Regulations Clarify When a Section 83 Substantial Risk of Forfeiture Exists: Only Established Through Service Condition or Performance Condition; Application of Section 16(b) Short-Swing Liability Rule Clarified

Sullivan & Cromwell LLP - February 26, 2014

On February 25, 2014, the Treasury Department and the IRS issued final regulations clarifying circumstances in which a substantial risk of forfeiture exists under Section 83 of the Internal Revenue Code.  Section 83 generally provides that, when property is transferred in connection with the performance of services, the excess of the fair market value of the property over the amount, if any, paid for the property will be included in income upon the earlier of (1) when the property is no longer subject to a substantial risk of forfeiture and (2) when the property becomes transferable.  Whether a substantial risk of forfeiture exists depends on the facts and circumstances.  The regulations clarify that:

  • A substantial risk of forfeiture may only be established through a service or performance condition.
  • Except as specifically provided in the regulations, transfer restrictions do not create a substantial risk of forfeiture.
  • A substantial risk of forfeiture due to Section 16(b) short-swing liability only applies to the initial six-month period after an award is granted.
The final regulations are available at and apply to property transferred on or after January 1, 2013.