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Under these regulations, the former general rule
and special rule are replaced by a revised general rule
that more closely follows the statutory language of
section 83(h). The service recipient is allowed a
deduction for the amount "included" in the service
provider's gross income. For this purpose, the amount
included means the amount reported on an original or
amended return or included in gross income as a result
of an IRS audit of the service provider.
Because of the potential difficulty of
demonstrating actual inclusion by the service provider,
a special rule provides that, if the service recipient
timely complies with applicable Form W-2 or 1099
reporting requirements under section 6041 (or 6041A),
as appropriate, with respect to the amount includible
in income by the service provider, the service provider
is deemed to have included the amount in gross income
for this purpose. Thus, the regulations allow the
deduction without requiring the service recipient to
demonstrate actual inclusion by the service provider.
* * *
* * * * * * *
The deemed inclusion rule may be used only by a
service recipient whose compliance with applicable Form
W-2 or 1099 reporting requirements is timely. Thus,
for example, under the current reporting requirements,
if amounts attributable to one or more section 83
transfers of property are includible in an employee's
income in year 1 (and are not eligible for any
reporting exemption), the employer generally is
required to furnish the employee a Form W-2 reflecting
that amount by January 31 of year 2 and generally is
required to file a copy of the Form W-2 with the
federal government by the last day of February of year
2. If the employer reports to the employee and the
government in a timely manner, the employer can rely on
the deemed inclusion rule to claim a deduction for the
amount in year 1. If the employee's Form W-2 is not
furnished until after January 31 of year 2 or the
government's copy of Form W-2 is not filed until after
the last day of February of year 2, the employer
generally is required to demonstrate that the employee
actually included the amount in income in order to
support its deduction of the amount. * * *
* * * * * * *
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