Source: https://www.bna.com/irs-issues-final-n17179889504/
Timestamp: 2017-04-23 10:00:22
Document Index: 387493006

Matched Legal Cases: ['§83', '§16', '§83', '§409', '§83', '§409', '§83', '§83']

IRS Issues Final Regulations on Property Transferred for Services Under Section 83 | Bloomberg BNA
By Sharon L. Klingelsmith, Esq., Mona Ghude, Esq.and Sharde Armstrong, Esq.
Drinker Biddle & Reath LLP, Philadelphia, PA and Chicago,IL
The Treasury Department (Treasury) and Internal Revenue Service(IRS) have issued final regulations clarifying the forfeitureprovisions under §83 for transactions occurring after January 1,2013. The regulations were issued on February 25, 2014. Section 83 provides that property transferred to an employee ascompensation (such as the issuance of employer stock or propertyother than cash) is not taxable until the property is no longersubject to a substantial risk of forfeiture or until the propertyis freely transferable, whichever is earlier. The regulations areconsistent with prior guidance, but offer several clarifications onwhat constitutes a "substantial risk of forfeiture." Employers whodid not evaluate the impact of the regulations when they wereoriginally proposed in 2012 will need to consider how the finalregulations affect existing arrangements.
The Final Regulations confirm that a "substantial risk offorfeiture" may be established only if a recipient'srights in transferred property are either (1) conditioned on theperformance, or refraining from performance (e.g., as a result of anon-compete agreement), of substantial services, or (2) are subjectto a condition related to the purpose of the transfer (e.g.,recipient must achieve a certain level of performance, such asmaintaining specified revenue levels). Additionally, the facts andcircumstances at the time of the property transfer must establishthe likelihood that a forfeiture event will occur and that theforfeiture condition will be enforced.
The Final Regulations clarify that, subject to certainexceptions, transfer restrictions on securities (such as lock-uparrangements, blackout periods, and insider-trading restrictions)alone do not create a substantial risk of forfeiture because rightsin these securities are not subject to future service conditions orconditions related to the purpose of the transfer. This is trueeven if a violation of the transfer restriction carries thepotential for forfeiture or disgorgement of some of the property,or other damages, penalties, or fees.
An exception to this rule arises if an insider may not sellshares of stock previously acquired in a non-exempt transactionwithin the past six-months due to potential liability under §16(b)of the Securities Exchange Act. Under the Final Regulations, unlessthe taxpayer has made a §83(b) election - i.e., an election to betaxed at the time of the stock issuance - the stock is subject to asubstantial risk of forfeiture and is not taxable until six monthsafter the acquisition date; this period is not tolled if there is asubsequent non-exempt acquisition.
While a non-compete clause never constitutes a substantial riskof forfeiture with respect to deferred compensation subject to§409A (which does not consider refraining from performance aservice condition), the Final Regulations retain the possibilitythat a non-compete clause may constitute a substantial risk offorfeiture under §83 depending on factors such as an employee'sage, health, other employment opportunities, and the likelihoodthat the restrictive condition will be enforced.
Finally, the preamble to the Final Regulations addresses acomment requesting that an involuntary termination without cause betreated as a substantial risk of forfeiture, similar to the §409Arule. The IRS and Treasury concluded that a right to receiveproperty in the future, such as upon an involuntary terminationwithout cause, is not "property" for purposes of §83 and does notgive rise to a substantial risk of forfeiture under §83.
For more information, in the Tax Management Portfolios, seeEickman, 384 T.M., Restricted Property - Section 83, andBrisendine, Drigotas and Pevarnik, 385 T.M., DeferredCompensation Arrangements, and in Tax Practice Series,see ¶5710, Deferred compensation Tax Concepts and Structures, and¶5810, Nonstatutory Stock Options.
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