Prop. Regs. limit conditions resulting in substantial risk of forfeiture under Sec. 83.

• Author: Lee, Robert

In May 2012, the IRS issued proposed regulations (REG-141075-09) to clarify specifically which conditions result in a substantial risk of forfeiture under Sec. 83. In the preamble to the proposed regulations, the IRS expressed a concern that confusion exists over the types of conditions that result in a substantial risk of forfeiture to a taxpayer's rights over the property received for performing services. According to the preamble, the proposed regulations modify the current regulations to limit such conditions only to a condition based on the performance of future services and to a condition related to the purpose of transferring the property. In addition, the proposed regulations distinguish themselves from the holding in Robinson, 805 F.2d 38 (1st Cir. 1986), and adopt the guidance provided by Rev. Rul. 2005-48. These regulations are proposed to become effective on Jan. 1,2013.

The Current Rules

The timing for a taxpayer to recognize income when property is received for performing services is generally based on when the property is either no longer subject to a substantial risk of forfeiture or is transferable under Sec. 83 (a). Sec. 83 (c) provides definitions of both substantial risk of forfeiture and transferability. According to this subsection, a substantial risk of forfeiture exists when the recipient's rights to full enjoyment of the property are conditioned upon the future performance of substantial services by any individual, and the property is transferable when the recipient's rights to the property are no longer subject to a substantial risk of forfeiture.

The current regulations provide an additional condition that results in a substantial risk of forfeiture. According to Regs. Sec. 1.83-3 (c) (1), a substantial risk of forfeiture exists when rights to the property are conditioned on the satisfaction of a condition related to the purpose of transferring the property and the possibility of forfeiting the property is substantial if the condition is not met. As an illustration, Regs. Sec. 1.83-3 (c) (2) provides a situation where an employee receives property from an employer under the requirement that the property will be returned if the employer's total earnings do not increase. In this case, the property is subject to a substantial risk of forfeiture since the possibility of not meeting the earnings requirement and, thus, forfeiting the property is considered substantial.

In addition, Robinson provided another condition...