On July 26, 2016, the Internal Revenue Service (IRS) issued final regulations eliminating the requirement that taxpayers submit a copy of an election made under Section 83(b) of the Internal Revenue Code (Section 83) with their tax return for the year the property subject to the election was transferred (81 Fed. Reg. 48707 (July 26, 2016)). The final regulations adopt proposed regulations that were issued July 17, 2015 without modification (see Legal Update, IRS Proposes Rules Eliminating Certain Section 83(b) Election Filing Requirements).

The final regulations apply to property transferred on or after January 1, 2016. As provided in the proposed regulations, taxpayers may also rely on this guidance for property transferred on or after January 1, 2015.

Section 83 applies to property transferred to an employee or other service provider in connection with the performance of services. Under Section 83, a taxpayer who receives property in connection with the performance of services must generally recognize ordinary income equal to the excess of the fair market value of the property over the amount (if any) paid for the property (26 U.S.C. § 83(a)) (see Practice Note, Overview of the Taxation of Equity Compensation Awards: Section 83 and the Transfer of Property). This amount is taxed in the year that the property vests, unless the service provider makes a Section 83(b) election which allows the property to instead be taxed on the grant date (26 U.S.C. § 83(b)). The election is made by filing a written statement with the IRS within 30 days after the date the property is transferred to the service provider. Under the existing regulations, the service provider must also include a copy of the written statement with the service provider's tax return for the year in which the property was transferred (26 C.F.R. § 1.83-2(c)) (see Standard Documents, Code Section 83(b) Election: Restricted Stock and Code Section 83(b) Election: Profits Interests).

Like the proposed regulations, the final regulations eliminate the requirement that a copy of the Section 83(b) election be submitted with an individual's tax return for the year the property subject to the election was transferred. The final rule allows taxpayers who wish to electronically file their annual income tax return but who have been unable to do so because of the requirement that they submit a copy of their Section 83(b) election (which cannot be electronically filed) with their income tax return to do so.

The final regulations also revoke Revenue Procedure 2012-29 to the extent that it requires a taxpayer to submit a copy of a Section 83(b) election with their tax return.

These final regulations help to promote the IRS's goal of encouraging taxpayers to file electronically. However, taxpayers should note that although the regulations eliminate the requirement to include a copy of the Section 83(b) election with their tax return, the election must still be filed with the IRS no later than 30 days after the date that the property subject to the election is transferred to the service provider (see Standard Documents, Code Section 83(b) Election: Restricted Stock and Code Section 83(b) Election: Profits Interests). The IRS also reminds taxpayers of their general recordkeeping responsibilities.