Extended risk of forfeiture delays recognition of income with respect to restricted property.

• Author: Kautter, David J.
• Position: Brief Article

Letter Ruling 9431021 recently addressed an issue that has long been a source of speculation for executive compensation tax specialists. The ruling involved a company that transferred restricted shares of common stock to an employee. The stock was to vest in increments of one-third on the fifth, sixth and seventh years after grant, as long as the employee was still providing services for the employer. In addition, the stock was not transferable until vested. The company proposed to lengthen the period for which the employee would have to remain employed before the shares would vest and commensurably defer the lapsing of the restrictions on transferability. The ruling held that this modification would not cause the employee to be to include the value of the shares in gross income.

Sec. 83 provides that the recipient of restricted property will be taxed on its value when such property is no longer subject to a substantial risk of forfeiture or the property becomes transferable, whichever occurs first. The IRS reasoned that the...