1972, October, Pg. 11. Employer Transfers of Restricted Property.

• Author: by Raymond L. Friedlob

1 Colo.Law. 11

Colorado Lawyer

1972.

1972, October, Pg. 11.

Employer Transfers of Restricted Property

11Vol. 1, No. 12, Pg. 11

Employer Transfers of Restricted Propertyby Raymond L. FriedlobRaymond L. Friedlob, Denver, is an associate with Brenman, Sobol and Baum. His article originally appeared in the tax notes section of the August 1972 American Bar Association Journal, and portions of the article are reprinted here with that publication's permission. Many of the footnotes to the original article have been excluded here to facilitate re-publication, and headings have been added.Tax planning in the employer-employee context has for many years included the transfer by an employer to an employee of property subject to certain types of restrictions (e.g., "lettered stock"). The popularity of this method of compensating employees was based on the fact that an employee was able both to avoid current taxation with respect to the property received and to realize capital gains (not ordinary income) on the eventual distribution of the property.

Section 83 of the Internal Revenue Code effected far-reaching changes with respect to restricted property and now provides that the value of property transferred in connection with the performance of services is to be taken into income in the first taxable year in which the property becomes transferable or is not subject to a substantial risk of forfeiture.(fn1) Thus, if in connection with his employment an employee acquires property valued at $100 for $50, and that property is freely transferable, the employee recognizes immediately $50 in ordinary income.

Application of Section 83 Is LimitedSection 83 applies only if "property" is transferred in connection with the performance of services. Property is defined to include real and personal property other than money, an interest in partnership capital received for services and notes or other evidences of indebtedness. In order to impose taxation under Section 83, the "property" must be transferred in connection with the performance of services, which includes past, present or future services as well as most types of employment relationships. This presumably does not exclude de minimis transfers such as the Christmas turkey.

The requirement of a "transfer" is fulfilled if the full cash (or other tangible) purchase price is either paid or committed to be paid by the employee under a personally binding obligation, or the employee acquires rights in the property which, without the payment of further consideration (other than the performance of substantial services), may ripen into an ownership interest.(fn2)

12The proposed regulations under Section 83 have attempted by extension of the definition of a "transfer" to apply the section to defer initial taxation of employer-employee shoestring purchases. In this situation, a purchase money obligation made by the employee without personal liability to him is cast as a split transaction, part option (not subject to Section 83 treatment) and part complete transfer to the extent payments are made (subject to Section 83). Even though the employee obtains the initial deferral, the ultimate detrimental result would be to tax the total appreciation in value of the property as ordinary income until the employee either becomes personally liable on the obligation or makes payments in discharge of the indebtedness.

The purpose of this limitation...