Property Transferred in Connection With the Performance of Services Under Section 83, 31783-31786 [2012-12855]
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Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
(b) * * *
(4) A notice of disaggregation is filed
pursuant to § 151.7(h), in which case the
notice shall be effective upon filing.
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5. In § 151.12, revise paragraph (a)(5)
and add paragraph (a)(6) to read as
follows:
§ 151.12 Delegation of authority to the
Director of the Division of Market Oversight.
(a) * * *
(5) In § 151.7(j)(1)(iii) to call for
additional information from a trader
claiming the exemption in § 151.7(j)(1).
(6) In § 150.10 for providing
instructions or determining the format,
coding structure, and electronic data
transmission procedures for submitting
data records and any other information
required under this part.
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Issued in Washington, DC, on May 17,
2012 by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendix will not
appear in the Code of Federal Regulations.
[FR Doc. 2012–12526 Filed 5–29–12; 8:45 am]
BILLING CODE P
srobinson on DSK4SPTVN1PROD with PROPOSALS
Appendix 1—Statement of
Commissioner Jill E. Sommers
I support the Commission’s proposed rules
that, among other things, expand the
exemptions relating to information sharing
restrictions, expand the circumstances under
which market participants will not be
required to aggregate positions, and reduce
the reporting burdens on higher tier entities.
I am pleased that we recognize that the final
position limits rules issued on November 18,
2011 set forth an unworkable and overly
restrictive approach to these issues.
Essentially, as they relate to ‘‘owned
entities,’’ the proposed rules contain three
‘‘tiers’’ for purposes of aggregation. First, if
the ownership interest is less than 10
percent, one need not aggregate positions
with those of the owned entity. Second, if the
ownership interest is between 10 percent and
50 percent, one must aggregate positions with
those of the owned entity unless it can be
shown that there is a lack of knowledge of,
and control over, the trading of the owned
entity. Third, if the ownership interest
exceeds 50 percent, one must always
aggregate positions with those of the owned
entity, even if there is a lack of knowledge
of, and control over, the trading of the owned
entity.
I question whether a bright-line approach
is the correct approach, and if it is, whether
the line should be drawn at 50 percent. In the
absence of knowledge of, and control over,
trading of an owned entity, is there a real
difference between owning 49 percent and
owning 50 percent? I don’t think there is. In
justifying 50 percent as the correct place to
draw the line, the preamble to the proposed
rules states, ‘‘such a bright-line rule would
provide clarity to market participants and a
useful tool for the Commission to simplify
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aggregation.’’ Providing clarity and certainty
to market participants is important. However,
if providing clarity and certainty results in a
one-size-fits-all answer that fails to take into
account the varying needs of a very diverse
group of market participants, the clarity and
certainty are of little use. Moreover, while it
is important to establish an aggregation
approach that the Commission can effectively
administer, I hesitate to put too much weight
on ‘‘simplifying’’ the approach if the
simplified approach is needlessly restrictive.
In my dissent to the final position limits
rules, I expressed concern that with regard to
the 19 new reference contracts, the
Commission was taking on ‘‘front-line
oversight of the granting and monitoring of
bona-fide hedging exemptions for the
transactions of massive, global corporate
conglomerates that on a daily basis produce,
process, handle, store, transport, and use
physical commodities in their extremely
complex logistical operations.’’ My concerns
apply equally to the issue of aggregation. We
have limited experience as it relates to these
new reference contracts, and no experience
aggregating swaps into the overall
calculations. In the face of such limited
experience, our apparent certainty on where
to draw lines is troubling.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–141075–09]
RIN 1545–BJ15
Property Transferred in Connection
With the Performance of Services
Under Section 83
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations relating to
property transferred in connection with
the performance of services under
section 83 of the Internal Revenue Code
(Code). These proposed regulations
affect certain taxpayers who received
property transferred in connection with
the performance of services.
DATES: Written or electronic comments
must be received by August 28, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–141075–09), room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–141075–
09), Courier’s Desk, Internal Revenue
SUMMARY:
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31783
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
https://www.regulations.gov/ (IRS REG–
141075–09).
FOR FURTHER INFORMATION CONTACT:
Concerning these proposed regulations,
Thomas Scholz or Dara Alderman at
(202) 622–6030 (not a toll-free number);
concerning submissions of comments,
and/or to request a hearing,
Oluwafunmilayo (Fumni) Taylor, at
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 83(a) of the Internal Revenue
Code (Code) provides that 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 the
property (determined without regard to
lapse restrictions) 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 (2) the amount (if
any) paid for such property, is included
in the gross income of the service
provider 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. Section
83(c)(1) provides that 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.
Section 1.83–3(c)(1) provides that, for
purposes of section 83 and the
regulations, whether a risk of forfeiture
is substantial or not depends upon the
facts and circumstances. Section 1.83–
3(c)(1) further provides 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
such condition is not satisfied.
Illustrations provided in § 1.83–3(c)(2)
of the regulations demonstrate when a
substantial risk of forfeiture will be
considered to exist.
In addition to providing that a
person’s rights in property are subject to
a substantial risk of forfeiture if
conditioned upon the future
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Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
performance of substantial services by
any individual, the legislative history
indicates that the drafters intended that
‘‘in other cases the question of whether
there is a substantial risk of forfeiture
depends upon the facts and
circumstances.’’ H.R. Rep. No. 91–413
(Pt. 1), 91st Cong., 1st Sess. 62, 88
(1969–3 Cum. Bull. 200, 255); S. Rep.
No. 91–552, 91st Cong., 1st Sess. 119,
121 (1969–3 Cum. Bull. 423, 501). The
current regulations adopt this approach
by finding that a substantial risk of
forfeiture may also arise if the rights to
the property are subject to a condition
related to the purpose of the transfer.
Some confusion has arisen as to
whether other conditions may also give
rise to a substantial risk of forfeiture.
See Robinson v. Commissioner, 805
F.2d 38 (1st Cir. 1986). The proposed
regulations clarify that a substantial risk
of forfeiture may be established only
through a service condition or a
condition related to the purpose of the
transfer.
Similarly, confusion has arisen as to
whether, in determining whether a
substantial risk of forfeiture exists, the
likelihood that a condition related to the
purpose of the transfer will occur must
be considered. Id. A conclusion that
such likelihood need not be considered
would lead to anomalies not intended
by the statute. For example, assume that
stock transferred by an employer to an
employee was made nontransferable
and also subject to a condition that the
stock be forfeited if the gross receipts of
the employer fell by 90% over the next
three years. Assume further that the
employer is a longstanding seller of a
product and that there is no indication
that either there will be a fall in demand
for the product or an inability of the
employer to sell the product, so that it
is extremely unlikely that the forfeiture
condition will occur. Although,
arguably, the condition is a condition
related to the purpose of the transfer
because it would, to some degree,
incentivize the employee to prevent
such a fall in gross receipts, the
Treasury Department and the IRS do not
believe that such a condition was
intended to defer the taxation of the
stock transfer. Accordingly, 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, both the likelihood that the
forfeiture event will occur and the
likelihood that the forfeiture will be
enforced must be considered.
Finally, the proposed regulations
would clarify that, except as specifically
provided in section 83(c)(3) and § 1.83–
3(j) and (k), transfer restrictions do not
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create a substantial risk of forfeiture,
including transfer restrictions which
carry the potential for forfeiture or
disgorgement of some or all of the
property, or other penalties, if the
restriction is violated. This position is
supported by the legislative history of
section 83. The Senate Report, under the
heading ‘‘General reasons for change,’’
provides as follows:
The present tax treatment of restricted
stock plans is significantly more generous
than the treatment specifically provided in
the law for other types of similarly funded
deferred compensation arrangements. An
example of this disparity can be seen by
comparing the situation where stock is
placed in a nonexempt employees’ trust
rather than given directly to the employee
subject to restrictions. If an employer
transfers stock to a trust for an employee and
the trust provides that the employee will
receive the stock at the end of 5 years if he
is alive at that time, the employee is treated
as receiving and is taxed on the value of the
stock at the time of the transfer. However, if
the employer, instead of contributing the
stock to the trust, gives the stock directly to
the employee subject to the restriction that it
cannot be sold for 5 years, then the
employee’s tax is deferred until the end of
the 5-year period. In the latter situation, the
employee actually possesses the stock, can
vote it, and receives the dividends, yet his
tax is deferred. In the case of the trust, he
may have none of these benefits, yet he is
taxed at the time the stock is transferred to
the trust.
S. Rep. No. 91–552, 1969–3 CB 423,
500. See also H. Rep. No. 91–413, 1969–
3 CB 200, 254.
The legislative history shows that
Congress intended for section 83 to be
interpreted in such a way that
precluded the use of transfer restrictions
as a means of deferring the taxable
event. If interpreted otherwise, section
83 would not alter the tax treatment of
the particular transaction that Congress
described as the reason for the statutory
change.
Moreover, Congress later added
section 83(c)(3) concerning sales that
may give rise to suit under section 16(b)
of the Securities Exchange Act of 1934
(the ‘‘Exchange Act’’). See Public Law
97–34, sec. 252, 1981–2 CB 256, 303.
Section 83(c)(3) provides that so long as
the sale of property at a profit could
subject a person to suit under section
16(b) of the Exchange Act, such person’s
rights in such property are (A) subject
to a substantial risk of forfeiture, and (B)
not transferable. Section 1.83–3(j) of the
regulations further provides that, for
purposes of section 83 and the
regulations, 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 Exchange Act, the person’s rights in
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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 Exchange Act.
Consistent with section 83(c)(3) and
§ 1.83–3(j), Revenue Ruling 2005–48
(2005–2 CB 259) provides that the only
provision of the securities law that
would delay taxation under section 83
is section 16(b) of the Exchange Act.
The ruling further provides that other
transfer restrictions (such as restrictions
imposed by lock-up agreements or
restrictions relating to insider trading
under Rule 10b–5 of the Exchange Act)
do not cause rights in property taxable
under section 83 to be substantially
nonvested. Revenue Ruling 2005–48
notes that the Treasury Department and
the IRS intend to amend the section 83
regulations to explicitly set forth the
holdings in the ruling.
Explanation of Provisions
The proposed regulations would
amend the second sentence of § 1.83–
3(c)(1) of the existing regulations to add
the word ‘‘only’’ to the phrase ‘‘[a]
substantial risk of forfeiture exists [only]
where * * *’’ The purpose of this
addition is to clarify that a substantial
risk of forfeiture may be established
only through a service condition or a
condition related to the purpose of the
transfer.
The proposed regulations would
amend the second sentence of § 1.83–
3(c)(1) of the existing regulations to
delete the clause ‘‘if such condition is
not satisfied.’’ The purpose of the
deletion is to clarify that, in determining
whether a substantial risk of forfeiture
exists based on a condition related to
the purpose of the transfer, both the
likelihood that the forfeiture event will
occur and the likelihood that the
forfeiture will be enforced must be
considered.
The proposed regulations would
amend § 1.83–3(c)(1) of the existing
regulations to add a sentence stating
that a transfer restriction, including a
transfer restriction which carries the
potential for forfeiture or disgorgement
of some or all of the property or other
penalties if the restriction is violated,
does not create a substantial risk of
forfeiture. The purpose of this addition
is to incorporate the holding in Rev.
Rul. 2005–48.
Furthermore, consistent with Rev.
Rul. 2005–48, the proposed regulations
would amend § 1.83–3(j)(2) to include
an example illustrating the application
of section 16(b) of the Exchange Act to
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Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
an option. The regulations are not
intended to provide guidance on the
application of section 16(b) of the
Exchange Act. Rather, for purposes of
the examples it is assumed that the
period of liability is determined in
accordance with the applicable law,
including any applicable court
decisions. See, for example, Stella v.
Graham-Paige Motors, 132 Fed. Supp.
100, 103 (S.D.N.Y. 1955), rev’d other
grounds, 232 F.2d 299 (2d Cir.), cert.
denied, 352 U.S. 831 (1956). The
proposed regulations also would add
two additional examples to § 1.83–
3(c)(4) illustrating that a substantial risk
of forfeiture is not created solely as a
result of potential liability under Rule
10b–5 of the Exchange Act or a lock-up
agreement. Rev. Rul. 2005–48 will be
obsoleted when the proposed
regulations are published as final
regulations. See § 601.601(d)(2).
Proposed Effective Date
These regulations under section 83
are proposed to apply as of January 1,
2013, and will apply to property
transferred on or after that date.
Taxpayers may rely on the proposed
regulations for property transferred after
publication of these proposed
regulations in the Federal Register.
srobinson on DSK4SPTVN1PROD with PROPOSALS
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulations do not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, these
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
timely submitted to the IRS. The IRS
and the Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier
to understand. All comments will be
available for public inspection and
copying. A public hearing will be
scheduled if requested in writing by any
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person that timely submits written or
electronic comments. If a public hearing
is scheduled, notice of the date, time,
and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal authors of these
proposed regulations are Thomas Scholz
and Dara Alderman, Office of the
Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel
from the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for Part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805.
Par. 2. Section 1.83–3 is amended by:
1. Revising paragraph (c)(1).
2. Adding Example 6 and Example 7
to paragraph (c)(4).
3. Adding Example 4 to paragraph
(j)(2).
4. Removing paragraph (j)(3).
5. Redesignating paragraph (k)(1) as
paragraph (k).
6. Removing paragraph (k)(2).
7. Adding paragraph (l).
The additions and revisions read as
follows:
§ 1.83–3
Meaning and use of certain terms.
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(c) Substantial risk of forfeiture—(1)
In general. For purposes of section 83
and the regulations, whether a risk of
forfeiture is substantial or not depends
upon the facts and circumstances. A
substantial risk of forfeiture exists only
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
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 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
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31785
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. Except as set forth in
paragraphs (j) and (k) of this section,
restrictions on the transfer of property,
whether contractual or by operation of
applicable law, will not result in a
substantial risk of forfeiture. 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.
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(4) * * *
Example 6. On January 3, 2013, Y
corporation grants to Q, an officer of Y, a
nonstatutory option to purchase Y common
stock. Although the option is immediately
exercisable, it has no readily ascertainable
fair market value when it is granted. Under
the option, Q has the right to purchase 100
shares of Y common stock for $10 per share,
which is the fair market value of a Y share
on the date of grant of the option. On May
1, 2013, Y sells its common stock in an initial
public offering. Pursuant to an underwriting
agreement entered into in connection with
the initial public offering, Q agrees not to
sell, otherwise dispose of, or hedge any Y
common stock from May 1 through
November 1 of 2013 (‘‘the lock-up period’’).
Q exercises the option and Y shares are
transferred to Q on August 15, 2013, during
the lock-up period. The underwriting
agreement does not impose a substantial risk
of forfeiture on the Y shares acquired by Q
because the provisions of the agreement do
not condition Q’s rights in the shares upon
anyone’s future performance (or refraining
from performance) of substantial services or
on the occurrence of a condition related to
the purpose of the transfer of shares to Q.
Accordingly, neither section 83(c)(3) nor the
imposition of the lock-up period by the
underwriting agreement preclude taxation
under section 83 when the shares resulting
from exercise of the option are transferred to
Q.
Example 7. Assume the same facts as in
Example 6, except that on May 1, 2013, Y
also adopts an insider trading compliance
program, under which, as applied to 2013,
insiders (such as Q) may trade Y shares only
between November 5 and November 30 of
that year (‘‘the trading window’’). Under the
program, if Q trades Y shares outside the
trading window without Y’s permission, Y
has the right to terminate Q’s employment.
However, the exercise of the nonstatutory
options outside the trading window for the
Y shares is not prohibited under the insider
trading compliance program. As of August
15, 2013 (the date Q fully exercises the
option), Q is in possession of material
nonpublic information concerning Y that
would subject him to liability under Rule
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Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
10b–5 under the Securities Exchange Act of
1934 if Q sold the Y shares while in
possession of such information. Neither the
insider trading compliance program nor the
potential liability under Rule 10b–5 impose
a substantial risk of forfeiture on the Y shares
acquired by Q, because the provisions of the
program and Rule 10b–5 do not condition Q’s
rights in the shares upon anyone’s future
performance (or refraining from performance)
of substantial services or on the occurrence
of a condition related to the purpose of the
transfer of shares to Q. Accordingly, none of
section 83(c)(3), the imposition of the trading
window by the insider trading compliance
program and the potential liability under
Rule 10b–5 preclude taxation under section
83 when the shares resulting from exercise of
the option are transferred to Q.
srobinson on DSK4SPTVN1PROD with PROPOSALS
*
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(j) * * *
(2) * * *
*
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2012–12855 Filed 5–29–12; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–142561–07]
RIN 1545–BH31
*
Regulations Revising Rules Regarding
Agency for a Consolidated Group
Example 4. On January 3, 2013, Y
corporation grants to Q, an officer of Y, a
nonstatutory option to purchase Y common
stock. Y stock is traded on an established
securities market. Although the option is
immediately exercisable, it has no readily
ascertainable fair market value when it is
granted. Under the option, Q has the right to
purchase 100 shares of Y common stock for
$10 per share, which is the fair market value
of a Y share on the date of grant of the option.
The grant of the option is not a transaction
exempt from section 16(b) of the Securities
Exchange Act of 1934. On August 15, 2013,
Y stock is trading at more than $10 per share.
On that date, Q fully exercises the option,
paying the exercise price in cash, and
receives 100 Y shares. Q’s rights in the shares
received as a result of the exercise are not
conditioned upon the future performance of
substantial services. Because no exemption
from section 16(b) was available for the
January 3, 2013 grant of the option, the
section 16(b) liability period expires on July
1, 2013. Accordingly, the section 16(b)
liability period expires before the date that Q
exercises the option and the Y common stock
is transferred to Q. Thus, the shares acquired
by Q pursuant to the exercise of the option
are not subject to a substantial risk of
forfeiture under section 83(c)(3) as a result of
section 16(b). As a result, section 83(c)(3)
does not preclude taxation under section 83
when the shares acquired pursuant to the
August 15, 2013 exercise of the option are
transferred to Q. If, instead, Q exercises the
nonstatutory option on May 30, 2013 when
Y stock is trading at more than $10 per share,
the shares acquired are subject to a
substantial risk of forfeiture under section
83(c)(3) as a result of section 16(b) through
July 1, 2013.
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*
*
(l) Effective/applicability date.
Paragraphs (j) and (k) of this section
apply to property transferred after
December 31, 1981. Paragraph (c)(1),
Example 6 and 7 of paragraph (c)(4), and
Example 4 of paragraph (j)(2) of this
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section apply to property transferred on
or after January 1, 2013.
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Internal Revenue Service (IRS),
Treasury.
AGENCY:
ACTION:
Notice of proposed rulemaking.
This document contains
proposed amendments to the
regulations regarding the agent for an
affiliated group that files a consolidated
return (consolidated group). The
proposed regulations provide guidance
concerning the identity and authority of
the agent for the consolidated group
(agent for the group). These proposed
regulations affect all consolidated
groups. This document also invites
comments from the public regarding
these proposed regulations.
SUMMARY:
Written or electronic comments
and a request for a public hearing must
be received by August 28, 2012.
DATES:
Send submissions to:
CC:PA:LPD:PR (REG–142561–07), room
5205, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may also be hand-delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–142561–07), Courier’s Desk,
Internal Revenue Service, 1111
Constitution Avenue NW., Washington,
DC, or sent electronically via the
Federal eRulemaking Portal at https://
www.regulations.gov (IRS REG–142561–
07).
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Gerald B. Fleming at (202) 622–7770 or
Richard M. Heinecke at (202) 622–7930;
concerning submissions of comments or
a request for a public hearing, Funmi
Taylor, (202) 622–7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
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Paperwork Reduction Act
The collections of information
contained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget
(OMB) for review and approval under
OMB approval number 1545–1699 in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)).
Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, SE:W:CAR:MP:T:SP,
Washington, DC 20224. Comments on
the collection of information should be
received by July 30, 2012.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the IRS,
including whether the collection will
have practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collections of information in the
proposed regulations are in § 1.1502–
77(c)(3), (c)(4), (c)(5), and (f)(3).
The proposed regulations provide that
an entity that is the agent for the group,
upon becoming the default successor, is
required to notify the Commissioner in
writing (under procedures prescribed by
the Commissioner), in accordance with
§ 1.1502–77(c)(3), that it is the default
successor.
The proposed regulations under
§ 1.1502–77(c)(4) further provide that,
when the agent for the group designates
an agent for the group under
circumstances in which the agent for the
group’s existence terminates without a
default successor, the agent for the
group must notify the Commissioner in
writing (under procedures prescribed by
the Commissioner) of the designation
and provide an agreement executed by
the designated entity acknowledging
E:\FR\FM\30MYP1.SGM
30MYP1
]]>Agencies
[Federal Register Volume 77, Number 104 (Wednesday, May 30, 2012)]
[Proposed Rules]
[Pages 31783-31786]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12855]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-141075-09]
RIN 1545-BJ15
Property Transferred in Connection With the Performance of
Services Under Section 83
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to
property transferred in connection with the performance of services
under section 83 of the Internal Revenue Code (Code). These proposed
regulations affect certain taxpayers who received property transferred
in connection with the performance of services.
DATES: Written or electronic comments must be received by August 28,
2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-141075-09), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
141075-09), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at https://www.regulations.gov/ (IRS REG-141075-09).
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
Thomas Scholz or Dara Alderman at (202) 622-6030 (not a toll-free
number); concerning submissions of comments, and/or to request a
hearing, Oluwafunmilayo (Fumni) Taylor, at (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 83(a) of the Internal Revenue Code (Code) provides that 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 the property
(determined without regard to lapse restrictions) 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 (2) the amount (if any) paid
for such property, is included in the gross income of the service
provider 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. Section 83(c)(1)
provides that 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.
Section 1.83-3(c)(1) provides that, for purposes of section 83 and
the regulations, whether a risk of forfeiture is substantial or not
depends upon the facts and circumstances. Section 1.83-3(c)(1) further
provides 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 such condition is not satisfied. Illustrations
provided in Sec. 1.83-3(c)(2) of the regulations demonstrate when a
substantial risk of forfeiture will be considered to exist.
In addition to providing that a person's rights in property are
subject to a substantial risk of forfeiture if conditioned upon the
future
[[Page 31784]]
performance of substantial services by any individual, the legislative
history indicates that the drafters intended that ``in other cases the
question of whether there is a substantial risk of forfeiture depends
upon the facts and circumstances.'' H.R. Rep. No. 91-413 (Pt. 1), 91st
Cong., 1st Sess. 62, 88 (1969-3 Cum. Bull. 200, 255); S. Rep. No. 91-
552, 91st Cong., 1st Sess. 119, 121 (1969-3 Cum. Bull. 423, 501). The
current regulations adopt this approach by finding that a substantial
risk of forfeiture may also arise if the rights to the property are
subject to a condition related to the purpose of the transfer. Some
confusion has arisen as to whether other conditions may also give rise
to a substantial risk of forfeiture. See Robinson v. Commissioner, 805
F.2d 38 (1st Cir. 1986). The proposed regulations clarify that a
substantial risk of forfeiture may be established only through a
service condition or a condition related to the purpose of the
transfer.
Similarly, confusion has arisen as to whether, in determining
whether a substantial risk of forfeiture exists, the likelihood that a
condition related to the purpose of the transfer will occur must be
considered. Id. A conclusion that such likelihood need not be
considered would lead to anomalies not intended by the statute. For
example, assume that stock transferred by an employer to an employee
was made nontransferable and also subject to a condition that the stock
be forfeited if the gross receipts of the employer fell by 90% over the
next three years. Assume further that the employer is a longstanding
seller of a product and that there is no indication that either there
will be a fall in demand for the product or an inability of the
employer to sell the product, so that it is extremely unlikely that the
forfeiture condition will occur. Although, arguably, the condition is a
condition related to the purpose of the transfer because it would, to
some degree, incentivize the employee to prevent such a fall in gross
receipts, the Treasury Department and the IRS do not believe that such
a condition was intended to defer the taxation of the stock transfer.
Accordingly, 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, both the likelihood
that the forfeiture event will occur and the likelihood that the
forfeiture will be enforced must be considered.
Finally, the proposed regulations would clarify that, except as
specifically provided in section 83(c)(3) and Sec. 1.83-3(j) and (k),
transfer restrictions do not create a substantial risk of forfeiture,
including transfer restrictions which carry the potential for
forfeiture or disgorgement of some or all of the property, or other
penalties, if the restriction is violated. This position is supported
by the legislative history of section 83. The Senate Report, under the
heading ``General reasons for change,'' provides as follows:
The present tax treatment of restricted stock plans is
significantly more generous than the treatment specifically provided
in the law for other types of similarly funded deferred compensation
arrangements. An example of this disparity can be seen by comparing
the situation where stock is placed in a nonexempt employees' trust
rather than given directly to the employee subject to restrictions.
If an employer transfers stock to a trust for an employee and the
trust provides that the employee will receive the stock at the end
of 5 years if he is alive at that time, the employee is treated as
receiving and is taxed on the value of the stock at the time of the
transfer. However, if the employer, instead of contributing the
stock to the trust, gives the stock directly to the employee subject
to the restriction that it cannot be sold for 5 years, then the
employee's tax is deferred until the end of the 5-year period. In
the latter situation, the employee actually possesses the stock, can
vote it, and receives the dividends, yet his tax is deferred. In the
case of the trust, he may have none of these benefits, yet he is
taxed at the time the stock is transferred to the trust.
S. Rep. No. 91-552, 1969-3 CB 423, 500. See also H. Rep. No. 91-
413, 1969-3 CB 200, 254.
The legislative history shows that Congress intended for section 83
to be interpreted in such a way that precluded the use of transfer
restrictions as a means of deferring the taxable event. If interpreted
otherwise, section 83 would not alter the tax treatment of the
particular transaction that Congress described as the reason for the
statutory change.
Moreover, Congress later added section 83(c)(3) concerning sales
that may give rise to suit under section 16(b) of the Securities
Exchange Act of 1934 (the ``Exchange Act''). See Public Law 97-34, sec.
252, 1981-2 CB 256, 303. Section 83(c)(3) provides that so long as the
sale of property at a profit could subject a person to suit under
section 16(b) of the Exchange Act, such person's rights in such
property are (A) subject to a substantial risk of forfeiture, and (B)
not transferable. Section 1.83-3(j) of the regulations further provides
that, for purposes of section 83 and the regulations, 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
Exchange Act, 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 Exchange Act.
Consistent with section 83(c)(3) and Sec. 1.83-3(j), Revenue
Ruling 2005-48 (2005-2 CB 259) provides that the only provision of the
securities law that would delay taxation under section 83 is section
16(b) of the Exchange Act. The ruling further provides that other
transfer restrictions (such as restrictions imposed by lock-up
agreements or restrictions relating to insider trading under Rule 10b-5
of the Exchange Act) do not cause rights in property taxable under
section 83 to be substantially nonvested. Revenue Ruling 2005-48 notes
that the Treasury Department and the IRS intend to amend the section 83
regulations to explicitly set forth the holdings in the ruling.
Explanation of Provisions
The proposed regulations would amend the second sentence of Sec.
1.83-3(c)(1) of the existing regulations to add the word ``only'' to
the phrase ``[a] substantial risk of forfeiture exists [only] where * *
*'' The purpose of this addition is to clarify that a substantial risk
of forfeiture may be established only through a service condition or a
condition related to the purpose of the transfer.
The proposed regulations would amend the second sentence of Sec.
1.83-3(c)(1) of the existing regulations to delete the clause ``if such
condition is not satisfied.'' The purpose of the deletion is to clarify
that, in determining whether a substantial risk of forfeiture exists
based on a condition related to the purpose of the transfer, both the
likelihood that the forfeiture event will occur and the likelihood that
the forfeiture will be enforced must be considered.
The proposed regulations would amend Sec. 1.83-3(c)(1) of the
existing regulations to add a sentence stating that a transfer
restriction, including a transfer restriction which carries the
potential for forfeiture or disgorgement of some or all of the property
or other penalties if the restriction is violated, does not create a
substantial risk of forfeiture. The purpose of this addition is to
incorporate the holding in Rev. Rul. 2005-48.
Furthermore, consistent with Rev. Rul. 2005-48, the proposed
regulations would amend Sec. 1.83-3(j)(2) to include an example
illustrating the application of section 16(b) of the Exchange Act to
[[Page 31785]]
an option. The regulations are not intended to provide guidance on the
application of section 16(b) of the Exchange Act. Rather, for purposes
of the examples it is assumed that the period of liability is
determined in accordance with the applicable law, including any
applicable court decisions. See, for example, Stella v. Graham-Paige
Motors, 132 Fed. Supp. 100, 103 (S.D.N.Y. 1955), rev'd other grounds,
232 F.2d 299 (2d Cir.), cert. denied, 352 U.S. 831 (1956). The proposed
regulations also would add two additional examples to Sec. 1.83-
3(c)(4) illustrating that a substantial risk of forfeiture is not
created solely as a result of potential liability under Rule 10b-5 of
the Exchange Act or a lock-up agreement. Rev. Rul. 2005-48 will be
obsoleted when the proposed regulations are published as final
regulations. See Sec. 601.601(d)(2).
Proposed Effective Date
These regulations under section 83 are proposed to apply as of
January 1, 2013, and will apply to property transferred on or after
that date. Taxpayers may rely on the proposed regulations for property
transferred after publication of these proposed regulations in the
Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, these regulations have
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are timely submitted to the
IRS. The IRS and the Treasury Department request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by
any person that timely submits written or electronic comments. If a
public hearing is scheduled, notice of the date, time, and place for
the hearing will be published in the Federal Register.
Drafting Information
The principal authors of these proposed regulations are Thomas
Scholz and Dara Alderman, Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for Part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
Par. 2. Section 1.83-3 is amended by:
1. Revising paragraph (c)(1).
2. Adding Example 6 and Example 7 to paragraph (c)(4).
3. Adding Example 4 to paragraph (j)(2).
4. Removing paragraph (j)(3).
5. Redesignating paragraph (k)(1) as paragraph (k).
6. Removing paragraph (k)(2).
7. Adding paragraph (l).
The additions and revisions read as follows:
Sec. 1.83-3 Meaning and use of certain terms.
* * * * *
(c) Substantial risk of forfeiture--(1) In general. For purposes of
section 83 and the regulations, whether a risk of forfeiture is
substantial or not depends upon the facts and circumstances. A
substantial risk of forfeiture exists only 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 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 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. Except as
set forth in paragraphs (j) and (k) of this section, restrictions on
the transfer of property, whether contractual or by operation of
applicable law, will not result in a substantial risk of forfeiture.
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.
* * * * *
(4) * * *
Example 6. On January 3, 2013, Y corporation grants to Q, an
officer of Y, a nonstatutory option to purchase Y common stock.
Although the option is immediately exercisable, it has no readily
ascertainable fair market value when it is granted. Under the
option, Q has the right to purchase 100 shares of Y common stock for
$10 per share, which is the fair market value of a Y share on the
date of grant of the option. On May 1, 2013, Y sells its common
stock in an initial public offering. Pursuant to an underwriting
agreement entered into in connection with the initial public
offering, Q agrees not to sell, otherwise dispose of, or hedge any Y
common stock from May 1 through November 1 of 2013 (``the lock-up
period''). Q exercises the option and Y shares are transferred to Q
on August 15, 2013, during the lock-up period. The underwriting
agreement does not impose a substantial risk of forfeiture on the Y
shares acquired by Q because the provisions of the agreement do not
condition Q's rights in the shares upon anyone's future performance
(or refraining from performance) of substantial services or on the
occurrence of a condition related to the purpose of the transfer of
shares to Q. Accordingly, neither section 83(c)(3) nor the
imposition of the lock-up period by the underwriting agreement
preclude taxation under section 83 when the shares resulting from
exercise of the option are transferred to Q.
Example 7. Assume the same facts as in Example 6, except that on
May 1, 2013, Y also adopts an insider trading compliance program,
under which, as applied to 2013, insiders (such as Q) may trade Y
shares only between November 5 and November 30 of that year (``the
trading window''). Under the program, if Q trades Y shares outside
the trading window without Y's permission, Y has the right to
terminate Q's employment. However, the exercise of the nonstatutory
options outside the trading window for the Y shares is not
prohibited under the insider trading compliance program. As of
August 15, 2013 (the date Q fully exercises the option), Q is in
possession of material nonpublic information concerning Y that would
subject him to liability under Rule
[[Page 31786]]
10b-5 under the Securities Exchange Act of 1934 if Q sold the Y
shares while in possession of such information. Neither the insider
trading compliance program nor the potential liability under Rule
10b-5 impose a substantial risk of forfeiture on the Y shares
acquired by Q, because the provisions of the program and Rule 10b-5
do not condition Q's rights in the shares upon anyone's future
performance (or refraining from performance) of substantial services
or on the occurrence of a condition related to the purpose of the
transfer of shares to Q. Accordingly, none of section 83(c)(3), the
imposition of the trading window by the insider trading compliance
program and the potential liability under Rule 10b-5 preclude
taxation under section 83 when the shares resulting from exercise of
the option are transferred to Q.
* * * * *
(j) * * *
(2) * * *
Example 4. On January 3, 2013, Y corporation grants to Q, an
officer of Y, a nonstatutory option to purchase Y common stock. Y
stock is traded on an established securities market. Although the
option is immediately exercisable, it has no readily ascertainable
fair market value when it is granted. Under the option, Q has the
right to purchase 100 shares of Y common stock for $10 per share,
which is the fair market value of a Y share on the date of grant of
the option. The grant of the option is not a transaction exempt from
section 16(b) of the Securities Exchange Act of 1934. On August 15,
2013, Y stock is trading at more than $10 per share. On that date, Q
fully exercises the option, paying the exercise price in cash, and
receives 100 Y shares. Q's rights in the shares received as a result
of the exercise are not conditioned upon the future performance of
substantial services. Because no exemption from section 16(b) was
available for the January 3, 2013 grant of the option, the section
16(b) liability period expires on July 1, 2013. Accordingly, the
section 16(b) liability period expires before the date that Q
exercises the option and the Y common stock is transferred to Q.
Thus, the shares acquired by Q pursuant to the exercise of the
option are not subject to a substantial risk of forfeiture under
section 83(c)(3) as a result of section 16(b). As a result, section
83(c)(3) does not preclude taxation under section 83 when the shares
acquired pursuant to the August 15, 2013 exercise of the option are
transferred to Q. If, instead, Q exercises the nonstatutory option
on May 30, 2013 when Y stock is trading at more than $10 per share,
the shares acquired are subject to a substantial risk of forfeiture
under section 83(c)(3) as a result of section 16(b) through July 1,
2013.
* * * * *
(l) Effective/applicability date. Paragraphs (j) and (k) of this
section apply to property transferred after December 31, 1981.
Paragraph (c)(1), Example 6 and 7 of paragraph (c)(4), and Example 4 of
paragraph (j)(2) of this section apply to property transferred on or
after January 1, 2013.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-12855 Filed 5-29-12; 8:45 am]
BILLING CODE 4830-01-P
