"Section 83" Nonsense
A NEW VERSION OF "SILVER-BULLET" FANTASY has lately been circulating briskly within the "tax honesty movement". This one is the notion that section 83 of the tax code is the long-sought mystical secret word by which the mis-application of the tax will be undone.
The theory grows out of ignorance of the actual nature of the tax, and presumes that "everything that comes in" inherently qualifies as "income" subject to tax. Looking at section 83 of the IRC, which provides that when property is transferred in connection with the performance of services, the difference between the fair market value of that property (once firmly owned by the recipient) over what the recipient paid for it (if anything) "shall be included in the gross income of the person who performed the services", the theorists imagine that the taxable portion of their pay is now only the excess of the amount received over what is imagined to be one's own cost of labor-- which most folks would say is $0.
Now, if the tax WERE on merely "what is received" or "what is gained" or anything like those things, this theory would be interesting, and Congress really might have made a giant boo-boo in adding section 83 to the law. Silly Congress!
But the tax is NOT on any of these things, of course. That's why section 83 has remained unchanged in the law for the 45 years since it was added in order to sort out how the growing practice of offering stock options and other non-cash forms of remuneration would be handled under the tax law.
IN FACT, THE "SECTION 83" THEORY IS A RE-PACKAGING of an old errant notion of a "property basis in labor", which holds that labor is personal property which is exchanged at par for pay, making the pay not a gain and therefore (for some reason) not taxable. Again, this theory is born of ignorance of the real nature of the tax, in which it is not understood that it is neither the labor, nor the pay for labor being taxed, but the privilege being exercised when certain distinguished, tax-entity-connected labor (or other activities) are being performed.
It is true that in the actual structure of the tax, "gain" is a necessary element in the measure of the taxable activity conducted. But because it is the voluntary exercise of federally-taxable privilege being taxed under that actual structure, Congress-- the privilege-grantor-- gets to decide what qualifies as relevant "gain" and "cost". Except for certain demonstrable business expenses and the like, what Congress allows to be taken as "cost" is the amount of that year's "personal exemption(s)", along with a variety of possibly-available deductions and credits.
FURTHER, all section 83 provides for in any event is that the calculated excess "shall be included in the gross income of the person who performed" the services for which the property was transferred ("in the first taxable year..."). It does NOT say that the excess, whatever it might prove to be, shall be taken as, or shall constitute, the total "income" of the recipient of the property (or anything like that).
UNFORTUNATELY, THOSE TAKEN IN BY "SECTION 83" NONSENSE are due for trouble. Among other things, unlike the truth about the tax revealed in CtC, which has forced the IRS to resort to frivolous hoaxes as pretexts for its sporadic efforts to discourage and evade educated claimants, the "basis in labor" notion is an actual current official "frivolous list" item:
(4) Wages, tips, and other compensation received for the performance of personal services are not taxable income or are offset by an equivalent deduction for the personal services rendered, including an argument that a taxpayer has a “claim of right” to exclude the cost or value of the taxpayer’s labor from income or that taxpayers have a basis in their labor equal to the fair market value of the wages they receive, or similar arguments described as frivolous in Rev. Rul. 2004-29, 2004-1 C.B. 627, or Rev. Rul. 2007-19, 2007-1 C.B. 843.
At the same time, of course, what a lame "silver bullet" this theory is, even were it not manifest nonsense! After all, even if the imagined loophole existed, Congress could change section 83 any time it caught on to its mistake.
THOSE PRESENTED WITH the "Section 83" nonsense should run, not walk, away. The actual truth about the tax is ready and waiting.