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

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.