By Craig Panholzer and Michael L. Salad
Earlier this month, the Internal Revenue Service (“IRS”) released Form 15620, which seeks to streamline elections made in accordance with 26 U.S.C. § 83(b) (an “83(b) Election”). An 83(b) Election allows a taxpayer to elect to include as gross income the fair market value of restricted property (such as stock) at the time it is granted, rather than waiting until restrictions (such as a vesting period) lapse. An 83(b) Election must be filed no later than 30 days after the date in which the property was transferred.
Here’s an example of how an 83(b) Election might work: An employee receives 2,000 shares of restricted stock issued by the employer, and the stock is subject to a four-year vesting period (i.e., the employee must work for the employer for four years before the employee owns the shares without restrictions). At the time employee receives the stock, its fair market value is $10 per share. The total value of the stock is $20,000 (2,000 shares x $10). Normally, the employee would not have to pay taxes on this stock until it vests, but if the employee files an 83(b) Election, the employee will recognize the income immediately.
Prior to releasing Form 15620, taxpayers who wished to immediately recognize income on unvested property were required to prepare their own election letters. Submitting self-prepared correspondence to the IRS often creates uncertainty as to whether all the necessary information is included to complete an 83(b) Election based on the guidance provided in 26 CFR 1.83-2 and Revenue Procedure 2012-29. Further, the content of such letters outlined in 26 CFR 1.83-2(e) offers varied interpretations that may be alleviated by an IRS form.
An 83(b) election also commences the long-term capital gains (and qualified small business stock) holding period earlier, resulting in taxation at the long-term capital gains rate as long as the sale of the stock occurs more than one year after receiving the grant or the restricted equity, as opposed to one year after the date of vesting (and in the case of qualified small business stock, a taxpayer may avoid federal tax on a portion or all of the gain if the sale occurs more than five years after the grant and other conditions are satisfied).
The new Form 15620 provides taxpayers with a standardized form to ease filing 83(b) Elections with the IRS. However, revocation of an 83(b) Election under 26 CFR 1.83-2(f) can be challenging. It is important to carefully consider the risks and benefits before making an 83(b) Election and coordinate with an experienced tax attorney.
Craig Panholzer is an attorney in Cooper Levenson’s Business & Tax practice group in its Florida office. He concentrates his practice on business transactions, estate planning, special needs planning, probate and tax matters.
Michael L. Salad is an attorney in Cooper Levenson’s Business & Tax practice group. He concentrates his practice on estate and asset protection planning, special needs planning, business transactions, mergers and acquisitions and tax matters. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in Florida, New Jersey, New York, Pennsylvania, Maryland, Connecticut, Georgia, Massachusetts, Alabama and the District of Columbia.
