United States: IRS Makes It More Difficult To Defer Taxation Of Restricted Stock And Similar Awards

Earlier this year, the IRS issued final regulations making it more difficult for taxpayers to defer taxation on property received for services. These final regulations are intended to clarify when substantial risk of forfeiture exists for property that is transferred for the performance of services under Section 83 of the Internal Revenue Code. However, in application these final regulations simply make it more difficult to defer taxation.   

Under Section 83 of the Code, the technical rule provides that if property, such as restricted stock, is transferred to a taxpayer for the performance of services, then the amount of the fair market value of the property that exceeds the amount paid by the taxpayer, if any, is included in that taxpayer's gross income in the first year the taxpayer's rights to that property are either transferable or are not subject to a substantial risk of forfeiture. Because of this rule, restricted stock transferred by a corporation to compensate an employee for the services he provided is not currently taxable if such stock is subject to a substantial risk of forfeiture. 

Rights to property are subject to a substantial risk of forfeiture if such rights are conditioned, directly or indirectly, on: (i) the future performance (or the refraining from the performance) of substantial services; or (ii) the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial. For example, a corporate transfer of restricted stock to an employee for his services is subject to a substantial risk of forfeiture if the employee is not allowed to sell or transfer the restricted stock until he has worked for the corporation for two additional years. Since the employee's rights to the transferred stock is conditioned on his performance of two additional years of service, such stock is subject to a substantial risk of forfeiture and thus, is not subject to taxation until the end of the two year period when the employee is allowed to sell and/or transfer such stock. 

The Code provides a specific carve out of the definition of substantial risk of forfeiture for the sales of transferred property that would cause the taxpayer to be sued under Section 16(b) of the Securities Exchange Act of 1934. Thus, if the sale of transferred property at a profit could subject the taxpayer to lawsuit under Section 16(b) of the Exchange Act, then that taxpayer's rights to the transferred property are treated as subject to a substantial risk of forfeiture and as nontransferable. This carve out allows transferred property subject to Section 16(b) of the Exchange Act to defer taxation until either the substantial risk of forfeiture or transfer restriction lapses. 

Prior to the final regulations, for a forfeiture condition that is related to the purpose of the transfer to be subject to a substantial risk of forfeiture, the Treasury Regulations required only that the possibility of forfeiture be substantial. The final regulations clarify that transferred property is not subject to a substantial risk of forfeiture if at the time of the transfer the facts and circumstances indicate that forfeiture is unlikely to be enforced when the forfeiture condition is not met. This requirement imposes an additional level of analysis so that in determining whether transferred property is subject to a substantial risk of forfeiture, both the likelihood that the forfeiture event will occur, and the likelihood that the forfeiture will be enforced must be considered.

Let's look at the following example. A corporation transfers restricted stock to its employee for his services. The employee is not allowed to transfer the stock for three years and is required to forfeit the stock if the corporation's gross receipts fall by 75% over the next three years. The corporation has a long history of success in its business and there is no indication that demand for its business will diminish or the corporation will be unable to sell its products over the next three years. Even though the forfeiture condition is related to the corporation's purpose, it is unlikely to occur and thus, the transferred stock should not be treated as subject to a substantial risk of forfeiture.

The final regulations further tighten the definition of substantial risk of forfeiture by restricting it to transferred property conditioned only on the future performance of substantial services or the occurrence of a condition related to a purpose of the transfer. No other conditions will subject transferred property to a substantial risk of forfeiture so that transfer restrictions, such as restrictions imposed by lock-up agreements or restrictions relating to insider trading under Rule 10b-5 of the  Exchange Act will not cause transferred property to be subject to a substantial risk of forfeiture under Section 83 of the Code. The final regulations provide new examples that address these issues in more detail.   

Moving forward, when a corporation transfers property for services to its employees, it should review the terms of the transfer carefully, and make sure the terms clearly satisfy these final regulations, so to ensure its employees the ability to defer tax on such property and avoid protracted negotiations with its employees. Even though these final regulations tighten the definition of substantial risk of forfeiture, and make the analysis of whether such property is subject to a substantial risk of forfeiture more complex, if the transaction is properly structured, restricted stock and similar awards continue to be powerful compensation tools that provide for meaningful opportunities to defer tax.    

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions