Rev Proc

26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of correct tax liability.
(Also: Part 1, §§ 83; 1.83–2.)

Rev. Proc. 2006–31
SECTION 1. PURPOSE
This revenue procedure provides guidance concerning the factors that must be
present in order for a taxpayer to receive
consent to revoke an election previously
filed under § 83(b) of the Internal Revenue
Code. It also sets out procedures for submitting a request for consent to revoke a
valid § 83(b) election.
SECTION 2. BACKGROUND
.01 Under § 83(a), if, in connection with
the performance of services, property is
transferred to any person other than the
person for whom such services are performed, then the excess of the fair market value of the property (determined without regard to any restriction other than a
restriction which by its terms will never
lapse) as of the first day that the transferee’s rights in the property are transferable or are not subject to a substantial
risk of forfeiture, whichever occurs earlier,
over the amount (if any) paid for the property is included in the service provider’s
gross income for the taxable year which includes that day.
.02 Section 83(b) and §1.83–2(a) of the
Income Tax Regulations permit the service
provider to elect to include in gross income
the excess (if any) of the fair market value
of the property at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83–3(i)) over
the amount (if any) paid for the property,
as compensation for services. If this election is made, the substantial vesting rules
of § 83(a) and the regulations thereunder
do not apply to the property, and, assuming there is no compensatory cancellation
of a nonlapse restriction, any subsequent
appreciation in the value of the property is
not taxable as compensation to the service
provider.
.03 Under § 83(b)(2), an election made
under § 83(b) must be made in accordance
with the regulations thereunder and must
be filed with the Internal Revenue Service
no later than 30 days after the date that

July 3, 2006

the property is transferred to the service
provider.
.04 Section 83(b)(2) and § 1.83–2(f)
provide that an election under § 83(b) may
not be revoked without the consent of the
Commissioner. The regulations also provide that such consent will only be granted
where the person filing the election is under a mistake of fact as to the underlying
transaction and must be requested within
60 days of the date on which the mistake of
fact first became known to the person who
made the election. Neither a mistake as to
the value (or decline in the value) of the
property for which the election was made
nor the failure of anyone to perform an act
that was contemplated at the time of transfer of the property constitute a mistake of
fact for this purpose.
.05 The mistake of fact exception in
§ 1.83–2(f) is narrow in its scope. A mistake of fact is an unconscious ignorance
of a fact that is material to the transaction.
See 27A AmJur 2d, Equity § 10. By contrast, a mistake of law occurs where a person is ignorant of, or comes to an erroneous conclusion as to, the legal effect of
the facts. See 27A AmJur 2d, Equity § 15.
.06 The failure of a service provider to
understand the substantial risk of forfeiture
associated with the transferred property is
not a mistake of fact under § 1.83–2(f).
.07 The failure of a service provider to
understand the tax consequences of making an election under § 83(b) is not a mistake of fact under § 1.83–2(f).
.08 The Internal Revenue Service has
recognized the principle that an election
made under the Code or regulations may
be revoked on or before the due date for
making the election. See Rev. Rul. 56–67,
1956–1 C.B. 437, dist. by Rev. Rul.
76–393, 1976–2 C.B. 255. See also Rev.
Rul. 78–295, 1978–2 C.B. 165. Accordingly, a request for consent to revoke a
§ 83(b) election will generally be granted
if the request is filed on or before the due
date for making that § 83(b) election.
.09 If consent to revoke an election under § 83(b) is granted, it will be effective
as of the date of the § 83(b) election.
SECTION 3. SCOPE
This revenue procedure applies to taxpayers who wish to revoke a valid election
under § 83(b).

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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

2006–27 I.R.B.

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.

2006–27 I.R.B.

SECTION 6. EFFECTIVE DATE
This revenue procedure is effective
June 13, 2006.
SECTION 7. PAPERWORK
REDUCTON ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. § 3507) under control number
1545–2018.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
The collection of information in this
revenue procedure is in section 4. This
information is required to evaluate and
process the request for consent to revoke
the § 83(b) election. The collection of
information is required to obtain a letter ruling granting consent to revoke the
§ 83(b) election. The likely respondents
are individuals.

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The estimated annual reporting and/or
recordkeeping burden is 400 hours.
The estimated annual burden per respondent/recordkeeper varies from 1 to 4
hours.
The estimated number of respondents is
200.
The estimated annual frequency of response is on occasion.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax return and tax return
information are confidential, as required
by § 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jean Casey of the Office of
Associate Chief Counsel (Tax Exempt &
Government Entities). For further information regarding this revenue procedure,
contact Jean Casey at (202) 622–6030 (not
a toll-free call).

July 3, 2006