Proposed § 83 Regulations’ Clarification of ‘Substantial Risk of Forfeiture’ May Impact Timing of Restricted Property Taxation

Generally, restricted property, such as employer stock, is taxed under Section 83 of the Internal Revenue Code when the rights to the property are either transferable or are not subject to a substantial risk of forfeiture. New proposed Treasury regulations clarify that a substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer. In addition, the proposed regulations clarify that, in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered. Finally, the proposed regulations clarify that, except with respect to sales which may give rise to suit under Section 16(b) of the Securities and Exchange Act of 1934, transfer restrictions alone do not create a substantial risk of forfeiture, including transfer restrictions that carry the potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated. The effective date of the proposed regulations is January 1, 2013, with regard to property transferred on or after that date. The proposed regulations can be found here.