On May 29, 2012, the IRS issued proposed regulations clarifying the meaning of substantial risk of forfeiture under Section 83 of the Internal Revenue Code (IRC). The regulations are proposed to apply to property transferred on or after January 1, 2013 and can be relied on for property transferred after May 30, 2012.

IRC Section 83 governs the taxation of property transferred to an employee or service provider in connection with the performance of services. For more information on IRC Section 83, see Practice Note, Overview of the Taxation of Equity Compensation Awards: Section 83 and the Transfer of Property.

The proposed regulations clarify that for purposes of IRC Section 83:

The proposed regulations also incorporate the holdings of IRS Revenue Ruling 2005-48, which provides that Section 16(b) of the Securities Exchange Act of 1934, as amended (Exchange Act) is the only provision of the securities law that would delay taxation under IRC Section 83. The proposed regulations clarify that except as specifically provided in Treasury Regulation Sections 1.83-3(j) and (k), transfer restrictions do not create a substantial risk of forfeiture, even if violation of transfer restrictions would result in the forfeiture of some or all of the property or the employee's liability for damages, penalties or fees. Under the proposed clarification, restrictions imposed by lock-up agreements or restrictions related to insider trading under Rule 10b-5 of the Exchange Act do not create a substantial risk of forfeiture.

Comments to the regulations must be received within 90 days of publication in the Federal Register.