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Tax Alert: New Executive Compensation Regulations Clarify Timing of Taxation

April 7, 2014

The Internal Revenue Service recently published final regulations under Section 83 of the tax code.

These regulations deal with the timing for taxation for grants of property (e.g., stock) that are subject to transferability restrictions or a substantial risk of forfeiture. They are effective for property transfers occurring on and after January 1, 2013.

For example, these regulations govern when the value of stock must be treated as taxable compensation if the stock is granted to an executive, subject to the risk that it be forfeited if the company’s performance is not maintained at certain levels for the next few years. They also govern the timing for taxation when stock is granted subject to the transferability restriction that it not be sold until after the insider trading period has expired.

Although the IRS takes the position these regulations “are consistent with the interpretation that the IRS historically has applied” and thus “do not constitute a narrowing of the requirements” to defer taxation, many disagree. The important point here:

If you are ever dealing with a transfer to a service provider of stock or other property that is subject to transferability restrictions or forfeiture requirements, carefully consider Section 83 and the issue of when such property should be subject to taxation.

Section 83 regulations also define substantial risk of forfeiture for other purposes of the tax code, such as:

  • Section 280G golden parachute rules
  • FICA taxation rules for deferred comp

Sue Odom is Member (Partner) of Nexsen Pruet in Columbia. She focuses on matters involving taxation and regularly helps professionals with issues including ERISA, employee benefits and executive compensation.