it’s a holiday week, I thought I’d do something a little lighter with the blog. Today I’m featuring a poem by John Hammond of Computershare (and poet laureate of the NASPP blog).
There won’t be a blog on Thursday, since it’s Thanksgiving and I hope you all will be spending time with your friends and families, giving thanks, doing whatever you do to celebrate national holidays, and not reading blogs about stock compensation.
Anapestic Ballad for 83(b) By John Hammond
“We don’t allow the use of 83(b)” You don’t? No, we don’t But how can that be? It’s tax code my friend, it’s a natural thing It’s the essence of harmony – it’s the I Ching Messing with tax? It’s like building a dam to steal all the water – then flooding your land The consequences are never as you intended Just wait ’til it’s the CEO you’ve offended And what would you do if a person – just one You the tax police now with your little tax gun? And he blinked his eyes slowly with a slight roll toward the back To begin his retort of my little attack It’s all in our plan… it’s as we intended To change it would require it to be amended… I certainly won’t argue what’s in your plans Your plans are your plans and that’s just how it stands But I am curious to know all the whys and the whats More than one plan design has been done by a yutz We don’t believe in them You don’t believe? It ain’t Santa Claus and this ain’t Christmas Eve The 83(b) has been a wonderful code For those who have used it – sure, you have to be bold My favorite use was with AMT When companies use to grant ISOs… before one twenty three It took an early exercise on repurchaseable shares And the AMT gods had to sit back and stare and say “Well done!” Well Done!? Perfect, I say! I have accelerated nothing, so nothing I’ll pay There has to be more…more than “I don’t believe” To abolish the code of 83(b) Our vendor can’t handle the process today We would track offline ’til systems were changed It’s not worth the risk or the mess or the fuss To handle the manual process of this stuff Have you considered RSUs an alternative way Versus saying you don’t and walking away With an RSU you could say, “we would, but cannot There is no transfer ‘cos property it’s not” It may just be diction… but diction’s a lot We’ll consider your advice when we make our next plan But it won’t change the past and it won’t change those grants Which at our burn rate, will be 2010 And I left my friend and I went on my way And thought of the thoughts we had thought of that day And I didn’t like it as friend or as foe Or as tax code groupie – I’m weird… yeah, I know In his shoes, I would have hoped I’d stood strong ‘Cos messin’ with tax code is really just wrong.
If you weren’t able to attend the NASPP Conference–or if you attended but weren’t able to get to all the sessions you were interested in–the recorded Conference audio is now available. You can purchase just the session(s) you are interested in, save by purchasing a five-session package, or save even more by purchasing the audio for the entire Conference. Purchase the audio today!
Conference attendees can access the full Conference materials, including any last-minute updates, as well as the audio for the 6th Annual Executive Compensation Conference at the NASPP Conference Materials Website.
NASPP Quick Survey on Tax Reporting and Collection Procedures
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register to attend local chapter meetings next Tuesday, Dec 1: Boston is hosting a meeting and the LA and San Fernando Valley chapters are hosting a joint meeting. Robyn Shutak, Education Director for the NASPP, will be presenting at the LA/San Fernando Valley meeting; be sure to stop by and say hello!