Home | News | Site Map | Search | Contact

"Section 83" Nonsense

Silver-bullet fantasist leading the naive past a mountain of CtC evidence

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 was secretly undone by Congress half a century ago.

Here's the proposition: In 1969, Congress gutted the then 107-year-old structure of the income tax as applied to pay-for-labor by implementing a change under which the tax now applies only to the difference between the value of the money you got paid for working and the value you gave for that money-- which is to say, the value of your labor... which is to say, what you got paid for it

That is, in regard to pay for work, the tax now only applies to a "difference" which will always be $0, according to the "Section 83" theorists.

SO, TO CONTINUE THE THEORISTS' STORY: Congress makes this dramatic change to the long-standing tax law in 1969, without saying a word about it to anyone. For some reason, despite the dramatic change in the law every single member of Congress and their aides, and every IRS worker, and every executive department legislative draftsman and aide, and every federal judge continues to pay taxes on every penny they are paid for their work over the intervening years.

Moreover, every one of the friends and family members of all these thousands of government actors with intimate knowledge of the change the "Section 83" theorists claim took place in 1969 does the same, continuing to pay taxes on every penny they earn, regardless of what they do for a living. No one asserts the alleged change; and no court challenge is ever brought arguing for the benefit of the alleged change.

Not that section 83 hasn't been the object of litigation, mind you. It has been the object of a lot of litigation, continuously, from very early on after its addition to tax law 49 years ago.

But somehow not one litigant ever argued what the "Section 83" theorists claim the addition is all about (or has as its effect). Nor has any court ever found any such thing, even though considerable discussion of the history and purpose of the section has been presented in the course of these litigations and rulings...*

Because the notions of those flogging "Section 83" as a dramatic transformation of tax law, or as a silver-bullet escape hatch, are nonsense.

THE ERRANT "SECTION 83" THEORY grows out of ignorance (willful or otherwise) of the section's actual nature, which is only about stock transfers as compensation for services rendered. It also grows out of ignorance about the actual nature of the tax, which does not tax labor, or property-- but instead taxes the exercise of privilege (and without regard to how it is exercised, whether laboriously or otherwise).

As summarized above, the theorists look 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". They then 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-- an "excess" which most folks would say is $0, on the argument that what they give up in time and effort (the "cost" of their labor) is at least equal to what they are paid for it in exchange.

But these things are not what section 83 is about. Here is how the purpose and application of section 83 is explained by the 9th Circuit in 1984:

9. Resolution of the legal issue presented here requires an understanding of section 83's background and operation. Congress enacted section 83 in 1969 in response to the existing disparity between the tax treatment of restricted stock plans and other types of deferred compensation arrangements. S. Rep. No. 552, 91st Cong., 1st Sess. 120-21, reprinted in 1969 U.S. Code Cong. & Ad. News 2027, 2150-51 (Senate Report). Prior to 1969, an individual purchasing restricted stock was taxed either when the restrictions lapsed or when the stock was sold in an arm's length transaction. Tax was imposed upon the difference between the purchase price and the fair market value at the time of transfer or when the restrictions lapsed, whichever was less. See Cohn v. Commissioner, 73 T.C. 443, 446 (1979). This had both tax deferral and tax avoidance advantages over, for example, employer contributions to an employee's pension or profit sharing trust, which were immediately taxable in the year of receipt. H.R. Rep. No. 413, 91st Cong., 1st Sess. 86-87, reprinted in 1969 U.S. Code Cong. & Ad. News 1645, 1733-34 (House Report); Senate Report at 120-21, reprinted in 1969 U.S. Code Cong. & Ad. News 2027, 2150-51.

10. Section 83 resolved this disparity by requiring the taxpayer either to elect to include the "excess" of the fair market value over the purchase price in the year the stock was transferred, or to be taxed upon the full amount of appreciation when the risk of forfeiture was removed. 26 U.S.C. Secs. 83(a), 83(b). See generally Sobeloff, Payment of Compensation in the Form of Restricted Property: Problems of Employer and Employee--The Rules of New Code Section 83, 28 Inst. on Fed. Tax'n 1041, 1042-43 (1970). By its terms, the statute applies when property is: (1) transferred in connection with the performance of services; (2) subject to a substantial risk of forfeiture; and (3) not disposed of in an arm's length transaction before the property becomes transferable or the risk of forfeiture is removed.

Alves v. C.I.R., 734 F.2d 478, (9th Cir. 1984)

See also this case from the 2nd Circuit in 2011, and a couple of very explicit Tax Court rulings debunking the attempted use of section 83 to exclude compensation for labor from the tax here and here.

THE FACT IS, 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 the theorists don't propose to explain) not taxable. Again, this theory is born of ignorance of the real nature of the tax.

These theorists do not understand that it is neither the labor, nor the pay for labor that is taxed under the income tax. What is taxed is 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 measuring 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, conveniently unremarked by the peddlers of this theory is the fact that, even if their misconstruction of the "property" with which section 83 concerns itself were correct, nothing in the section says that the excess in value described is to be considered the ONLY thing to be included "in the gross income of the person who performed the services," or that the pay overall is NOT to be included, for that matter. In fact, section 83 is but one of 18 sections from chapter 1 of Title 26 U.S.C. gathered under the subheading, "Items specifically included in gross income". Further still, as the definition of "Gross Income" at section 61 says:

 "[G]ross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust."

And by the way, let's apply common sense to the plain language of section 83. Looking at that language in subparagraph (a) we see:

(a) General rule

If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—

(1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over

(2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.

Those promoting the "Section 83" nonsense want their dupes to imagine that the "property" being spoken of in the section is labor. And yet, look at how this "property" is discussed in the section: "the person having the beneficial interest in such property"; "the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture"; "if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable"... Does it sound like labor is being spoken of here? How about we get rational: It is obviously stock being spoken of, here.

The purveyors of this nonsense produce only excerpts of cases in supposed support of their arguments. These excerpts are offered due to their inclusion of expansive language seeming to declare that section 83 applies to all compensation, and to everyone.

But the portions of these rulings which would make clear what the courts are speaking of are omitted. Concealed by the "section 83" folks is that in these cases, the only compensation being discussed is that of stock options and the like, just as is described in the law.

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 (and would) change section 83 as soon as someone successfully used it to shield actual "income" from the tax.

THOSE PRESENTED WITH the "Section 83" nonsense should run, not walk, away. The actual truth about the tax is ready and waiting for you.


*Compare the track record of [zero] practical effects from the changes in the law of which the "Section 83" theorists make so much with that of CtC, in which less than 90 days after the publication of the book in 2003 the first-ever-in-American-history complete income tax refund is issued. This concrete, practical demonstration of accuracy is then followed by more than 250,000 repeat performances, continuously, for 15 years now and counting, even while the IRS struggles mightily to suppress the book's revelations...

BTW: See this for some discussion of the pernicious effect of nonsense theories and CtC denial of the sort described in this article. It's important.