Companies that compensate their employees with annual or long-term awards of restricted property such as restricted stock grants should take note of the final regulations relating to property transferred in connection with the performance of services under Internal Revenue Code Section 83 issued by the Internal Revenue Service on February 25, 2014 (the “Final Regulations”). These rules impact the timing of taxation of restricted stock grants and other compensatory transfers of property.
The Final Regulations are substantially similar to the proposed regulations issued by the IRS in May 2012, which we discussed in our June 2012 Client Alert, “IRS Issues Proposed Regulations under Internal Revenue Code Section 83 Regarding Substantial Risk of Forfeiture Analysis,” available here, but further clarify the impact of insider trading restrictions under Section 16(b) of the Securities Exchange Act of 1934 and involuntary separations from service on the Section 83 “substantial risk of forfeiture” analysis.
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Generally, Section 83 requires the inclusion in gross income of property transferred in connection with the performance of services when the property is no longer “subject to a substantial risk of forfeiture.” Section 83 regulations provide that whether a risk of forfeiture is “substantial” depends upon the particular facts and circumstances. Under these regulations, a substantial risk of forfeiture may exist where vesting of property is subject to (i) a service condition (e.g., employee must work for a specified period to become vested) or (ii) a condition related to the purpose of the transfer (e.g., a performance-based condition).