The Internal Revenue Service (IRS) issued proposed regulations under Internal Revenue Code (IRC) § 83, which governs the timing of income inclusion for property that is subject to a substantial risk of forfeiture. The proposed regulations would make three clarifications:
- A substantial risk of forfeiture arises only through a service condition or a condition related to the purpose of the transfer of property and not as a result of other conditions.
- With respect to transfer restrictions on securities, such as lock-up provisions, buy-back provisions, or restrictions relating to insider trading, there is no substantial risk of forfeiture. Only when a security is subject to the short-swing profit rules under § 16(b) of the Securities Exchange Act of 1934 is there a substantial risk of forfeiture.
- The IRS indicates that in determining whether there is a substantial risk of forfeiture, both the likelihood that the forfeiture will occur and be enforced are relevant to making the determination.
This last clarification is highlighted by an example in the preamble to the proposed regulations, where a risk of forfeiture is not viewed as substantial because the condition causing the forfeiture was so unlikely to occur. This example may indicate a potential change in interpretation by the IRS under IRC § 83.