Restricted Property — Section 83 examines the operation of Internal Revenue Code §83 in taxing various types of transfers of property in connection with the performance of services by employees. Section 83 is most often associated with transfers of “restricted property” (i.e., property which is transferred to an individual subject to forfeiture and other types of restrictions). Its scope, however, is far broader. The regulations under §83 make it clear that the term “property”  applies to transfers of all types of property in respect of services other than cash, whether or not subject to restrictions. Section 83 applies to all service-related transfers of property and is not limited to the traditional, common law employer-employee relationship.  

This Portfolio, written by John L. Utz, Esq., member of Utz, Miller & Kuhn, LLC, focuses on the application of  §83 and upon the typical transactions to which §83 applies. It also examines the federal income tax consequences of such arrangements to both employers and employees. 

The Worksheets in the Portfolio include relevant practitioner aids, including sample plans and a sample form that may be used in making the election permitted by §83(b). 

A sampling of specific topics covered include the interrelationship between §83 and  §409A,  substantial risk of forfeiture, basis of restricted property, partial vesting, non-arm's-length dispositions, and more. 

Restricted Property — Section 83 allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. Introduction

Introductory Material

A. Functions of § 83

B. Other Features of § 83

II. Definition of Key Statutory Terms

Introductory Material

A. In Connection with Performance of Services

B. Property

C. Transfer

1. Tax Stakes Behind “Transfer” Concept

2. Limitations upon Scope of “Transfer”

a. Options to Purchase Property

b. Acquisition of Property with Nonrecourse Debt

c. Property Which Must Be Returned

D. Substantial Risk of Forfeiture

1. Future Performance of Substantial Services

a. Discharge for Crime or Misconduct

b. Noncompetition, Consulting Clauses

c. Enforcement of Forfeiture Restrictions in Case of Shareholder-Employees

2. Other Types of Substantial Risks of Forfeiture

3. Forfeiture at Fair Market Value

E. Transferability

III. Operation of § 83

Introductory Material

A. Rule of § 83(a)

1. Tax Treatment of Employee

2. Basis of Restricted Property

3. Holding Period in Restricted Property

4. Treatment of Income Generated by Restricted Property During Period Restrictions Are in Place

B. Tax Consequences to Employer

1. Employer's Deduction - General Rule

2. Limitations upon Employer's Deduction

a. Withholding

b. Capitalization Requirement

3. Employer's Recognized Gain or Loss

a. Sale Portion

b. Compensation Portion

C. Dispositions of Restricted Property Before Restrictions Lapse

1. Arm's-Length Dispositions

a. Consequences to Employee

b. Consequences to Employer

c. Consequences to Transferee

d. Income Generated by Restricted Property After Arm's-Length Disposition

2. Non-Arm's-Length Dispositions

a. Consequences to Employee

b. Consequences to Employer

c. Consequences to Transferee

d. Income Generated by Restricted Property After Non-Arm's-Length Disposition

3. Forfeiture of Restricted Property

a. Consequences to Employee

b. Consequences to Employer

c. Forfeiture of Restricted Property by Transferees of Employee

d. Forfeiture of Property After Compensation Element Closes

4. Transfers upon Death of Employee

5. Exchanges of Restricted Property

D. Section 83(b) Election

1. Tax Stakes and Consequences of Election

a. To Employee

b. To Employer

2. Time and Manner of Election

3. Revocability of Election

4. Effect of Decline in Value or Forfeiture of Property

E. Restrictions Which Will Never Lapse

1. Definition of Nonlapse Restriction

2. Effect of Nonlapse Restriction

3. Cancellation of Nonlapse Restriction

F. Transfers of Property to Employees by Shareholders

1. The Regulations' Approach

a. Shareholder Transfer of Employer Stock to Employee

(1) Consequences to Shareholder

(2) Consequences to Employer and Employee

b. Shareholder Transfer of Property Other Than Employer Stock to Employee

(1) Consequences to Shareholder

(2) Consequences to Employer and Employee

c. Transfer of Parent Corporation Stock to Employee of Subsidiary

d. Bargain Sales by Shareholders to Employees

(1) In General

(2) Effect of Regulation upon Buy-Sell Agreements

e. Employee Forfeiture of Property Received from Shareholder

2. Case Law Approach

3. Evaluation of Tilford and Downer

4. Suggested Resolution

a. Shareholder Transfer Without Consideration

b. Bargain Sales by Shareholders

IV. Exceptions to Applicability of § 83

Introductory Material

A. Qualified Employee Benefit Programs

B. Options to Purchase or to Sell Property

1. Tax Stakes in Option to Purchase Transactions

2. Readily Ascertainable Fair Market Value

a. Actively Traded Options

b. Options Not Actively Traded

c. Option Privilege

3. Disposition of Option Before Exercise

V. Interrelationship of § 83 with Other Provisions

Introductory Material

A. Employees' Trusts and § 402(b)

1. Taxation of Employee

a. Employer Contributions and Trust Earnings Before Substantial Vesting

b. Taxation of Employee's Account upon Substantial Vesting

c. Employer Contributions and Trust Earnings After Substantial Vesting

d. Distribution of Employee's Trust Interest

2. Taxation of Employer

a. Employer's Deduction

b. Property Contributed to Trust by Employer

3. Taxation of Trust

4. Special Problems of Employees' Trusts

a. Transitional Rules

b. Treatment of Qualified Plans upon Disqualification

c. Partial Vesting

d. Educational Benefit Trusts

B. Employment Taxes

C. Section 83 and Transfers of Partnership Interests for Services

1. Interest in Partnership Capital

2. Interest in Partnership Profits

D. Nonqualified Deferred Compensation Plans Under § 409A

Working Papers

Table of Worksheets

Worksheet 1 Election to Include in Gross Income in Year of Transfer of Property Pursuant to § 83(b) of the Internal Revenue Code

Worksheet 2 Sample Restricted Management Stock Bonus Plan

Worksheet 3 Sample Executive Stock Purchase Plan

Worksheet 4 Transfer of Restricted Stock at Fair Market Value: Alves v. Commissioner

Worksheet 5 Legislative History of Section 83 as Added by P.L. 91–172 (Tax Reform Act of 1969) (Includes House Report, Supplemental House Report, Senate Report Conference Report and Joint Committee “Bluebook”)

Worksheet 6 IRS Allows Rescission of Section 83(b) Elections: A Ruling of Limited Utility

Bibliography

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Other Statutes:

Regulations:

Legislative History:

Treasury Rulings:

Cases:

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