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The IRS recently proposed regulations (REG-141075-09) under
Section 83 to clarify and make changes to the current
regulations.
Section 83 provides rules regarding the recognition of income
when property (e.g., stock) is transferred to a service provider in
connection with the performance of services. In general, the
service provider recognizes income in the first taxable year that
the property has been transferred to the service provider, and the
property is either transferrable or not subject to a substantial
risk of forfeiture (i.e., the property is vested).
The current regulations provide that a substantial risk of
forfeiture exists where rights in property that are transferred are
conditioned, directly or indirectly, upon the future performance
(or refraining from performance) of substantial services by any
person, or the occurrence of a condition related to a purpose of
the transfer, and the possibility of forfeiture is substantial if
the condition is not satisfied. A condition related to a purpose of
the transfer includes, for example, reaching certain revenue or net
income targets. The proposed regulations would clarify that, in
determining whether a substantial risk of forfeiture exists based
on a condition related to the purpose of the transfer, two issues
must be considered: the likelihood that the forfeiture event will
occur and the likelihood that the forfeiture will be enforced.
In addition, the proposed regulations would provide that, in
general, a transfer restriction (including a transfer restriction
that carries the potential for forfeiture or disgorgement of some
or all of the property or other penalties if the restriction is
violated) does not create a substantial risk of forfeiture. For
example, an employer stipulates that an employee may not sell or
transfer shares of stock granted to the employee even after the
stock becomes nonforfeitable. This transfer restriction is not a
substantial risk of forfeiture for purposes of Section 83. Section
83 and the current regulations, however, provide one exception to
this general rule: Section 83(c)(3) provides that as long as the
sale of property at a profit could subject a person to suit under
section 16(b) of the Securities and Exchange Act of 1943 (the
Exchange Act), the person's rights in the property are subject
to a substantial risk of forfeiture and are not transferable. The
proposed regulations provide a new example that clarifies that the
exception under Section 83(c)(3) applies to only section 16(b) of
the Exchange Act and not to other provisions of the Exchange Act
that may restrict an employee's ability to sell or transfer
shares of stock.
These regulations are proposed to apply as of Jan. 1, 2013, and
will apply to property transfers on or after that date. Taxpayers
may rely on these proposed regulations before they become
final.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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