On June 13, the IRS issued Revenue Procedure 2006-31 (IRB
2006-27) which provides guidance on requesting consent to revoke a Section 83(b) election. Here are the relevant parts of the Rev Proc.
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SECTION 4. PROCEDURE
.01 A request for consent to revoke an election made under §83(b) must be made under the procedures for requesting a letter ruling. See Rev. Proc. 2006-1, 2006-1 I.R.B. 1, or its successor. .02 In addition to a complete description of the facts and the other information and documents required under section
7.01 of Rev. Proc. 2006-1, or its successor, the request must contain: the date the §83(b) election was made; a copy of the §83(b) election; a description of the mistake of fact as to the underlying transaction; and the date on which the mistake of fact first became known to the person making the election. .03 If the request to revoke an election under §83(b) is being made on or before the due date for making the election, this fact must be included in the request for revocation. SECTION 5. EXAMPLES
Example 1. On July 10, 2006, in connection with the performance of services, Company M transfers 100 shares of substantially nonvested Company M stock to A, its employee. The restricted stock agreement provides that the stock will revert to Company M if A's employment is terminated for any reason before July 10, 2010. A pays $50X for the shares, which have an aggregate fair market value of $100X on July
10, 2006. On that same day, A files a valid election under §83(b). On July 28, 2006, A learns that the forfeiture provision in the stock agreement means A will forfeit the stock even if Company M terminates A's employment without cause. In addition, A realizes that A misunderstood the tax results of filing the election. On August 16, 2006, A files a request for a ruling from the Internal Revenue Service for consent to revoke A's §83(b) election. The request cites A's misunderstanding of the forfeiture provision and A's misunderstanding of the tax results as the basis for the ruling request. While A's request for a ruling is made within 60 days of the date A learns the full meaning of the forfeiture provision and when A realizes the tax results of filing the election, neither reason for which A requests the revocation is a "mistake of fact as to the underlying transaction." The underlying transaction is A's receipt of the restricted stock transferred pursuant to the employment agreement. A's misunderstanding of the forfeiture provision is not a mistake of fact as to the underlying transaction. Rather, it is a failure to understand the substantial risk of forfeiture set forth in the restricted stock agreement. Additionally, A's misunderstanding of the tax results of the election is a mistake of law and not a mistake of fact. Accordingly, consent to revoke the §83(b) election will not be granted. Example 2. The facts are the same as in Example 1, except that the request for a ruling is filed on August 4, 2006. Because the request is filed within the 30-day period during which the §83(b) election could be made, consent to revoke the §83(b) election will be granted, regardless of the reason for which it is filed. Example 3. On August 31, 2006, B begins employment with Company O under an employment contract that provides that B will receive Company O Class A common stock. On September 1,
2006, Company O transfers 50X shares of substantially nonvested Company O Class B common stock to B in accordance with the employment contract. B pays $100X for the shares, which have an aggregate fair market value of $100X on that date. On September 15, 2006, B makes a valid election under §83(b) with respect to the stock transfer. On September
29, 2006, B discovers that Company O has two classes of common stock and that Company O transferred Class B common stock to B instead of Class A common stock. On November 1,
2006, B files a request for a ruling from the Internal Revenue Service to revoke the election. B's request for consent to revoke the §83(b) election is timely, and it is based on a mistake of fact as to the underlying transaction because B did not receive the property B expected to receive in the transfer. Based on these facts, and absent any other facts to the contrary, consent to revoke the §83(b) election will be granted because the stock B received was transferred under a mistake of fact as to the underlying transaction. Example 4. The facts are the same as in Example 3, except that B files the request for the ruling on December 15,
2006. Because the request for revocation was not requested within 60 days of the date B discovered the mistake of fact as to the underlying transaction, B's request will not be granted. SECTION 6. EFFECTIVE DATE
This revenue procedure is effective June 13, 2006.
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