Under Section 83, of the Internal Revenue Code (the “Code”) restricted stock and other property that is transferred to a service provider (e.g., an employee or director) for services is taxable when the service provider’s rights in the property are no longer subject to a substantial risk of forfeiture.  The Department of Treasury recently issued final regulations under Section 83 that clarify what events constitute a “substantial risk of forfeiture.” The final regulations provide that a substantial risk of forfeiture may be established only if a service provider’s rights in transferred property are either (i) conditioned on the performance, or refraining from performance (e.g., as a result of a non-competition agreement), of substantial services, or (ii) subject to a condition related to the purpose of the transfer (e.g., performance-based awards). In addition, to determine if a substantial risk of forfeiture exists, both the likelihood that a forfeiture event will occur and the likelihood that it actually will be enforced must be established by the underlying facts and circumstances.
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