Revoking an 83(b) election - Rev Proc 2006-31


B

Bill Brown

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.

----------------------------------------------

SECTION 4. PROCEDURE

..01 A request for consent to revoke an election made under
=A783(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 =A783(b) election was made; a
copy of the =A783(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 =A783(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
=A783(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 =A783(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 =A783(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 =A783(b) election could be made, consent to revoke
the =A783(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
=A783(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 =A783(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 =A783(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.
---------------------------------------------------
 
Last edited by a moderator:
Ad

Advertisements


Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top