§83 — Property transferred in connection with performance of services
160 citing cases
Statute Text — 26 U.S.C. §83
If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—
the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over
the amount (if any) paid for such property,
shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.
Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—
the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over
the amount (if any) paid for such property.
If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.
An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.
For purposes of this section—
The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.
The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.
So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are—
subject to a substantial risk of forfeiture, and
not transferable.
For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.
In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value.
If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes—
that such cancellation was not compensatory, and
that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations,
the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and
the amount, if any, paid for the cancellation,
the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of—
This section shall not apply to—
a transaction to which section 421 applies,
a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),
the transfer of an option without a readily ascertainable fair market value,
the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or
group-term life insurance to which section 79 applies.
In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.
If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege—
such exchange shall be disregarded for purposes of subsection (a), and
the property received shall be treated as property to which subsection (a) applies.
In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.
For purposes of this subtitle—
If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a).
The taxable year determined under this subparagraph is the taxable year of the employee which includes the earliest of—
the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer),
the date the employee first becomes an excluded employee,
the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection),
the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or
the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock.
For purposes of this subsection, the term “qualified stock” means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if—
such stock is received—
in connection with the exercise of an option, or
in settlement of a restricted stock unit, and
such option or restricted stock unit was granted by the corporation—
in connection with the performance of services as an employee, and
during a calendar year in which such corporation was an eligible corporation.
The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture.
For purposes of subparagraph (A)(ii)(II)—
The term “eligible corporation” means, with respect to any calendar year, any corporation if—
no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and
such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock.
For purposes of clause (i)(II)—
except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5),
employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and
rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit.
For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee.
In the case of any calendar year beginning before January 1, 2018, clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same.
For purposes of this subsection—
The term “qualified employee” means any individual who—
is not an excluded employee, and
agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met.
The term “excluded employee” means, with respect to any corporation, any individual—
who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years,
who is or has been at any prior time—
the chief executive officer of such corporation or an individual acting in such a capacity, or
the chief financial officer of such corporation or an individual acting in such a capacity,
who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or
who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation).
An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b).
No election may be made under this section with respect to any qualified stock if—
the qualified employee has made an election under subsection (b) with respect to such qualified stock,
any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or
such corporation purchased any of its outstanding stock in the calendar year preceding the calendar year which includes the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless—
not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and
the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.
For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection.
Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased.
The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock.
Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph.
For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation.
Any corporation which transfers qualified stock to a qualified employee shall, at the time that (or a reasonable period before) an amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee—
certify to such employee that such stock is qualified stock, and
notify such employee—
that the employee may be eligible to elect to defer income on such stock under this subsection, and
that, if the employee makes such an election—
the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period,
the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and
the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding.
This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units.
Treasury Regulations
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Treas. Reg. §1.83-1Property transferred in connection with the performance of services
(a) Inclusion in gross income—(1) General rule. Section 83 provides rules for the taxation of property transferred to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services by such employee or independent contractor. In general, such property is not taxable under section 83(a) until it has been transferred (as defined in § 1.83-3(a)) to such person and become substantially vested (as defined in § 1.83-3(b)) in such person. In that case, the excess of—
(i) The fair market value of such property (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) at the time that the property becomes substantially vested, over
(ii) The amount (if any) paid for such property,
shall be included as compensation in the gross income of such employee or independent contractor for the taxable year in which the property becomes substantially vested. Until such property becomes substantially vested, the transferor shall be regarded as the owner of such property, and any income from such property received by the employee or independent contractor (or beneficiary thereof) or the right to the use of such property by the employee or independent contractor constitutes additional compensation and shall be included in the gross income of such employee or independent contractor for the taxable year in which such income is received or such use is made available. This paragraph applies to a transfer of property in connection with the performance of services even though the transferor is not the person for whom such services are performed.
(2) Life insurance. The cost of life insurance protection under a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection is taxable generally under section 61 and the regulations thereunder during the period such contract remains substantially nonvested (as defined in § 1.83-3(b)). For the taxation of life insurance protection under a split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)), see § 1.61-22.
(3) Cross references. For rules concerning the treatment of employers and other transferors of property in connection with the performance of services, see section 83(h) and § 1.83-6. For rules concerning the taxation of beneficiaries of an employees' trust that is not exempt under section 501(a), see section 402(b) and the regulations thereunder.
(b) Subsequent sale, forfeiture, or other disposition of nonvested property. (1) If substantially nonvested property (that has been transferred in connection with the performance of services) is subsequently sold or otherwise disposed of to a third party in an arm's length transaction while still substantially nonvested, the person who performed such services shall realize compensation in an amount equal to the excess of—
(i) The amount realized on such sale or other disposition, over
(ii) The amount (if any) paid for such property.
Such amount of compensation is includible in his gross income in accordance with his method of accounting. Two preceding sentences also apply when the person disposing of the property has received it in a non-arm's length transaction described in paragraph (c) of this section. In addition, section 83(a) and paragraph (a) of this section shall thereafter cease to apply with respect to such property.
(2) If substantially nonvested property that has been transferred in connection with the performance of services to the person performing such services is forfeited while still substantially nonvested and held by such person, the difference between the amount paid (if any) and the amount received upon forfeiture (if any) shall be treated as an ordinary gain or loss. This paragraph (b)(2) does not apply to property to which § 1.83-2(a) applies.
(3) This paragraph (b) shall not apply to, and no gain shall be recognized on, any sale, forfeiture, or other disposition described in this paragraph to the extent that any property received in exchange therefor is substantially nonvested. Instead, section 83 and this section shall apply with respect to such property received (as if it were substituted for the property disposed of).
(c) Dispositions of nonvested property not at arm's length. If substantially nonvested property (that has been transferred in connection with the performance of services) is disposed of in a transaction which is not at arm's length and the property remains substantially nonvested, the person who performed such services realizes compensation equal in amount to the sum of any money and the fair market value of any substantially vested property received in such disposition. Such amount of compensation is includible in his gross income in accordance with his method of accounting. However, such amount of compensation shall not exceed the fair market value of the property disposed of at the time of disposition (determined without regard to any lapse restriction), reduced by the amount paid for such property. In addition, section 83 and these regulations shall continue to apply with respect to such property, except that any amount previously includible in gross income under this paragraph (c) shall thereafter be treated as an amount paid for such property. For example, if in 1971 an employee pays $50 for a share of stock which has a fair market value of $100 and is substantially monvested at that time and later in 1971 (at a time when the property still has a fair market value of $100 and is still substantially nonvested) the employee disposes of, in a transaction not at arm's length, the share of stock to his wife for $10, the employee realizes compensation of $10 in 1971. If in 1972, when the share of stock has a fair market value of $120, it becomes substantially vested, the employee realizes additional compensation in 1972 in the amount of $60 (the $120 fair market value of the stock less both the $50 price paid for the stock and the $10 taxed as compensation in 1971). For purposes of this paragraph, if substantially nonvested property has been transferred to a person other than the person who performed the services, and the transferee dies holding the property while the property is still substantially nonvested and while the person who performed the services is alive, the transfer which results by reason of the death of such transferee is a transfer not at arm's length.
(d) Certain transfers upon death. If substantially nonvested property has been transferred in connection with the performance of services and the person who performed such services dies while the property is still substantially nonvested, any income realized on or after such death with respect to such property under this section is income in respect of a decedent to which the rules of section 691 apply. In such a case the income in respect of such property shall be taxable under section 691 (except to the extent not includible under section 101(b)) to the estate or beneficiary of the person who performed the services, in accordance with section 83 and the regulations thereunder. However, if an item of income is realized upon such death before July 21, 1978, because the property became substantially vested upon death, the person responsible for filing decedent's income tax return for decedent's last taxable year may elect to treat such item as includible in gross income for decedent's last taxable year by including such item in gross income on the return or amended return filed for decedent's last taxable year.
(e) Forfeiture after substantial vesting. If a person is taxable under section 83(a) when the property transferred becomes substantially vested and thereafter the person's beneficial interest in such property is nevertheless forfeited pursuant to a lapse restriction, any loss incurred by such person (but not by a beneficiary of such person) upon such forfeiture shall be an ordinary loss to the extent the basis in such property has been increased as a result of the recognition of income by such person under section 83(a) with respect to such property.
(f) Examples. The provisions of this section may be illustrated by the following examples:
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Treas. Reg. §1.83-1(a)Inclusion in gross income—(1) General rule.
Inclusion in gross income—(1) General rule. Section 83 provides rules for the taxation of property transferred to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services by such employee or independent contractor. In general, such property is not taxable under section 83(a) until it has been transferred (as defined in § 1.83-3(a)) to such person and become substantially vested (as defined in § 1.83-3(b)) in such person. In that case, the excess of—
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Treas. Reg. §1.83-1(b)Subsequent sale, forfeiture, or other disposition of nonvested property.
Subsequent sale, forfeiture, or other disposition of nonvested property. (1) If substantially nonvested property (that has been transferred in connection with the performance of services) is subsequently sold or otherwise disposed of to a third party in an arm's length transaction while still substantially nonvested, the person who performed such services shall realize compensation in an amount equal to the excess of—
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Treas. Reg. §1.83-1(c)Dispositions of nonvested property not at arm's length.
Dispositions of nonvested property not at arm's length. If substantially nonvested property (that has been transferred in connection with the performance of services) is disposed of in a transaction which is not at arm's length and the property remains substantially nonvested, the person who performed such services realizes compensation equal in amount to the sum of any money and the fair market value of any substantially vested property received in such disposition. Such amount of compensation is includible in his gross income in accordance with his method of accounting. However, such amount of compensation shall not exceed the fair market value of the property disposed of at the time of disposition (determined without regard to any lapse restriction), reduced by the amount paid for such property. In addition, section 83 and these regulations shall continue to apply with respect to such property, except that any amount previously includible in gross income under this paragraph (c) shall thereafter be treated as an amount paid for such property. For example, if in 1971 an employee pays $50 for a share of stock which has a fair market value of $100 and is substantially monvested at that time and later in 1971 (at a time when the property still has a fair market value of $100 and is still substantially nonvested) the employee disposes of, in a transaction not at arm's length, the share of stock to his wife for $10, the employee realizes compensation of $10 in 1971. If in 1972, when the share of stock has a fair market value of $120, it becomes substantially vested, the employee realizes additional compensation in 1972 in the amount of $60 (the $120 fair market value of the stock less both the $50 price paid for the stock and the $10 taxed as compensation in 1971). For purposes of this paragraph, if substantially nonvested property has been transferred to a person other than the person who performed the services, and the transferee dies holding the property while the property is still substantially nonvested and while the person who performed the services is alive, the transfer which results by reason of the death of such transferee is a transfer not at arm's length.
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Treas. Reg. §1.83-1(d)Certain transfers upon death.
Certain transfers upon death. If substantially nonvested property has been transferred in connection with the performance of services and the person who performed such services dies while the property is still substantially nonvested, any income realized on or after such death with respect to such property under this section is income in respect of a decedent to which the rules of section 691 apply. In such a case the income in respect of such property shall be taxable under section 691 (except to the extent not includible under section 101(b)) to the estate or beneficiary of the person who performed the services, in accordance with section 83 and the regulations thereunder. However, if an item of income is realized upon such death before July 21, 1978, because the property became substantially vested upon death, the person responsible for filing decedent's income tax return for decedent's last taxable year may elect to treat such item as includible in gross income for decedent's last taxable year by including such item in gross income on the return or amended return filed for decedent's last taxable year.
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Treas. Reg. §1.83-1(e)Forfeiture after substantial vesting.
Forfeiture after substantial vesting. If a person is taxable under section 83(a) when the property transferred becomes substantially vested and thereafter the person's beneficial interest in such property is nevertheless forfeited pursuant to a lapse restriction, any loss incurred by such person (but not by a beneficiary of such person) upon such forfeiture shall be an ordinary loss to the extent the basis in such property has been increased as a result of the recognition of income by such person under section 83(a) with respect to such property.
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Treas. Reg. §1.83-1(f)Examples.
Examples. The provisions of this section may be illustrated by the following examples:
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Treas. Reg. §1.83-1(i)§1.83-1(i)
The amount realized on such sale or other disposition, over
(ii) The amount (if any) paid for such property.
Such amount of compensation is includible in his gross income in accordance with his method of accounting. Two preceding sentences also apply when the person disposing of the property has received it in a non-arm's length transaction described in paragraph (c) of this section. In addition, section 83(a) and paragraph (a) of this section shall thereafter cease to apply with respect to such property.
(2) If substantially nonvested property that has been transferred in connection with the performance of services to the person performing such services is forfeited while still substantially nonvested and held by such person, the difference between the amount paid (if any) and the amount received upon forfeiture (if any) shall be treated as an ordinary gain or loss. This paragraph (b)(2) does not apply to property to which § 1.83-2(a) applies.
(3) This paragraph (b) shall not apply to, and no gain shall be recognized on, any sale, forfeiture, or other disposition described in this paragraph to the extent that any property received in exchange therefor is substantially nonvested. Instead, section 83 and this section shall apply with respect to such property received (as if it were substituted for the property disposed of).
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Treas. Reg. §1.83-2Election to include in gross income in year of transfer
(a) In general. If property is transferred (within the meaning of § 1.83-3(a)) in connection with the performance of services, the person performing such services may elect to include in gross income under section 83(b) the excess (if any) of the fair market value of the property at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) over the amount (if any) paid for such property, as compensation for services. The fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election as provided for in this section. If this election is made, the substantial vesting rules of section 83(a) and the regulations thereunder do not apply with respect to such property, and except as otherwise provided in section 83(d)(2) and the regulations thereunder (relating to the cancellation of a nonlapse restriction), any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services. Thus, property with respect to which this election is made shall be includible in gross income as of the time of transfer, even though such property is substantially nonvested (as defined in § 1.83-3(b)) at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested (as defined in § 1.83-3(b)). In computing the gain or loss from the subsequent sale or exchange of such property, its basis shall be the amount paid for the property increased by the amount included in gross income under section 83(b). If property for which a section 83(b) election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of—
(1) The amount paid (if any) for such property, over,
(2) The amount realized (if any) upon such forfeiture.
If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss. A sale or other disposition of the property that is in substance a forfeiture, or is made in contemplation of a forfeiture, shall be treated as a forfeiture under the two immediately preceding sentences.
(b) Time for making election. Except as provided in the following sentence, the election referred to in paragraph (a) of this section shall be filed not later than 30 days after the date the property was transferred (or, if later, January 29, 1970) and may be filed prior to the date of transfer. Any statement filed before February 15, 1970, which was amended not later than February 16, 1970, in order to make it conform to the requirements of paragraph (e) of this section, shall be deemed a proper election under section 83(b).
(c) Manner of making election. The election referred to in paragraph (a) of this section is made by filing one copy of a written statement with the internal revenue office with which the person who performed the services files his return.
(d) Additional copies. The person who performed the services shall also submit a copy of the statement referred to in paragraph (c) of this section to the person for whom the services are performed. In addition, if the person who performs the services and the transferee of such property are not the same person, the person who performs the services shall submit a copy of such statement to the transferee of the property.
(e) Content of statement. The statement shall be signed by the person making the election and shall indicate that it is being made under section 83(b) of the Code, and shall contain the following information:
(1) The name, address and taxpayer identification number of the taxpayer;
(2) A description of each property with respect to which the election is being made;
(3) The date or dates on which the property is tansferred and the taxable year (for example, “calendar year 1970” or “fiscal year ending May 31, 1970”) for which such election was made;
(4) The nature of the restriction or restrictions to which the property is subject;
(5) The fair market value at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) of each property with respect to which the election is being made;
(6) The amount (if any) paid for such property; and
(7) With respect to elections made after July 21, 1978, a statement to the effect that copies have been furnished to other persons as provided in paragraph (d) of this section.
(f) Revocability of election. An election under section 83(b) may not be revoked except with the consent of the Commissioner. Consent will be granted only in the case where the transferee is under a mistake of fact as to the underlying transaction and must be requested within 60 days of the date on which the mistake of fact first became known to the person who made the election. In any event, a mistake as to the value, or decline in the value, of the property with respect to which an election under section 83(b) has been made or a failure to perform an act contemplated at the time of transfer of such property does not constitute a mistake of fact.
(g) Effective/applicability date. Paragraph (c) of this section applies to property transferred on or after January 1, 2016.
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Treas. Reg. §1.83-2(a)In general.
In general. If property is transferred (within the meaning of § 1.83-3(a)) in connection with the performance of services, the person performing such services may elect to include in gross income under section 83(b) the excess (if any) of the fair market value of the property at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) over the amount (if any) paid for such property, as compensation for services. The fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election as provided for in this section. If this election is made, the substantial vesting rules of section 83(a) and the regulations thereunder do not apply with respect to such property, and except as otherwise provided in section 83(d)(2) and the regulations thereunder (relating to the cancellation of a nonlapse restriction), any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services. Thus, property with respect to which this election is made shall be includible in gross income as of the time of transfer, even though such property is substantially nonvested (as defined in § 1.83-3(b)) at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested (as defined in § 1.83-3(b)). In computing the gain or loss from the subsequent sale or exchange of such property, its basis shall be the amount paid for the property increased by the amount included in gross income under section 83(b). If property for which a section 83(b) election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of—
(1) The amount paid (if any) for such property, over,
(2) The amount realized (if any) upon such forfeiture.
If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss. A sale or other disposition of the property that is in substance a forfeiture, or is made in contemplation of a forfeiture, shall be treated as a forfeiture under the two immediately preceding sentences.
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Treas. Reg. §1.83-2(b)Time for making election.
Time for making election. Except as provided in the following sentence, the election referred to in paragraph (a) of this section shall be filed not later than 30 days after the date the property was transferred (or, if later, January 29, 1970) and may be filed prior to the date of transfer. Any statement filed before February 15, 1970, which was amended not later than February 16, 1970, in order to make it conform to the requirements of paragraph (e) of this section, shall be deemed a proper election under section 83(b).
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Treas. Reg. §1.83-2(c)Manner of making election.
Manner of making election. The election referred to in paragraph (a) of this section is made by filing one copy of a written statement with the internal revenue office with which the person who performed the services files his return.
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Treas. Reg. §1.83-2(d)Additional copies.
Additional copies. The person who performed the services shall also submit a copy of the statement referred to in paragraph (c) of this section to the person for whom the services are performed. In addition, if the person who performs the services and the transferee of such property are not the same person, the person who performs the services shall submit a copy of such statement to the transferee of the property.
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Treas. Reg. §1.83-2(e)Content of statement.
Content of statement. The statement shall be signed by the person making the election and shall indicate that it is being made under section 83(b) of the Code, and shall contain the following information:
(1) The name, address and taxpayer identification number of the taxpayer;
(2) A description of each property with respect to which the election is being made;
(3) The date or dates on which the property is tansferred and the taxable year (for example, “calendar year 1970” or “fiscal year ending May 31, 1970”) for which such election was made;
(4) The nature of the restriction or restrictions to which the property is subject;
(5) The fair market value at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) of each property with respect to which the election is being made;
(6) The amount (if any) paid for such property; and
(7) With respect to elections made after July 21, 1978, a statement to the effect that copies have been furnished to other persons as provided in paragraph (d) of this section.
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Treas. Reg. §1.83-2(f)Revocability of election.
Revocability of election. An election under section 83(b) may not be revoked except with the consent of the Commissioner. Consent will be granted only in the case where the transferee is under a mistake of fact as to the underlying transaction and must be requested within 60 days of the date on which the mistake of fact first became known to the person who made the election. In any event, a mistake as to the value, or decline in the value, of the property with respect to which an election under section 83(b) has been made or a failure to perform an act contemplated at the time of transfer of such property does not constitute a mistake of fact.
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Treas. Reg. §1.83-2(g)Effective/applicability date.
Effective/applicability date. Paragraph (c) of this section applies to property transferred on or after January 1, 2016.
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Treas. Reg. §1.83-3Meaning and use of certain terms
(a) Transfer—(1) In general. For purposes of section 83 and the regulations thereunder, a transfer of property occurs when a person acquires a beneficial ownership interest in such property (disregarding any lapse restriction, as defined in § 1.83-3(i)). For special rules applying to the transfer of a life insurance contract (or an undivided interest therein) that is part of a split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)), see § 1.61-22(g).
(2) Option. The grant of an option to purchase certain property does not constitute a transfer of such property. However, see § 1.83-7 for the extent to which the grant of the option itself is subject to section 83. In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. The determination of the substance of the transaction shall be based upon all the facts and circumstances. The factors to be taken into account include the type of property involved, the extent to which the risk that the property will decline in value has been transferred, and the likelihood that the purchase price will, in fact, be paid. See also § 1.83-4(c) for the treatment of forgiveness of indebtedness that has constituted an amount paid.
(3) Requirement that property be returned. Similarly, no transfer may have occurred where property is transferred under conditions that require its return upon the happening of an event that is certain to occur, such as the termination of employment. In such a case, whether there is, in fact, a transfer depends upon all the facts and circumstances. Factors which indicate that no transfer has occurred are described in paragraph (a) (4), (5), and (6) of this section.
(4) Similarity to option. An indication that no transfer has occurred is the extent to which the conditions relating to a transfer are similar to an option.
(5) Relationship to fair market value. An indication that no transfer has occurred is the extent to which the consideration to be paid the transferee upon surrendering the property does not approach the fair market value of the property at the time of surrender. For purposes of paragraph (a) (5) and (6) of this section, fair market value includes fair market value determined under the rules of § 1.83-5(a)(1), relating to the valuation of property subject to nonlapse restrictions. Therefore, the existence of a nonlapse restriction referred to in § 1.83-5(a)(1) is not a factor indicating no transfer has occurred.
(6) Risk of loss. An indication that no transfer has occurred is the extent to which the transferee does not incur the risk of a beneficial owner that the value of the property at the time of transfer will decline substantially. Therefore, for purposes of this (6), risk of decline in property value is not limited to the risk that any amount paid for the property may be lost.
(7) Examples. The provisions of this paragraph may be illustrated by the following examples:
(b) Substantially vested and substantially nonvested property. For purposes of section 83 and the regulations thereunder, property is substantially nonvested when it is subject to a substantial risk of forfeiture, within the meaning of paragraph (c) of this section, and is nontransferable, within the meaning of paragraph (d) of this section. Property is substantially vested for such purposes when it is either transferable or not subject to a substantial risk of forfeiture.
(c) Substantial risk of forfeiture—(1) In general. For purposes of section 83 and these regulations, whether a risk of forfeiture is substantial or not depends upon the facts and circumstances. Except as set forth in paragraphs (j) and (k) of this section, a substantial risk of forfeiture exists only if 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 upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial. Property is not transferred subject to a substantial risk of forfeiture if at the time of transfer the facts and circumstances demonstrate that the forfeiture condition is unlikely to be enforced. Further, property is not transferred subject to a substantial risk of forfeiture to the extent that the employer is required to pay the fair market value of a portion of such property to the employee upon the return of such property. The risk that the value of property will decline during a certain period of time does not constitute a substantial risk of forfeiture. A nonlapse restriction, standing by itself, will not result in a substantial risk of forfeiture. A restriction on the transfer of property, whether contractual or by operation of applicable law, will result in a substantial risk of forfeiture only if and to the extent that the restriction is described in paragraph (j) or (k) of this section. For this purpose, transfer restrictions that will not result in a substantial risk of forfeiture include, but are not limited to, restrictions that if violated, whether by transfer or attempted transfer of the property, would result in the forfeiture of some or all of the property, or liability by the employee for any damages, penalties, fees, or other amount.
(2) Illustrations of substantial risks of forfeiture. The regularity of the performance of services and the time spent in performing such services tend to indicate whether services required by a condition are substantial. The fact that the person performing services has the right to decline to perform such services without forfeiture may tend to establish that services are insubstantial. Where stock is transferred to an underwriter prior to a public offering and the full enjoyment of such stock is expressly or impliedly conditioned upon the successful completion of the underwriting, the stock is subject to a substantial risk of forfeiture. Where an employee receives property from an employer subject to a requirement that it be returned if the total earnings of the employer do not increase, such property is subject to a substantial risk of forfeiture. On the other hand, requirements that the property be returned to the employer if the employee is discharged for cause or for committing a crime will not be considered to result in a substantial risk of forfeiture. An enforceable requirement that the property be returned to the employer if the employee accepts a job with a competing firm will not ordinarily be considered to result in a substantial risk of forfeiture unless the particular facts and circumstances indicate to the contrary. Factors which may be taken into account in determining whether a convenant not to compete constitutes a substantial risk of forfeiture are the age of the employee, the availability of alternative employment opportunities, the likelihood of the employee's obtaining such other employment, the degree of skill possessed by the employee, the employee's health, and the practice (if any) of the employer to enforce such covenants. Similarly, rights in property transferred to a retiring employee subject to the sole requirement that it be returned unless he renders consulting services upon the request of his former employer will not be considered subject to a substantial risk of forfeiture unless he is in fact expected to perform substantial services.
(3) Enforcement of forfeiture condition. In determining whether the possibility of forfeiture is substantial in the case of rights in property transferred to an employee of a corporation who owns a significant amount of the total combined voting power or value of all classes of stock of the employer corporation or of its parent corporation, there will be taken into account (i) the employee's relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation, (ii) the position of the employee in the corporation and the extent to which he is subordinate to other employees, (iii) the employee's relationship to the officers and directors of the corporation, (iv) the person or persons who must approve the employee's discharge, and (v) past actions of the employer in enforcing the provisions of the restrictions. For example, if an employee would be considered as having received rights in property subject to a substantial risk of forfeiture, but for the fact that the employee owns 20 percent of the single class of stock in the transferor corporation, and if the remaining 80 percent of the class of stock is owned by an unrelated individual (or members of such an individual's family) so that the possibility of the corporation enforcing a restriction on such rights is substantial, then such rights are subject to a substantial risk of forfeiture. On the other hand, if 4 percent of the voting power of all the stock of a corporation is owned by the president of such corporation and the remaining stock is so diversely held by the public that the president, in effect, controls the corporation, then the possibility of the corporation enforcing a restriction on rights in property transferred to the president is not substantial, and such rights are not subject to a substantial risk of forfeiture.
(4) Examples. The rules contained in paragraph (c)(1) of this section may be illustrated by the following examples. In each example it is assumed that, if the conditions on transfer are not satisfied, the forfeiture provision will be enforced.
(d) Transferability of property. For purposes of section 83 and the regulations thereunder, the rights of a person in property are transferable if such person can transfer any interest in the property to any person other than the transferor of the property, but only if the rights in such property of such transferee are not subject to a substantial risk of forfeiture. Accordingly, property is transferable if the person performing the services or receiving the property can sell, assign, or pledge (as collateral for a loan, or as security for the performance of an obligation, or for any other purpose) his interest in the property to any person other than the transferor of such property and if the transferee is not required to give up the property or its value in the event the substantial risk of forfeiture materializes. On the other hand, property is not considered to be transferable merely because the person performing the services or receiving the property may designate a beneficiary to receive the property in the event of his death.
(e) Property. For purposes of section 83 and the regulations thereunder, the term “property” includes real and personal property other than either money or an unfunded and unsecured promise to pay money or property in the future. The term also includes a beneficial interest in assets (including money) which are transferred or set aside from the claims of creditors of the transferor, for example, in a trust or escrow account. See, however, § 1.83-8(a) with respect to employee trusts and annuity plans subject to section 402(b) and section 403(c). In the case of a transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, or any undivided interest therein, the policy cash value and all other rights under such contract (including any supplemental agreements thereto and whether or not guaranteed), other than current life insurance protection, are treated as property for purposes of this section. However, in the case of the transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, which was part of a split-dollar arrangement (as defined in § 1.61-22(b)) entered into (as defined in § 1.61-22(j)) on or before September 17, 2003, and which is not materially modified (as defined in § 1.61-22(j)(2)) after September 17, 2003, only the cash surrender value of the contract is considered to be property. Where rights in a contract providing life insurance protection are substantially nonvested, see § 1.83-1(a)(2) for rules relating to taxation of the cost of life insurance protection.
(f) Property transferred in connection with the performance of services. Property transferred to an employee or an independent contractor (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of section 83. The existence of other persons entitled to buy stock on the same terms and conditions as an employee, whether pursuant to a public or private offering may, however, indicate that in such circumstances a transfer to the employee is not in recognition of the performance of, or the refraining from performance of, services. The transfer of property is subject to section 83 whether such transfer is in respect of past, present, or future services.
(g) Amount paid. For purposes of section 83 and the regulations thereunder, the term “amount paid” refers to the value of any money or property paid for the transfer of property to which section 83 applies, and does not refer to any amount paid for the right to use such property or to receive the income therefrom. Such value does not include any stated or unstated interest payments. For rules regarding the calculation of the amount of unstated interest payments, see § 1.483-1(c). When section 83 applies to the transfer of property pursuant to the exercise of an option, the term “amount paid” refers to any amount paid for the grant of the option plus any amount paid as the exercise price of the option. For rules regarding the forgiveness of indebtedness treated as an amount paid, see § 1.83-4(c).
(h) Nonlapse restriction. For purposes of section 83 and the regulations thereunder, a restriction which by its terms will never lapse (also referred to as a “nonlapse restriction”) is a permanent limitation on the transferability of property—
(1) Which will require the transferee of the property to sell, or offer to sell, such property at a price determined under a formula, and
(2) Which will continue to apply to and be enforced against the transferee or any subsequent holder (other than the transferor).
A limitation subjecting the property to a permanent right of first refusal in a particular person at a price determined under a formula is a permanent nonlapse restriction. Limitations imposed by registration requirements of State or Federal security laws or similar laws imposed with respect to sales or other dispositions of stock or securities are not nonlapse restrictions. An obligation to resell or to offer to sell property transferred in connection with the performance of services to a specific person or persons at its fair market value at the time of such sale is not a nonlapse restriction. See § 1.83-5(c) for examples of nonlapse restrictions.
(i) Lapse restriction. For purposes of section 83 and the regulations thereunder, the term “lapse restriction” means a restriction other than a nonlapse restriction as defined in paragraph (h) of this section, and includes (but is not limited to) a restriction that carries a substantial risk of forfeiture.
(j) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934—(1) In general. For purposes of section 83 and the regulations thereunder if the sale of property at a profit within six months after the purchase of the property could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, the person's rights in the property are treated as subject to a substantial risk of forfeiture and as not transferable until the earlier of (i) the expiration of such six-month period, or (ii) the first day on which the sale of such property at a profit will not subject the person to suit under section 16(b) of the Securities Exchange Act of 1934. However, whether an option is “transferable by the optionee” for purposes of § 1.83-7(b)(2)(i) is determined without regard to section 83(c)(3) and this paragraph (j).
(2) Examples. The provisions of this paragraph may be illustrated by the following examples:
(k) For purposes of section 83 and the regulations thereunder, property is subject to substantial risk of forfeiture and is not transferable so long as the property is subject to a restriction on transfer to comply with the “Pooling-of-Interests Accounting” rules set forth in Accounting Series Release Numbered 130 ((10/5/72) 37 FR 20937; 17 CFR 211.130) and Accounting Series Release Numbered 135 ((1/18/73) 38 FR 1734; 17 CFR 211.135).
(l) Effective/applicability date. This section applies to property transferred on or after January 1, 2013. For rules relating to property transferred before that date, see § 1.83-3 as contained in 26 CFR part 1 (as of April 1, 2012).
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Treas. Reg. §1.83-3(a)Transfer—(1) In general.
Transfer—(1) In general. For purposes of section 83 and the regulations thereunder, a transfer of property occurs when a person acquires a beneficial ownership interest in such property (disregarding any lapse restriction, as defined in § 1.83-3(i)). For special rules applying to the transfer of a life insurance contract (or an undivided interest therein) that is part of a split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)), see § 1.61-22(g).
(2) Option. The grant of an option to purchase certain property does not constitute a transfer of such property. However, see § 1.83-7 for the extent to which the grant of the option itself is subject to section 83. In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. The determination of the substance of the transaction shall be based upon all the facts and circumstances. The factors to be taken into account include the type of property involved, the extent to which the risk that the property will decline in value has been transferred, and the likelihood that the purchase price will, in fact, be paid. See also § 1.83-4(c) for the treatment of forgiveness of indebtedness that has constituted an amount paid.
(3) Requirement that property be returned. Similarly, no transfer may have occurred where property is transferred under conditions that require its return upon the happening of an event that is certain to occur, such as the termination of employment. In such a case, whether there is, in fact, a transfer depends upon all the facts and circumstances. Factors which indicate that no transfer has occurred are described in paragraph (a) (4), (5), and (6) of this section.
(4) Similarity to option. An indication that no transfer has occurred is the extent to which the conditions relating to a transfer are similar to an option.
(5) Relationship to fair market value. An indication that no transfer has occurred is the extent to which the consideration to be paid the transferee upon surrendering the property does not approach the fair market value of the property at the time of surrender. For purposes of paragraph (a) (5) and (6) of this section, fair market value includes fair market value determined under the rules of § 1.83-5(a)(1), relating to the valuation of property subject to nonlapse restrictions. Therefore, the existence of a nonlapse restriction referred to in § 1.83-5(a)(1) is not a factor indicating no transfer has occurred.
(6) Risk of loss. An indication that no transfer has occurred is the extent to which the transferee does not incur the risk of a beneficial owner that the value of the property at the time of transfer will decline substantially. Therefore, for purposes of this (6), risk of decline in property value is not limited to the risk that any amount paid for the property may be lost.
(7) Examples. The provisions of this paragraph may be illustrated by the following examples:
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Treas. Reg. §1.83-3(b)Substantially vested and substantially nonvested property.
Substantially vested and substantially nonvested property. For purposes of section 83 and the regulations thereunder, property is substantially nonvested when it is subject to a substantial risk of forfeiture, within the meaning of paragraph (c) of this section, and is nontransferable, within the meaning of paragraph (d) of this section. Property is substantially vested for such purposes when it is either transferable or not subject to a substantial risk of forfeiture.
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Treas. Reg. §1.83-3(c)Substantial risk of forfeiture—(1) In general.
Substantial risk of forfeiture—(1) In general. For purposes of section 83 and these regulations, whether a risk of forfeiture is substantial or not depends upon the facts and circumstances. Except as set forth in paragraphs (j) and (k) of this section, a substantial risk of forfeiture exists only if 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 upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial. Property is not transferred subject to a substantial risk of forfeiture if at the time of transfer the facts and circumstances demonstrate that the forfeiture condition is unlikely to be enforced. Further, property is not transferred subject to a substantial risk of forfeiture to the extent that the employer is required to pay the fair market value of a portion of such property to the employee upon the return of such property. The risk that the value of property will decline during a certain period of time does not constitute a substantial risk of forfeiture. A nonlapse restriction, standing by itself, will not result in a substantial risk of forfeiture. A restriction on the transfer of property, whether contractual or by operation of applicable law, will result in a substantial risk of forfeiture only if and to the extent that the restriction is described in paragraph (j) or (k) of this section. For this purpose, transfer restrictions that will not result in a substantial risk of forfeiture include, but are not limited to, restrictions that if violated, whether by transfer or attempted transfer of the property, would result in the forfeiture of some or all of the property, or liability by the employee for any damages, penalties, fees, or other amount.
(2) Illustrations of substantial risks of forfeiture. The regularity of the performance of services and the time spent in performing such services tend to indicate whether services required by a condition are substantial. The fact that the person performing services has the right to decline to perform such services without forfeiture may tend to establish that services are insubstantial. Where stock is transferred to an underwriter prior to a public offering and the full enjoyment of such stock is expressly or impliedly conditioned upon the successful completion of the underwriting, the stock is subject to a substantial risk of forfeiture. Where an employee receives property from an employer subject to a requirement that it be returned if the total earnings of the employer do not increase, such property is subject to a substantial risk of forfeiture. On the other hand, requirements that the property be returned to the employer if the employee is discharged for cause or for committing a crime will not be considered to result in a substantial risk of forfeiture. An enforceable requirement that the property be returned to the employer if the employee accepts a job with a competing firm will not ordinarily be considered to result in a substantial risk of forfeiture unless the particular facts and circumstances indicate to the contrary. Factors which may be taken into account in determining whether a convenant not to compete constitutes a substantial risk of forfeiture are the age of the employee, the availability of alternative employment opportunities, the likelihood of the employee's obtaining such other employment, the degree of skill possessed by the employee, the employee's health, and the practice (if any) of the employer to enforce such covenants. Similarly, rights in property transferred to a retiring employee subject to the sole requirement that it be returned unless he renders consulting services upon the request of his former employer will not be considered subject to a substantial risk of forfeiture unless he is in fact expected to perform substantial services.
(3) Enforcement of forfeiture condition. In determining whether the possibility of forfeiture is substantial in the case of rights in property transferred to an employee of a corporation who owns a significant amount of the total combined voting power or value of all classes of stock of the employer corporation or of its parent corporation, there will be taken into account (i) the employee's relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation, (ii) the position of the employee in the corporation and the extent to which he is subordinate to other employees, (iii) the employee's relationship to the officers and directors of the corporation, (iv) the person or persons who must approve the employee's discharge, and (v) past actions of the employer in enforcing the provisions of the restrictions. For example, if an employee would be considered as having received rights in property subject to a substantial risk of forfeiture, but for the fact that the employee owns 20 percent of the single class of stock in the transferor corporation, and if the remaining 80 percent of the class of stock is owned by an unrelated individual (or members of such an individual's family) so that the possibility of the corporation enforcing a restriction on such rights is substantial, then such rights are subject to a substantial risk of forfeiture. On the other hand, if 4 percent of the voting power of all the stock of a corporation is owned by the president of such corporation and the remaining stock is so diversely held by the public that the president, in effect, controls the corporation, then the possibility of the corporation enforcing a restriction on rights in property transferred to the president is not substantial, and such rights are not subject to a substantial risk of forfeiture.
(4) Examples. The rules contained in paragraph (c)(1) of this section may be illustrated by the following examples. In each example it is assumed that, if the conditions on transfer are not satisfied, the forfeiture provision will be enforced.
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Treas. Reg. §1.83-3(d)Transferability of property.
Transferability of property. For purposes of section 83 and the regulations thereunder, the rights of a person in property are transferable if such person can transfer any interest in the property to any person other than the transferor of the property, but only if the rights in such property of such transferee are not subject to a substantial risk of forfeiture. Accordingly, property is transferable if the person performing the services or receiving the property can sell, assign, or pledge (as collateral for a loan, or as security for the performance of an obligation, or for any other purpose) his interest in the property to any person other than the transferor of such property and if the transferee is not required to give up the property or its value in the event the substantial risk of forfeiture materializes. On the other hand, property is not considered to be transferable merely because the person performing the services or receiving the property may designate a beneficiary to receive the property in the event of his death.
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Treas. Reg. §1.83-3(e)Property.
Property. For purposes of section 83 and the regulations thereunder, the term “property” includes real and personal property other than either money or an unfunded and unsecured promise to pay money or property in the future. The term also includes a beneficial interest in assets (including money) which are transferred or set aside from the claims of creditors of the transferor, for example, in a trust or escrow account. See, however, § 1.83-8(a) with respect to employee trusts and annuity plans subject to section 402(b) and section 403(c). In the case of a transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, or any undivided interest therein, the policy cash value and all other rights under such contract (including any supplemental agreements thereto and whether or not guaranteed), other than current life insurance protection, are treated as property for purposes of this section. However, in the case of the transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, which was part of a split-dollar arrangement (as defined in § 1.61-22(b)) entered into (as defined in § 1.61-22(j)) on or before September 17, 2003, and which is not materially modified (as defined in § 1.61-22(j)(2)) after September 17, 2003, only the cash surrender value of the contract is considered to be property. Where rights in a contract providing life insurance protection are substantially nonvested, see § 1.83-1(a)(2) for rules relating to taxation of the cost of life insurance protection.
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Treas. Reg. §1.83-3(f)Property transferred in connection with the performance of services.
Property transferred in connection with the performance of services. Property transferred to an employee or an independent contractor (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of section 83. The existence of other persons entitled to buy stock on the same terms and conditions as an employee, whether pursuant to a public or private offering may, however, indicate that in such circumstances a transfer to the employee is not in recognition of the performance of, or the refraining from performance of, services. The transfer of property is subject to section 83 whether such transfer is in respect of past, present, or future services.
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Treas. Reg. §1.83-3(g)Amount paid.
Amount paid. For purposes of section 83 and the regulations thereunder, the term “amount paid” refers to the value of any money or property paid for the transfer of property to which section 83 applies, and does not refer to any amount paid for the right to use such property or to receive the income therefrom. Such value does not include any stated or unstated interest payments. For rules regarding the calculation of the amount of unstated interest payments, see § 1.483-1(c). When section 83 applies to the transfer of property pursuant to the exercise of an option, the term “amount paid” refers to any amount paid for the grant of the option plus any amount paid as the exercise price of the option. For rules regarding the forgiveness of indebtedness treated as an amount paid, see § 1.83-4(c).
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Treas. Reg. §1.83-3(h)Nonlapse restriction.
Nonlapse restriction. For purposes of section 83 and the regulations thereunder, a restriction which by its terms will never lapse (also referred to as a “nonlapse restriction”) is a permanent limitation on the transferability of property—
(1) Which will require the transferee of the property to sell, or offer to sell, such property at a price determined under a formula, and
(2) Which will continue to apply to and be enforced against the transferee or any subsequent holder (other than the transferor).
A limitation subjecting the property to a permanent right of first refusal in a particular person at a price determined under a formula is a permanent nonlapse restriction. Limitations imposed by registration requirements of State or Federal security laws or similar laws imposed with respect to sales or other dispositions of stock or securities are not nonlapse restrictions. An obligation to resell or to offer to sell property transferred in connection with the performance of services to a specific person or persons at its fair market value at the time of such sale is not a nonlapse restriction. See § 1.83-5(c) for examples of nonlapse restrictions.
160 Citing Cases
Petitioner also appears to argue that section 83 is inapplicable because she did not make an affirmative election under section 83 with respect to the Performance Rights Plan.
perty at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934 (Exchange Act), the person’s rights in the property are “subject to a substantial risk of forfeiture” and “not transferable” for purposes of section 83. “If a taxpayer is permitted 13 [*13] recognition of the income attributable to the exercises were deferred until June 30, 2000, because a sale of the InfoSpace shares by Mrs. Strom before that time could have subjected her to a suit under
receives a profits interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of being a partner, the [IRS] will not treat the receipt of such an interest as a taxable event for the partner or 10 Proposed Treasury regulations under section 83 reject the concept that the receipt of a partnership interest in connection with services is not a realization event. In conjunction with the issuance of these proposed regulations, the IRS issued
Larson’s stock in Morley was not subject to a substantial risk of forfeiture pursuant to section 83 for taxable years 1999 and 2000.
, the weight afforded to revenue rulings depends upon their persuasiveness and the consistency of the Internal Revenue Service’s position over time. See Webber v. Commissioner, 144 T.C. 324, 352- 353 (2015). 8Sec. 83(e)(3) excludes from the reach of sec. 83 “the transfer of an option without a readily ascertainable fair market value”. 9The service recipient may claim that deduction for the taxable year for which the service provider includes the amount in gross income. See sec. 83(h). -15- [*15]
Nothing in section 83, 1001, or 1012 provides otherwise.
First, he contends that section 83 is inapplicable because petitioners supplied only property, and no substantial future services, in exchange for the UMLIC S-Corp.
First, he contends that section 83 is inapplicable because petitioners supplied only property, and no substantial future services, in exchange for the UMLIC S-Corp.
Section 402(b)(1) provides: Contributions to an employees' trust made by an employer during a taxable year ofthe employerwhich ends with or within a taxable year ofthe trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income ofthe employee in accordance with section 83 (relating to property transferred in connection with performance ofservices) * * *.
575 (1984), aff'd sub nom. Hernandez v. Commissioner, 490 U.S. 680. - 21 - [*21] The external features ofthe transactions at issue show that petitioners' gifts were not part ofa "quid pro quo exchange." Petitioners conveyed a fee simple in- terest in Parcel A to Heritage on January 24, 2007. This was an outright gift that petitioners cou
Petitioner also claims that section 83 and its accompanying regulations, dealing with transfers ofproperty in connection with services, support the proposition that all amounts it pays to its shareholder attorneys should be treated as compensation for services.
Section 402(b)(1) provides: Contributions to an employees' trust made by an employer during a taxable year ofthe employerwhich ends with or within a taxable year ofthe trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income ofthe employee in accordance with section 83 (relating to property transferred in connection with performance ofservices) * * *.
575 (1984), aff'd sub nom. Hernandez v. Commissioner, 490 U.S. 680. - 21 - [*21] The external features ofthe transactions at issue show that petitioners' gifts were not part ofa "quid pro quo exchange." Petitioners conveyed a fee simple in- terest in Parcel A to Heritage on January 24, 2007. This was an outright gift that petitioners cou
However, for the reasons stated below, we conclude that petitioner failed to meet either requirement ofsection 83 and, therefore, section 83 does not apply in this case.
Respondent set forth in the notice under the heading "Long Term Capital Loss Carryback--2000" the following alternative reason (respondent's alternative determinations) for disallowing the carryback to taxable year 2000 ofa total of $199,114,494 ofclaimed long-term capital losses: 2. Alternatively, ifloss recognition in connection with
We held thatthe property was not subject to a substantial risk offorfeiture bec use the possibility that an employee would be discharged for theft or embezzle ent "is too remote to present any substantial risk that the amounts contributed on is behalfwill be forfeited." kd. at 405. We noted that the Department ofthe Treas ry had issued proposed regulations under section 83 and stated our beliefthat our 1olding was consistent with those regulations.
Petitioners argue that section 83 applies to the nonvested 2% interest in Crescent Holdings. Because petitioner's right to the 2% interest never vested, he was not the owner ofthe interest under section 1.83-1(a)(1), Income Tax Regs. As a result, petitioners argue that petitioner should not be allocated any partnership profits or losses attributable to the interest for the years at issue. Intervenor argues that section 83 does not apply to the 2% interest.
The sole issue for decision is whether stock petitioners received in December 1998, which was labeled “restricted stock,” was subject to a substantial risk of forfeiture when issued to them or rather was “substantially vested” within the meaning of section 83 and section 1.83-1(a)(1), Income Tax Regs.
- 5 - [*25] Petitioners contend that no propert was transferred to them that could be taxed under section 83(a).
Applicability ofSection 83 Section 83(a) generally provides that where property is transferred to a taxpayer in connection with the performance ofservices, the fair marketvalue of the property atthe first time the rights ofthe person having the beneficial interest in the propertyare transferable or not subject to a substantial risk offorfeiture, less the amount pa
In December 2003 upon rollout ofthe SDLIAs, the income petitioners realized under section 61 or alternatively the taxable value ofproperty transferred to them under section 83 was the $710,376 difference between the $842,345 that N & J Managementpaid in premiums on their behalfand that was owed by them and the $131,969 they reimbursedN & J Management.
Lowe should be determined under section 83 and that the value of the policy should be reduced by the amount of the surrender charges payable upon termination of the policy.
In the case of options without a readily ascertainable fair market value, section 83 applies to the stock received upon exercise of the options rather than at the time of receipt.
*, the funds were * * * set aside for him and were not subject. to" SBE, TransNational, or TLCM creditors, the last because TLCM (in whose name the account was opened) "if it existed at all, was a shell.?' Respondent also invokes the application of sec. 83 (Property transferred in connection with the performance of services) top the transfers of funds to the HD Vest account, statin~g that "section 83 all but codifies the economic benefit doctrine in the compensation context" and noting that tho
In conclusion, section 83 does not apply to the deferred compensation arrangement at issue.
In the case of options without a readily ascertainable fair market value, section 83 applies to the stock received upon exercise of the options rather than at the time of receipt.
The annual tax for such benefits shall be determined in accordance with Code Section 83 and the Regulations thereunder and shall be the lower of the PS 58 table costs or the insured’s term insurance rates in accordance with Rev.
held that "within the meaning of section 83" the shareholder had not performed a service .
In particular, petitioners rely upon regulations under section 83, which provide that "In the case of a transfer of a life insurance contract * * * only the cash surrender value of the contract is considered. to be property" for purposes of section 83 . Sec . 1 .83-3(e), Income Tax Regs . Section 83 and the regulations thereunder are by their terms inapplicable to the transaction in question .10 But even by analogy, these regulations are not helpful to petitioners since, as just discussed, secti
We held that “within the meaning of section 83” the shareholder had not performed a service.
In particular, petitioners rely upon regulations under section 83, which provide that “In the case of a transfer of a life insurance contract * * * only the cash surrender value of the contract is considered to be property” for purposes of section 83.
f Y preferred stock. In 1997, the warrants were exercised. R, in his notices of deficiency, determined that the warrants were transferred in connection with the performance of services, and the income from the warrants is taxable in 1997 pursuant to sec. 83, I.R.C. 1 Cases of the following petitioners are consolidated herewith: Kevin Kimberlin Partners Ltd. Partnership, Kevin B. Kimberlin, Tax Matters Partner, docket No. 24500-04; and Spencer Trask & Co. and Subsidiary f.k.a. Spencer Trask Holdi
Thus, section 83 is inapplicable.
- 10 - Section 421(a) provides an exception to the tax treatment prescribed by section 83 for certain types of employee plans, including employee stock purchase plans such as the Fannie Mae ESPP involved here.
For purposes of section 83 and the regulations thereunder, a transfer of property occurs when a person acquires a beneficial ownership interest in the property .
Section 83 does not apply to a "statutory" stock option ; i .e ., an "incentive stock option" (ISO) within the meaning of section 422(b), that meets the requirements of sections 421 through 424 . As relevant herein, section 421(a) provides that if the requirements of section 422(a) are met,' a taxpayer does not recognize income either upon the gran
ues for decision in these cases are whether: (1) Warrants issued to petitioners in accordance with a settlement and release agreement were transferred in connection with the performance of services and therefore constitute taxable income pursuant to section 83; (2) the warrants had a readily ascertainable fair market value in 1995, on the date of grant, or in 1997, the year of exercise; and (3) the payment to Kevin Kimberlin (i.e., the warrants transferred to him by Spencer Trask) is a construct
1.83-1(a), Income Tax Regs.; sec. 1.83-7(a), Income Tax Regs. - 9 - exceeds the option price that he or she pays. Sec. 83(a); Racine v. Commissioner, T.C. Memo. 2006-162; sec. 1.83-7(a), Income Tax Regs. The recipient thereupon obtains a basis in the acquired stock equal to the option price plus any amount includible in gross income
The change was based on the theory that, under section 83, petitioner was not required to recognize AMTI on the exercise of his ISOs because his rights to the shares of Exodus stock were subject to substantial risk of forfeiture and were nontransferable.
We hold petitioner's rights were not subject to a substantial risk of forfeiture .
However, unlike the original 2001 return, the 2001 amended return reflected petitioner’s assertion that the section 83(b) election made in 2000 was invalid as to the nonvested shares.
ncy (deficiency notice) dated December 22, 2004 . Respondent determined in the deficiency notice that petitioners should have included in income the spread between the fair market value of the shares and the exercise price for the shares pursuant to section 83 . Respondent accordingly determined that $25,047,304 was the correct tax liability, giving rise to a $6 .7 million deficiency. Respondent also determined that petitioners were liable for the accuracy- related penalty. Petitioners timely fi
Respondent determined pursuant to section 83 that petitioners should have included the spread between the fair market value of the shares and the exercise price for the shares as gross income for the 2000 taxable year.6 Respondent accordingly determined that $774,147 was the correct tax liability, rather than the $259,685 reported on the amended return, resulting in a $514,462 defi
on 421 defers the recognition of income on the exercise of an ISO until the disposition of the stock. However, for AMT purposes, section 421 does not apply . Sec . 56(b)(3) . Instead, the exercise of an ISO results in the recognition of income under section 83 . See sec . 56(b)(3) ; Speltz v . Commissioner, 124 T .C . 165, 178 (2005), affd . F.3d (8th Cir . July 14, 2006) ; sec . 1 .83-7(a), Income Tax Regs . Consequently, if the stock's FMV exceeds the option price on the date of exercise, a ta
The change was based on the theory that, under section 83, petitioner was not required to recognize AMTI on the exercise of his ISOs because his rights to the shares of Exodus stock were subject to substantial risk of forfeiture and were nontransferable.
In sum, when the aggregate fair market value of stock that a taxpayer may acquire pursuant to ISOs that are exercisable for the first time during any taxable year exceeds $100,000, such options shall be treated as nonqualified stock options (NSOs) under section 83 (as discussed in detail below).
s otherwise provided in this paragraph (d).(2)(iii), the operating expense attributable to stock-based compensation is equal to the amount allowable to the controlled participant as a deduction for federal income tax purposes with respect to that stock-based compensation (for example, under section 83(h)) and is taken into account as an operating expense under this section for the taxable year for which the deduction is allowable. (1) Transfers to which section 421 applies.--Solely for purposes
ISOs and ESPP purchase rights receive special tax treatment and are typically not subject to tax when they are granted or exercised, but the stock acquired pursuant to the exercise of these options is subject to tax when such stock is sold.5 NSOs, however, are, pursuant to section 83,6 Property Transferred in Connection with the Performance of Services, subject to tax upon exercise unless the option has a readily ascertainable fair market value.7 Sec.
- 7 - Under section 83, a taxpayer generally must recognize income when he exercises a compensatory stock option to the extent that the fair market value of the shares of stock transferred to him exceeds the exercise price he pays if the taxpayer’s rights in the shares are transferable or not subject to a substantial risk of forfeiture.
Petitioner did not receive these shares in a distribution from a plan described in section 401(a) or in a transfer pursuant to an option or other right to acquire stock to which section 83, 422, or 423 applied.
Petitioner did not receive these shares in a distribution from a plan described in section 401(a) or in a transfer pursuant to an option or other right to acquire stock to which section 83, 422, or 423 applied.
1986), that a payment received by the taxpayer from an employer in exchange for the cancellation of stock options was includable in gross income as compensation pursuant to section 83.
83(c)(3), I.R.C., is inapplicable because the 6-month restricted period under sec.
ubject to a substantial risk of forfeiture because petitioner was subject to section 16(b) for a period of 2 years under the lockup agreement. Respondent argues that, upon exercise of the stock option, petitioner recognized compensation income under section 83. Respondent counters that the shares were not subject to section 83(c)(3) when petitioner exercised the option on September 7, 1994, because the section 16(b) limitation had expired. Respondent contends that the 6-month period in which pet
83 provides in relevant part: SEC.
Section 83 is another example of a section expressly limiting the amount of an employer’s deduction. Addressing the deduction available for property transferred for the performance of services, Congress restricted the amount of the deduction to “an amount equal to the amount included * * * in the gross income - 15 - of the person who performed suc
note 17, P.S. 58 income relates to life insurance contracts held in a qualified pension plan. - 32 - contributions when they were made, because she received in connection with services property not subject to a substantial risk of forfeiture under section 83. VI. The Lakewood Plan Mr. Cohen introduced Drs. Hirshkowitz and Desai to the SC VEBA in 1990. Drs. Hirshkowitz and Desai both knew that the premiums paid on the C-group product were more expensive than the cost of term life insurance. They
n 402(b). As to the latter position, respondent determined that Dr. Mall was taxable on the disallowed contributions when they were made, because she received in connection with services property not subject to a substantial risk of forfeiture under section 83. VI. The Lakewood Plan Mr. Cohen introduced Drs. Hirshkowitz and Desai to the SC VEBA in 1990. Drs. Hirshkowitz and Desai both knew that the premiums paid on the C-group product were more expensive than the cost of term life insurance. The
Section 83 is another example of a section expressly limiting the amount of an employer’s deduction. Addressing the deduction available for property transferred for the performance of services, Congress restricted the amount of the deduction to “an amount equal to the amount included * * * in the gross income of the person who performed such servic
Nor did the parties in those cases, unlike the parties here, dispute that the employers were entitled to a deduction, challenging only the timing of that deduction. In summary, petitioner has not met the requirements for deductibility under section 83(h), and it has not met the requirements for deductibility under section 1.83-6, Income Tax Regs., either pre- or post-amendment.
Alternatively, petitioner argues that the $3,068,750 should be - 16 - deductible as loan fees or compensation paid to FNBB under section 83.2 OPINION $5 Million Paid to Cruze as Covenant Not to Compete For the years in issue, amounts paid for covenants not to compete generally are deductible over the useful life of the covenants as current business expenses; whereas amounts paid for goodwill or going concern value of a business generally are treated as nondeductible capital
fails to qualify under 5 At time of default in February 1989 the loan represented 58 percent of the plan's assets. - 20 - section 401(a), whether employer contributions are to be included in the employees' incomes is determined in accordance with section 83. Sec. 402(b); Ludden v. Commissioner, supra at 830. In determining whether a plan is qualified under section 401(a), the operation of the trust is relevant as are its terms. Winger's Dept. Store, Inc. v. Commissioner, 82 T.C. 869, 876 (1984)
n for the transfer on its 1988 Federal income tax return. Petitioner filed its 1988 return based on the calendar year. Discussion Respondent determined that petitioner could not deduct the claimed amount because it failed to meet the requirements of section 83. Petitioner must prove this determination wrong. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner also must prove its entitlement to the deduction. Deductions are a matter of legislative grace. New Colonial Ice Co. v.
In so arguing, petitioner contends that section 83 authorizes the requisite specific exclusion from gross income for compensation received for services rendered, since "[petitioner's basis (cost) is the * * * [fair market value] of his services, [and] this amount is deductible as cost" under the statute.
Because petitioners made a section 83(b) election with respect to the subject stock, and because the restrictions on the stock were not perpetual, the value of the SWI stock for - 25 - section 83 purposes must be determined as though the restrictions did not exist.
mply money, was what he desired and pursued. The cases petitioner relies on, which involve amounts received upon cancellation of employment contracts, do not apply to the current situation. Petitioner also contends that the outcome is controlled by section 83. Section 83(a) provides: (a) General Rule.--If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of-- (1) the fair market value of s
In order to elect the retirement option as established by the Board's policy it was necessary for Petitioner Glenn L. (continued...) - 14 - After the conclusion of trial, the Court directed the parties to file seriatim briefs. See Rule 151(b). Petitioners' opening brief includes 8 pages of proposed findings of fact. See Rule 151(e)(
- 11 - IMED currently takes the position that its stock options are governed by Section 83 and therefore the present tax treatment is * * * no income to the employee on grant or exercise and no compensation deduction to IMED.
Petitioners further argue that section 83 does not provide support for taxing them (as respondent argues) since section 83(e) provides that section 83 shall not apply to "a transfer to or from a trust described in Section 401(a)".
83-17- 105 states in pertinent part: No insurer or agent doing business in this state shall pay, directly or indirectly, any commission or any other valuable consideration to any person for services as an agent within this state unless such person shall hold a currently valid license and certificate of authority to act as an agent, as required
The crux of petitioner's position is that wages are not income, apparently because of the provisions of section 83 and the notion that a person's labor is property in which the person has a basis equal to its fair market value.
Langeliers, instead of addressing the notice of deficiency, petitioner attempted to introduce into evidence a document called "CODE BREAKER - The § 83 Equation", which was marked for identification as petitioners' Exhibit 3.
tions to its employees for 1991 by purchasing an irrevocable letter of credit on March 13, 1992. The letter of credit constituted a transfer of an interest in substantially vested property, includable in income of the employees as of that date under sec. 83, I.R.C. P, an accrual basis taxpayer, deducted the amount of the letter of credit on its 1991 return on the basis that it paid the vacation pay within 2-1/2 months of the close of its 1991 taxable year and was therefore entitled to the claime
It contained a potted history of early income tax cases, culminating with some references to petitioner's efforts to file a return under section 83 that would obviate any taxable gain from his services, all of which purportedly led petitioner to conclude that his receipts were not income and that this Court had no jurisdiction over the case.
tions may be deferred or eliminated. Moreover, if contributions to an employees’ trust are made by an employer during a taxble year for which the trust is not exempt from tax, the employees are taxed on the value of such employer contributions under section 83. Sec. 402(b). Respondent determined that the lump-sum distributions received by petitioners from their profit-sharing plan are includable in petitioners’ gross income for taxable year 1988 because, at the time of the distributions, the Pla
The parties have, stipulated that the letter of credit represented a transfer of substantially vested interests in property to the employees for purposes of section 83, and that the fair market value of the interests was includable in the employees’ gross incomes for 1992 as of the date the interests were transferred.
a beneficiary of a nonexempt trust: (b) TAXABILITY OF BENEFICIARY OF NONEXEMPT TRUST.--Contributions to an employees' trust made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee
Thus, the amended petition alleges in part as follows: During the years of 1990, 1991, and 1992 the Petitioner did in fact receive payment for services actually rendered in a fair market value exchange under 26 USC §83, §1001, §1011 and §1012 not comprising taxable income, said acts performed as Unalienable rights to life, liberty, pursue happiness and acquire property, with labor being property.
Thus, the amended petition alleges in part as follows: During the years of 1990, 1991, and 1992 the Petitioner did in fact receive payment for services actually rendered in a fair market value exchange under 26 USC §83, §1001, §1011 and §1012 not comprising taxable income, said acts performed as Unalienable rights to life, liberty, pursue happiness and acquire property, with labor being property.
Internal Revenue Code section 83[3] applies to ANY compensation income * * * .
s various contentions, petitioner alleged that respondent erred in determining that petitioner earned nonemployee compensation for the years in issue on the ground that the compensation in question was paid in the form of corporate stock subject to section 83. Petitioner also alleged that respondent erred in determining that he failed to report unearned income for the years in issue. In particular, petitioner asserted that the notes and contracts of sale that are the subject of this adjustment w
made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee’s interest in the trust shall be substituted for the fair market value of the property for purposes of applying such secti