The IRS issued new proposed regulations on the timing of taxable compensation upon the transfer of property to a service provider (e.g., compensatory stock or partnership interest). In general, section 83 taxes the receipt of property in connection with the performance of 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.” The proposed regulations clarify that taxable compensation can occur even though there are some transfer restrictions or risks of forfeiture. Specifically the proposed regulations provide that:
- A substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer.
- In determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered.
- Restrictions on the transfer of property, whether contractual or by operation of applicable law, will not result in a substantial risk of forfeiture except as provided in section 83(c)(3) and Reg. §1.83-3(j) or (k) (generally relating to sales of property that could give rise to a lawsuit under section 16(b) of the Securities Exchange Act of 1934)).
- The proposed regulations incorporate the holdings in Rev. Rul. 2005-48 which relates to transfer restrictions, such as from lock-up agreements or restrictions relating to insider trading, that do not prevent property from being “substantially nonvested”.
The proposed regulations apply to property transferred on or after January 1, 2013.