Final Regulations Issued on Compensatory Property Transfers
Treasury recently finalized Regulations under Code Section 83, which governs the taxation of the transfer of property (such as shares of stock, partnership interests, options, or warrants) to persons in exchange for services. Under these rules, the taxable event to the recipient generally occurs upon the earlier of the property being transferrable or when the property is not subject to a substantial risk of forfeiture. The final regulations modify Section 1.83-3(c) to 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 determining whether a substantial risk of forfeiture exists, both the likelihood that the forfeiture will occur and the likelihood that the forfeiture will be enforced must be considered. Also, a transfer restriction that provides for the forfeiture or disgorgement of all or a portion of the property in the event of a violation of the restriction generally does not create a substantial risk of forfeiture. Finally, the final regulations incorporate the holding of Revenue Ruling 2005—48 by providing that the only provision of the securities law that would delay taxation under Code section 83 would be if a sale of the property could subject the seller to liability under Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) (which generally prevents corporate insiders from purchasing and selling corporate securities within 6 months). The final regulations add examples illustrating that a substantial risk of forfeiture is not created solely as a result of potential liability under Rule 10b-5 of the Exchange Act (relating to fraud or insider trading) or as a result of a lock-up agreement.
If you have questions regarding the final regulations or the tax treatment of granting equity interests in corporations or tax partnerships or options to acquire equity interests in exchange for services, please contact: