The IRS recently released final regulations (“Final Regulations”) clarifying the conditions that constitute a substantial risk of forfeiture for purposes of Section 83 of the Internal Revenue Code.  As some of you know, Section 83 generally provides that property transferred in connection with the performance of services will be not be taxed until the date on which the property is no longer subject to a “substantial risk of forfeiture.”  Common “substantial risks of forfeiture” for purposes of Section 83 are continued employment (i.e., time-based vesting conditions) and performance (i.e., performance-based vesting conditions).

The Final Regulations clarify that (i) except as expressly provided in the regulations, a substantial risk of forfeiture may be established only though service conditions related to the purpose of the property transfer, (ii) in determining whether a substantial risk of forfeiture exists, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture event will be enforced must be considered, (iii) except as expressly provided in the regulations, transfer restrictions (including restrictions that carry the potential for disgorgement of the transferred property) do not constitute a substantial risk of forfeiture, and (iv) a substantial risk of forfeiture due to liability under the SEC short-swing profit rules do not extend beyond the six month period described in the SEC rules.

Although requested by many practitioners, the Final Regulations do not expressly provide that an employee’s involuntary separation from service without cause constitutes a substantial risk of forfeiture for purposes of Section 83 (even though the condition constitutes a substantial risk of forfeiture under Section 409A of the Code).

More information about the Final Regulations can be found here.