In Private Letter Ruling 201405008, the Internal Revenue Service recently ruled that a Section 83(b) election was valid in spite of the fact that it was not attached to the taxpayer’s personal tax return for the year of the election.
In general, under Code Section 83(b), taxpayers can elect to be taxed currently on the excess of the value of property that they receive over the amount that they pay for it, even if their interest in the property has not yet vested. If the property subsequently increases in value, this election can be very valuable by resulting in appreciation being taxed at capital gains rates that might otherwise be taxed as ordinary income.
Code Section 83(b)(2) states that the election “shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer.” Regulations Section 1.83-2(c) indicates that the election is made by filing a copy of the election with the IRS within 30 days after the property was transferred, and also states that “one copy of such statement shall be submitted with his income tax return for the taxable year in which such property was transferred.”
The ruling involved a taxpayer who timely filed the election with the IRS within 30 days of the property transfer but who did not attach a copy of the election to his or her Form 1040 for the year of the transfer. Fortunately for the taxpayer in question, the ruling indicated that the submission of the election to the IRS within 30 days of the property transfer fulfilled the requirements for a valid election, and the failure to attach the copy to the tax return did not affect the validity of the election. The IRS requested that the taxpayer forward a copy of the election to the IRS to be associated with the processing of the tax return.
The ruling does not state the rationale for the decision. It may have been made because, unlike the requirement to send a copy of the election to the IRS within 30 days of the property transfer, the requirement to attach a copy to the tax return does not appear in the text of the statute.
This ruling might be very welcome news to taxpayers who have not attached copies of otherwise valid elections to their Forms 1040. That said, this ruling, like all private letter rulings, contains the disclaimer that it may not be used or cited as precedent. Taxpayers should continue to be careful to attach copies of their Section 83(b) elections to their timely filed returns, but this ruling indicates that the IRS might show leniency if they fail to do so.