The IRS recently proposed regulations (REG-141075-09) under Section 83 to clarify and make changes to the current regulations.
Section 83 provides rules regarding the recognition of income when property (e.g., stock) is transferred to a service provider in connection with the performance of services. In general, the service provider recognizes income in the first taxable year that the property has been transferred to the service provider, and the property is either transferrable or not subject to a substantial risk of forfeiture (i.e., the property is vested).
The current regulations provide that a substantial risk of forfeiture exists where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if the condition is not satisfied. A condition related to a purpose of the transfer includes, for example, reaching certain revenue or net income targets. The proposed regulations would clarify that, in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, two issues must be considered: the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced.
In addition, the proposed regulations would provide that, in general, a transfer restriction (including a transfer restriction that carries the potential for forfeiture or disgorgement of some or all of the property or other...