Property transferred in connection with performance of services
General rule
If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—
the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over
the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.
Election to include in gross income in year of transfer
In general
Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—
the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over
the amount (if any) paid for such property.
If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.
Election
Special rules
For purposes of this section—
Substantial risk of forfeiture
Transferability of property
Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934
So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are—
subject to a substantial risk of forfeiture, and
not transferable.
For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.
Certain restrictions which will never lapse
Valuation
Cancellation
If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes—
that such cancellation was not compensatory, and
that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations,
the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of—
the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and
the amount, if any, paid for the cancellation,
shall be treated as compensation for the taxable year in which such cancellation occurs.
Applicability of section
This section shall not apply to—
a transaction to which section 421 applies,
a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),
the transfer of an option without a readily ascertainable fair market value,
the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or
group-term life insurance to which section 79 applies.
Holding period
Certain exchanges
If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege—
such exchange shall be disregarded for purposes of subsection (a), and
the property received shall be treated as property to which subsection (a) applies.
Deduction by employer
Source
(Added Pub. L. 91–172, title III, § 321(a),Notes
References in Text
Amendments
Effective Date of 2004 Amendment
Effective Date of 1986 Amendment
Effective Date of 1984 Amendment
Effective Date of 1983 Amendment
Effective Date of 1981 Amendment
Effective Date of 1976 Amendment
Effective Date
Savings Provision
Plan Amendments Not Required Until January 1, 1989
Application of Amendments Made by Section 252 of Pub. L. 97–34
Notwithstanding subsection (c) of section 252 of the Economic Recovery Tax Act of 1981 [section 252(c) of Pub. L. 97–34, set out above], the amendment made by subsection (a) of such section 252 [amending this section] (and the provisions of subsection (b) of such section 252 [set out below]) shall apply to any transfer of stock to any person if—
such transfer occurred in November or December of 1973 and was pursuant to the exercise of an option granted in November or December of 1971,
in December 1973 the corporation granting the option was acquired by another corporation in a transaction qualifying as a reorganization under section 368 of the Internal Revenue Code of 1954 [now 1986],
the fair market value (as of
in 1975 or 1976 such person sold substantially all of the stock received in such reorganization, and
such person makes an election under this section at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe.
Limitation on amount of benefit.—
Paragraph (1) shall not apply to transfers with respect to any employee to the extent that the application of paragraph (1) with respect to such employee would (but for this paragraph) result in a reduction in liability for income tax with respect to such employee for all taxable years in excess of $100,000 (determined without regard to any interest).
Statute of limitations.—
Overpayments.—
If refund or credit of any overpayment of tax resulting from the application of paragraph (1) is prevented on the date of the enactment of this Act [
Deficiencies.—
If the assessment of any deficiency of tax resulting from the application of paragraph (1) is prevented on the date of the enactment of this Act [
Time for Making Certain Section 83(b) Elections
“In the case of any transfer of property in connection with the performance of services on or before
the amount paid for such property was not less than its fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), and
the election is consented to by the person transferring such property.
The election shall contain that information required by the Secretary of the Treasury or his delegate for elections permitted by such section 83(b). The period for assessing any tax attributable to a transfer of property which is the subject of an election made pursuant to this section shall not expire before the date which is 3 years after the date such election was made.”