Academic journal article Journal of Accountancy

Final Rules on Substantial Risk of Forfeiture Are Released

Academic journal article Journal of Accountancy

Final Rules on Substantial Risk of Forfeiture Are Released

Article excerpt

The IRS finalized regulations that clarify when a substantial risk of forfeiture exists on the transfer of stock to an employee that is treated as compensation under Sec. 83. If a substantial risk of forfeiture exists, the employee does not have to recognize the income at the time of the transfer.

The regulations adopt proposed rules issued in May 2012, with a few clarifications (REG-141075-09).

Under prior 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 new regulations clarify that (1) except as specifically provided in Sec. 83(c)(3) and Regs. Secs. 1.83-3(j) (sales that may give rise to suits under Section 16(b) of the Securities Exchange Act of 1934) and 1.83-3(k) (transfer restrictions under the pooling-of-interests accounting rule), a substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer; (2) 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; and (3) except as specifically provided in Sec. …

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