Noncash compensation: new administrative clarifications.

• Author: Josephs, Stuart R.
• Position: FedTax

Under IRC Sec. 83(a), the receipt of a beneficial interest in property in return For the performance of services is taxable currently unless the recipient's interest is subject to a. substantial forfeiture risk and nontransferable.

In the latter situation, taxation occurs when the risk is extinguished and the property is transferable.

Whether restricted property is taxed currently or subsequently; compensation income is computed as follows:

Under Sec. 83(c)(1), the rights of a person in property are subject to a substantial forfeiture risk if such person's rights to the property's fUll enjoyment are conditioned upon the future performance of substantial services by any individual.

Regs. Sec. 1.83-3(c)(1) provides that whether a forfeiture risk is substantial or not depends upon the Facts and circumstances. This regulation further provides that a substantial forfeit tire risk exists where rights in property that are transferred arc conditioned, directly or indirectly. upon the flaunt performance (or refraining from performance) of substantial services by any person, or the occurrence of 21. condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if such condition is not satisfied.

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First Clarification

Some confusion has arisen as to whether other conditions also may give rise to a substantial forfeiture risk. See Robinson n Commissioner, 805 F 2d 38 (1st Cir. 1986).

Proposed regulations (REG-111075-09)--published May 30, 2012--would clarify that a substantial forfeiture risk may be established only through a service condition or a condition related in We purpose of the transfer.

Second Clarification

Similarly, confusion has arisen as to whether, in determining whether a substantial forfeiture risk exists, the likelihood that a condition related to the purpose of the transfer will occur must be considered. A conclusion that such a likelihood need not be considered "would lead to anomalies not intended by the statute," according to the proposed regulations' preamble.

For example, assume that stock transferred by an employer to an employee is nontransferable and also subject to a condition that the stock must be forfeited if the employer's gross receipts fall by 90 percent (Are the next three years. Assume further that the employer is a longstanding seller of a product and that there is no indication that either there will Ix' a rail in demand for the product or an ability of the...