Sec. 83 substantial risk of forfeiture clarified.

• Author: Nevius, Alistair M.

The IRS issued proposed regulations that would clarify when a substantial risk of forfeiture exists on the transfer of stock to an employee that is treated as compensation under Sec. 83 (REG-141075-09). When a substantial risk of forfeiture exists, the employee does not yet have to recognize the income on the transfer.

Under current Regs. Sec. 1.83-3(c)(1), "a substantial risk of forfeiture exists where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if such condition is not satisfied."

The IRS believes that this language has created confusion about whether conditions other than those related to the purpose of the transfer give rise to a substantial risk of forfeiture and whether the likelihood that a condition will occur must be considered. To clarify that no other conditions should be considered, the proposed regulations would add the word "only" before the word "where" in the second sentence of Regs. Sec. 1.83-3(c)(1).

To clarify that only conditions that have some reasonable chance of occurring should be considered, the proposed regulations would eliminate the phrase "if such condition is not satisfied" at the end of the second sentence of Regs. Sec. 1.83-3(c)(1). The purpose of the deletion is to make clear that, in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the...