The IRS published new Rev. Proc. 2012-29, to provide both a sample election under section 83(b) and examples of the income tax consequences of making such an election with respect to compensatory stock. It is common for a partnership or corporation to issue equity-based compensation to an employee subject to vesting and transfer restrictions. In general under section 83, the employee does not include income until such restrictions lapse, absent making a section 83(b) election within 30 days of receipt of the property. One potential benefit of the election is that the compensation income is measured by the value of the property on the initial issuance date and not the later vesting date (when the value may be higher). Until now the IRS only provided a general regulatory description of what to include in this election. The examples also help taxpayers quantify the tax implications of making or not making the election, explaining the tax effect upon issuance of the property right and upon later forfeiture if the vesting restrictions are not satisfied.
The text of the sample election follows.
Section 83(b) Election
The undersigned taxpayer hereby elects, pursuant to § 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income as compensation for services the excess (if any) of the fair market value of the shares described below over the amount paid for those shares.
1. The name, taxpayer identification number, address of the undersigned, and the taxable year for which this election is being made are:
TAXPAYER’S NAME: _______________________________________
TAXPAYER’S SOCIAL SECURITY NUMBER: _____________________
TAXABLE YEAR: Calendar Year 20__
2. The property which is the subject of this election is __________ shares of common stock of __________________________.
3. The property was transferred to the undersigned on [DATE].
4. The property is subject to the following restrictions: [Describe applicable restrictions here.]
5. The fair market value of the property at the time of transfer (determined without regard to any restriction other than a nonlapse restriction as defined in § 1.83-3(h) of the Income Tax Regulations) is: $_______ per share x ________ shares = $___________.
6. For the property transferred, the undersigned paid $______ per share x _________ shares = $______________.
7. The amount to include in gross income is $______________. [The result of the amount reported in Item 5 minus the amount reported in Item 6]
The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his or her income tax return for the taxable year in which the property is transferred. The undersigned is the person performing the services in connection with which the property was transferred.