Property Transferred in Connection With the Performance of Services Under Section 83, 10663-10665 [2014-03988]
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Federal Register / Vol. 79, No. 38 / Wednesday, February 26, 2014 / Rules and Regulations
Appendix 1 to Subpart P of Part 404—
Listing of Impairments
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1. Growth Impairment (100.00): January 30,
2015.
2. Musculoskeletal System (1.00 and
101.00): July 31, 2015.
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4. Respiratory System (3.00 and 103.00):
January 30, 2015.
5. Cardiovascular System (4.00 and
104.00): July 31, 2015.
6. Digestive System (5.00 and 105.00):
January 30, 2015
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9. Skin Disorders (8.00 and 108.00):
January 30, 2015.
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12. Neurological (11.00 and 111.00): July
31, 2015.
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[FR Doc. 2014–04123 Filed 2–25–14; 8:45 am]
BILLING CODE 4191–02–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9659]
RIN 1545–BJ15
Property Transferred in Connection
With the Performance of Services
Under Section 83
Internal Revenue Service,
Department of the Treasury.
ACTION: Final regulations.
AGENCY:
This document contains final
regulations relating to property
transferred in connection with the
performance of services under section
83 of the Internal Revenue Code (Code).
These final regulations affect certain
taxpayers who receive property
transferred in connection with the
performance of services.
DATES:
Effective Date: These regulations are
effective on February 26, 2014.
Applicability Date: For dates of
applicability, see § 1.83–3(l).
FOR FURTHER INFORMATION CONTACT:
Thomas Scholz or Michael Hughes at
(202) 317–5600 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
mstockstill on DSK4VPTVN1PROD with RULES
SUMMARY:
Background
On May 30, 2012, the Department of
Treasury (Treasury) and the Internal
Revenue Service (IRS) published a
notice of proposed rulemaking (REG–
141075–09) in the Federal Register (77
FR 31783) under section 83 of the Code.
Treasury and the IRS received two
VerDate Mar<15>2010
16:19 Feb 25, 2014
Jkt 232001
comments responding to the notice of
proposed rulemaking. No public hearing
was requested and no public hearing
was held. After consideration of these
comments, Treasury and the IRS adopt
the proposed regulations as final
regulations with the modifications
described in this preamble.
Explanation of Provisions
Section 83 of the Code addresses the
tax consequences of the transfer of
property in connection with the
performance of services. These final
regulations provide several
clarifications regarding whether a
substantial risk of forfeiture exists in
connection with property subject to
section 83. Specifically, the final
regulations clarify that (1) except as
specifically provided in section 83(c)(3)
and §§ 1.83–3(j) and (k), a substantial
risk of forfeiture may be established
only through a service condition or a
condition related to the purpose of the
transfer, (2) in determining whether a
substantial risk of forfeiture exists based
on a condition related to the purpose of
the transfer, both the likelihood that the
forfeiture event will occur and the
likelihood that the forfeiture will be
enforced must be considered, and (3)
except as specifically provided in
section 83(c)(3) and §§ 1.83–3(j) and (k),
transfer restrictions do not create a
substantial risk of forfeiture, including
transfer restrictions that carry the
potential for forfeiture or disgorgement
of some or all of the property, or other
penalties, if the restriction is violated.
Summary of Comments
Treasury and the IRS received two
written comments on the notice of
proposed rulemaking. The first
comment was not responsive to the
notice of proposed rulemaking. The
second comment expressed concern that
the proposed regulations result in a
narrowing of the circumstances that
would establish a substantial risk of
forfeiture and requested clarification
regarding whether an involuntary
separation from service without cause
could establish a substantial risk of
forfeiture. The comment noted that, for
purposes of section 409A, an amount
that is payable only upon a service
provider’s involuntary separation from
service without cause is subject to a
substantial risk of forfeiture if the
possibility of forfeiture is substantial,
and it suggested that these regulations
specifically state that an involuntary
separation without cause may qualify as
a substantial risk of forfeiture under
section 83 in appropriate circumstances.
These regulations are intended to
clarify the definition of a substantial
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10663
risk of forfeiture and are consistent with
the interpretation that the IRS
historically has applied, and therefore
from the perspective of Treasury and the
IRS they do not constitute a narrowing
of the requirements to establish a
substantial risk of forfeiture. See
Robinson v. Commissioner, 805 F.2d 38
(1st Cir. 1986). Further, Treasury and
the IRS believe that these regulations
should not be modified to state that an
involuntary separation from service
without cause may qualify as a
substantial risk of forfeiture under
section 83. While a service provider’s
right to receive property (or an amount
in cash) in the future upon the service
provider’s involuntary separation from
service without cause may be subject to
a substantial risk of forfeiture for
purposes of section 409A if the
possibility of forfeiture is substantial, a
substantial risk of forfeiture under
section 83 can exist only when property
is actually transferred in connection
with the performance of services. A
right to receive property in the future is
generally not property for purposes of
section 83. See § 1.83–3(e). Accordingly,
an involuntary separation from service
without cause cannot qualify as a
substantial risk of forfeiture under
section 83 if property is not transferred
until after the separation from service
occurs.
When a transfer of property does
occur, a substantial risk of forfeiture
may be established through a substantial
services condition or a condition related
to the purpose of the transfer if the
possibility of forfeiture is substantial.
The acceleration of vesting upon an
involuntary separation from service
without cause (or separation from
service as a result of death or disability)
will not cause a requirement of
substantial services that otherwise
would be treated as a substantial risk of
forfeiture to fail to qualify as a
substantial risk of forfeiture, provided
that facts and circumstances do not
demonstrate that the occurrence of an
involuntary separation from service
without cause is likely to occur during
the agreed upon service period.
Certain practitioners informally
requested clarification regarding the
application of section 83(c)(3) to a
variation of the facts set forth in
Example 4 of proposed regulation
§ 1.83–3(j)(2). Specifically, practitioners
asked whether the purchase of shares in
a transaction not exempt from section
16(b) of the Securities Exchange Act of
1934 prior to the exercise of a stock
option that would not otherwise give
rise to section 16(b) liability would
defer taxation of the stock option
exercise. Treasury and the IRS do not
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10664
Federal Register / Vol. 79, No. 38 / Wednesday, February 26, 2014 / Rules and Regulations
believe that such a non-exempt
purchase of shares would defer taxation
of the subsequent stock option exercise.
This result is consistent with Example
3 of § 1.83–3(j)(2). In response to these
requests for clarification, Treasury and
the IRS have revised Example 4 of
proposed regulation § 1.83–3(j)(2) to
address the situation raised.
Applicability Date
These regulations apply to property
transferred on or after January 1, 2013.
Effect on Other Documents
Rev. Rul. 2005–48 (2005–2 CB 259) is
obsolete as of February 26, 2014.
Special Analyses
It has been determined that this final
regulation is not a significant regulatory
action as defined in Executive Order
12866, as supplemented by Executive
Order 13653. 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, the notice
of proposed rule making preceding
these final regulations was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for
comment on their impact on small
business.
Drafting Information
The principal authors of these final
regulations are Thomas Scholz and
Michael Hughes, Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
Other personnel from Treasury and the
IRS also participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is
amended as follows:
mstockstill on DSK4VPTVN1PROD with RULES
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).
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16:19 Feb 25, 2014
Jkt 232001
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. Removing paragraph (k).
■ 6. Redesignating paragraph (k)(1) as
paragraph (k).
■ 7. Adding paragraph (l).
The revisions and additions 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
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.
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*
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(4) * * *
Example 6. On April 3, 2013, Y
corporation grants to Q, an officer of Y, a
nonstatutory option to purchase Y common
stock. Although the option is immediately
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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 August
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 August 1 through
February 1 of 2014 (‘‘the lock-up period’’). Q
exercises the option and Y shares are
transferred to Q on November 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 precludes 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 August 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
during a limited number of days following
each quarterly earnings release (‘‘a trading
window’’). Under the program, if Q trades Y
shares outside a trading window without Y’s
permission, Y has the right to terminate Q’s
employment. However, the exercise of the
nonstatutory options outside a trading
window for Y shares is not prohibited under
the insider trading compliance program. Q
fully exercises the option, and Y shares are
transferred to Q, on November 15, 2013. The
exercise of the option occurs outside a
trading window, and, on the date of exercise,
Q is in possession of material nonpublic
information concerning Y that would subject
him to liability under Rule 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
windows 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. (i) On June 3, 2013, Y
corporation grants to Q, an officer of Y, a
nonstatutory option to purchase Y common
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mstockstill on DSK4VPTVN1PROD with RULES
Federal Register / Vol. 79, No. 38 / Wednesday, February 26, 2014 / Rules and Regulations
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 one that
satisfies the requirements for a transaction
that is exempt from section 16(b) of the
Securities Exchange Act of 1934. On
December 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 June 3, 2013 grant of the
option, the section 16(b) liability period
expires on December 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 December 15, 2013
exercise of the option are transferred to Q.
(ii) Assume the same facts as in paragraph
(i) of this Example 4 except that Q exercises
the nonstatutory option on October 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
December 1, 2013.
(iii) Assume the same facts as in paragraph
(i) of this Example 4 except that on
November 5, 2013, Q also purchases 100
shares of Y common stock on the public
market. The purchase of the shares is not a
transaction exempt from section 16(b) of the
Securities Exchange Act of 1934. Because no
exemption from section 16(b) was available
for the November 5, 2013 purchase of shares,
the section 16(b) liability period with respect
to such shares will last for a period of six
months after the November 5, 2013 purchase
of shares. Notwithstanding the non-exempt
purchase of Y common stock on November
5, 2013, the shares acquired by Q pursuant
to the December 15, 2013 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
December 15, 2013 exercise of the option are
transferred to Q.
*
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*
*
(l) Effective/applicability date. This
section applies to property transferred
on or after January 1, 2013. For rules
relating to property transferred before
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16:19 Feb 25, 2014
Jkt 232001
that date, see § 1.83–3 as contained in
26 CFR part 1 (as of April 1, 2012).
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
Approved: January 31, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2014–03988 Filed 2–25–14; 8:45 am]
BILLING CODE 4830–01–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Parts 141 and 142
[EPA–HQ–OW–2008–0878; FRL–9906–89–
OW]
National Primary Drinking Water
Regulations: Minor Corrections to the
Revisions to the Total Coliform Rule
Environmental Protection
Agency (EPA).
ACTION: Direct final rule.
AGENCY:
In this action, the
Environmental Protection Agency (EPA)
is making minor corrections to the final
Revisions to the Total Coliform Rule
(RTCR), as authorized under the Safe
Drinking Water Act, to correct
typographical errors in sections relating
to recordkeeping and State primacy
requirements, which could affect
implementation and enforcement of the
RTCR if they were left uncorrected. This
action also includes other edits to the
final rule language that are intended to
improve the understanding of the rule
and avoid confusion. This action does
not impose new requirements; rather it
clarifies what must be included in
States’ primacy applications related to
this rule and the specific records water
systems must keep.
DATES: This rule is effective on April 28,
2014 without further notice, unless EPA
receives adverse comment by March 28,
2014. If EPA receives adverse comment,
we will publish a timely withdrawal in
the Federal Register informing the
public that the rule will not take effect.
The incorporation by reference of
certain material listed in the rule was
approved by the Director of the Federal
Register as of April 15, 2013.
ADDRESSES: Submit your comments,
identified by Docket ID No. EPA–HQ–
OW–2008–0878, by one of the following
methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the on-line
instructions for submitting comments.
• Mail: Water Docket, Environmental
Protection Agency, Mailcode: 2822T,
SUMMARY:
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10665
1200 Pennsylvania Ave. NW.,
Washington, DC 20460, Attention
Docket ID No. EPA–HQ–OW–2008–
0878.
• Hand Delivery: EPA Docket Center,
(EPA/DC) EPA West, Room 3334, 1301
Constitution Ave. NW., Washington,
DC. Such deliveries are only accepted
during the Docket’s normal hours of
operation, and special arrangements
should be made for deliveries of boxed
information.
Instructions: Direct your comments to
Docket ID No. EPA–HQ–OW–2008–
0878. EPA’s policy is that all comments
received will be included in the public
docket without change and may be
made available online at
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which means EPA will not know your
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you provide it in the body of your
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and cannot contact you for clarification,
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E:\FR\FM\26FER1.SGM
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]]>Agencies
[Federal Register Volume 79, Number 38 (Wednesday, February 26, 2014)]
[Rules and Regulations]
[Pages 10663-10665]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03988]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9659]
RIN 1545-BJ15
Property Transferred in Connection With the Performance of
Services Under Section 83
AGENCY: Internal Revenue Service, Department of the Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to property
transferred in connection with the performance of services under
section 83 of the Internal Revenue Code (Code). These final regulations
affect certain taxpayers who receive property transferred in connection
with the performance of services.
DATES:
Effective Date: These regulations are effective on February 26,
2014.
Applicability Date: For dates of applicability, see Sec. 1.83-
3(l).
FOR FURTHER INFORMATION CONTACT: Thomas Scholz or Michael Hughes at
(202) 317-5600 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On May 30, 2012, the Department of Treasury (Treasury) and the
Internal Revenue Service (IRS) published a notice of proposed
rulemaking (REG-141075-09) in the Federal Register (77 FR 31783) under
section 83 of the Code. Treasury and the IRS received two comments
responding to the notice of proposed rulemaking. No public hearing was
requested and no public hearing was held. After consideration of these
comments, Treasury and the IRS adopt the proposed regulations as final
regulations with the modifications described in this preamble.
Explanation of Provisions
Section 83 of the Code addresses the tax consequences of the
transfer of property in connection with the performance of services.
These final regulations provide several clarifications regarding
whether a substantial risk of forfeiture exists in connection with
property subject to section 83. Specifically, the final regulations
clarify that (1) except as specifically provided in section 83(c)(3)
and Sec. Sec. 1.83-3(j) and (k), a substantial risk of forfeiture may
be established only through a service condition or a condition related
to the purpose of the transfer, (2) in determining whether a
substantial risk of forfeiture exists based on a condition related to
the purpose of the transfer, both the likelihood that the forfeiture
event will occur and the likelihood that the forfeiture will be
enforced must be considered, and (3) except as specifically provided in
section 83(c)(3) and Sec. Sec. 1.83-3(j) and (k), transfer
restrictions do not create a substantial risk of forfeiture, including
transfer restrictions that carry the potential for forfeiture or
disgorgement of some or all of the property, or other penalties, if the
restriction is violated.
Summary of Comments
Treasury and the IRS received two written comments on the notice of
proposed rulemaking. The first comment was not responsive to the notice
of proposed rulemaking. The second comment expressed concern that the
proposed regulations result in a narrowing of the circumstances that
would establish a substantial risk of forfeiture and requested
clarification regarding whether an involuntary separation from service
without cause could establish a substantial risk of forfeiture. The
comment noted that, for purposes of section 409A, an amount that is
payable only upon a service provider's involuntary separation from
service without cause is subject to a substantial risk of forfeiture if
the possibility of forfeiture is substantial, and it suggested that
these regulations specifically state that an involuntary separation
without cause may qualify as a substantial risk of forfeiture under
section 83 in appropriate circumstances.
These regulations are intended to clarify the definition of a
substantial risk of forfeiture and are consistent with the
interpretation that the IRS historically has applied, and therefore
from the perspective of Treasury and the IRS they do not constitute a
narrowing of the requirements to establish a substantial risk of
forfeiture. See Robinson v. Commissioner, 805 F.2d 38 (1st Cir. 1986).
Further, Treasury and the IRS believe that these regulations should not
be modified to state that an involuntary separation from service
without cause may qualify as a substantial risk of forfeiture under
section 83. While a service provider's right to receive property (or an
amount in cash) in the future upon the service provider's involuntary
separation from service without cause may be subject to a substantial
risk of forfeiture for purposes of section 409A if the possibility of
forfeiture is substantial, a substantial risk of forfeiture under
section 83 can exist only when property is actually transferred in
connection with the performance of services. A right to receive
property in the future is generally not property for purposes of
section 83. See Sec. 1.83-3(e). Accordingly, an involuntary separation
from service without cause cannot qualify as a substantial risk of
forfeiture under section 83 if property is not transferred until after
the separation from service occurs.
When a transfer of property does occur, a substantial risk of
forfeiture may be established through a substantial services condition
or a condition related to the purpose of the transfer if the
possibility of forfeiture is substantial. The acceleration of vesting
upon an involuntary separation from service without cause (or
separation from service as a result of death or disability) will not
cause a requirement of substantial services that otherwise would be
treated as a substantial risk of forfeiture to fail to qualify as a
substantial risk of forfeiture, provided that facts and circumstances
do not demonstrate that the occurrence of an involuntary separation
from service without cause is likely to occur during the agreed upon
service period.
Certain practitioners informally requested clarification regarding
the application of section 83(c)(3) to a variation of the facts set
forth in Example 4 of proposed regulation Sec. 1.83-3(j)(2).
Specifically, practitioners asked whether the purchase of shares in a
transaction not exempt from section 16(b) of the Securities Exchange
Act of 1934 prior to the exercise of a stock option that would not
otherwise give rise to section 16(b) liability would defer taxation of
the stock option exercise. Treasury and the IRS do not
[[Page 10664]]
believe that such a non-exempt purchase of shares would defer taxation
of the subsequent stock option exercise. This result is consistent with
Example 3 of Sec. 1.83-3(j)(2). In response to these requests for
clarification, Treasury and the IRS have revised Example 4 of proposed
regulation Sec. 1.83-3(j)(2) to address the situation raised.
Applicability Date
These regulations apply to property transferred on or after January
1, 2013.
Effect on Other Documents
Rev. Rul. 2005-48 (2005-2 CB 259) is obsolete as of February 26,
2014.
Special Analyses
It has been determined that this final regulation is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13653. 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, the notice of proposed rule making
preceding these final regulations was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal authors of these final regulations are Thomas Scholz
and Michael Hughes, Office of the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). Other personnel from
Treasury and the IRS also participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR Part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for Part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.83-3 is amended by:
0
1. Revising paragraph (c)(1).
0
2. Adding Example 6 and Example 7 to paragraph (c)(4).
0
3. Adding Example 4 to paragraph (j)(2).
0
4. Removing paragraph (j)(3).
0
5. Removing paragraph (k).
0
6. Redesignating paragraph (k)(1) as paragraph (k).
0
7. Adding paragraph (l).
The revisions and additions 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 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.
* * * * *
(4) * * *
Example 6. On April 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 August 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 August 1 through February 1 of 2014 (``the lock-up
period''). Q exercises the option and Y shares are transferred to Q
on November 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
precludes 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
August 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 during a limited number of days following each quarterly
earnings release (``a trading window''). Under the program, if Q
trades Y shares outside a trading window without Y's permission, Y
has the right to terminate Q's employment. However, the exercise of
the nonstatutory options outside a trading window for Y shares is
not prohibited under the insider trading compliance program. Q fully
exercises the option, and Y shares are transferred to Q, on November
15, 2013. The exercise of the option occurs outside a trading
window, and, on the date of exercise, Q is in possession of material
nonpublic information concerning Y that would subject him to
liability under Rule 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 windows 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. (i) On June 3, 2013, Y corporation grants to Q, an
officer of Y, a nonstatutory option to purchase Y common
[[Page 10665]]
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 one that
satisfies the requirements for a transaction that is exempt from
section 16(b) of the Securities Exchange Act of 1934. On December
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 June 3, 2013 grant of the
option, the section 16(b) liability period expires on December 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 December 15, 2013 exercise
of the option are transferred to Q.
(ii) Assume the same facts as in paragraph (i) of this Example 4
except that Q exercises the nonstatutory option on October 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 December 1,
2013.
(iii) Assume the same facts as in paragraph (i) of this Example
4 except that on November 5, 2013, Q also purchases 100 shares of Y
common stock on the public market. The purchase of the shares is not
a transaction exempt from section 16(b) of the Securities Exchange
Act of 1934. Because no exemption from section 16(b) was available
for the November 5, 2013 purchase of shares, the section 16(b)
liability period with respect to such shares will last for a period
of six months after the November 5, 2013 purchase of shares.
Notwithstanding the non-exempt purchase of Y common stock on
November 5, 2013, the shares acquired by Q pursuant to the December
15, 2013 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 December
15, 2013 exercise of the option are transferred to Q.
* * * * *
(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 Sec. 1.83-3 as contained in 26 CFR
part 1 (as of April 1, 2012).
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: January 31, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-03988 Filed 2-25-14; 8:45 am]
BILLING CODE 4830-01-P
