Code Section 83 generally requires an employee to include in ordinary income the value of property which is transferred in connection with the performance of services when the property is no longer “subject to a substantial risk of forfeiture.” If the transferred property is determined to be subject to a substantial risk of forfeiture, the employee will not be required to take the value of the property into income for income tax purposes until the risk of forfeiture lapses. An employee may, however, elect under Code Section 83(b) to take the value of the property into income at the time of the transfer to avoid tax on a potentially higher value when the restrictions lapse.

The Section 83 Treasury regulations generally provide that whether a risk of forfeiture is “substantial” depends on the particular facts and circumstances. Recently issued final Treasury regulations effective January 1, 2013, clarify that (1) a “substantial risk of forfeiture” may be established only if rights in the property transferred are subject to a “service condition” (i.e., future performance of services or refraining from performance of services) or a “condition related to the purpose of the transfer” (i.e., a performance condition); (2) in determining whether a “substantial risk of forfeiture” exists, both the likelihood that a forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered; and (3) transfer restrictions applicable to stock or securities (such as rights of first refusal, call rights, lock-up provisions, blackout periods and insider trading compliance programs) generally will not create a substantial risk of forfeiture, even if a violation may result in penalties or disgorgement of some or all of the property.

Both the final Treasury regulations and the Austin case (discussed below) indicate that the existence of a “substantial risk of forfeiture” for purposes of delaying the timing of income taxation will turn on the facts and circumstances of each case and whether the likelihood that forfeiture may occur is truly substantial, in some cases without regard to how forfeiture provisions are labeled.