[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.83-1]

[Page 328-330]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.83-1  Property transferred in connection with the performance of 
services.

    (a) Inclusion in gross income--(1) General rule. Section 83 provides 
rules for the taxation of property transferred to an employee or 
independent contractor (or beneficiary thereof) in connection with the 
performance of services by such employee or independent contractor. In 
general, such property is not taxable under section 83(a) until it has 
been transferred (as defined in Sec. 1.83-3(a)) to such person and 
become substantially vested (as defined in Sec. 1.83-3(b)) in such 
person. In that case, the excess of--
    (i) The fair market value of such property (determined without 
regard to any lapse restriction, as defined in Sec. 1.83-3(i)) at the 
time that the property becomes substantially vested, over
    (ii) The amount (if any) paid for such property,

shall be included as compensation in the gross income of such employee 
or independent contractor for the taxable year in which the property 
becomes substantially vested. Until such property becomes substantially 
vested, the transferor shall be regarded as the owner of such property, 
and any income from such property received by the employee or 
independent contractor (or beneficiary thereof) or the right to the use 
of such property by the employee or independent contractor constitutes 
additional compensation and shall be included in the gross income of 
such employee or independent contractor for the taxable year in which 
such income is received or such use is made available. This paragraph 
applies to a transfer of property in connection with the performance of 
services even though the transferor is not the person for whom such 
services are performed.
    (2) Life insurance. The cost of life insurance protection under a 
life insurance contract, retirement income contract, endowment contract, 
or other contract providing life insurance protection is taxable 
generally under section 61 and the regulations thereunder during the 
period such contract remains substantially nonvested (as defined in 
Sec. 1.83-3(b)).For the taxation of life insurance protection under a 
split-

[[Page 329]]

dollar life insurance arrangement (as defined in Sec. 1.61-22(b)(1) or 
(2)), see Sec. 1.61-22.
    (3) Cross references. For rules concerning the treatment of 
employers and other transferors of property in connection with the 
performance of services, see section 83(h) and Sec. 1.83-6. For rules 
concerning the taxation of beneficiaries of an employees' trust that is 
not exempt under section 501(a), see section 402(b) and the regulations 
thereunder.
    (b) Subsequent sale, forfeiture, or other disposition of nonvested 
property. (1) If substantially nonvested property (that has been 
transferred in connection with the performance of services) is 
subsequently sold or otherwise disposed of to a third party in an arm's 
length transaction while still substantially nonvested, the person who 
performed such services shall realize compensation in an amount equal to 
the excess of--
    (i) The amount realized on such sale or other disposition, over
    (ii) The amount (if any) paid for such property.

Such amount of compensation is includible in his gross income in 
accordance with his method of accounting. Two preceding sentences also 
apply when the person disposing of the property has received it in a 
non-arm's length transaction described in paragraph (c) of this section. 
In addition, section 83(a) and paragraph (a) of this section shall 
thereafter cease to apply with respect to such property.
    (2) If substantially nonvested property that has been transferred in 
connection with the performance of services to the person performing 
such services is forfeited while still substantially nonvested and held 
by such person, the difference between the amount paid (if any) and the 
amount received upon forfeiture (if any) shall be treated as an ordinary 
gain or loss. This paragraph (b)(2) does not apply to property to which 
Sec. 1.83-2(a) applies.
    (3) This paragraph (b) shall not apply to, and no gain shall be 
recognized on, any sale, forfeiture, or other disposition described in 
this paragraph to the extent that any property received in exchange 
therefor is substantially nonvested. Instead, section 83 and this 
section shall apply with respect to such property received (as if it 
were substituted for the property disposed of).
    (c) Dispositions of nonvested property not at arm's length. If 
substantially nonvested property (that has been transferred in 
connection with the performance of services) is disposed of in a 
transaction which is not at arm's length and the property remains 
substantially nonvested, the person who performed such services realizes 
compensation equal in amount to the sum of any money and the fair market 
value of any substantially vested property received in such disposition. 
Such amount of compensation is includible in his gross income in 
accordance with his method of accounting. However, such amount of 
compensation shall not exceed the fair market value of the property 
disposed of at the time of disposition (determined without regard to any 
lapse restriction), reduced by the amount paid for such property. In 
addition, section 83 and these regulations shall continue to apply with 
respect to such property, except that any amount previously includible 
in gross income under this paragraph (c) shall thereafter be treated as 
an amount paid for such property. For example, if in 1971 an employee 
pays $50 for a share of stock which has a fair market value of $100 and 
is substantially monvested at that time and later in 1971 (at a time 
when the property still has a fair market value of $100 and is still 
substantially nonvested) the employee disposes of, in a transaction not 
at arm's length, the share of stock to his wife for $10, the employee 
realizes compensation of $10 in 1971. If in 1972, when the share of 
stock has a fair market value of $120, it becomes substantially vested, 
the employee realizes additional compensation in 1972 in the amount of 
$60 (the $120 fair market value of the stock less both the $50 price 
paid for the stock and the $10 taxed as compensation in 1971). For 
purposes of this paragraph, if substantially nonvested property has been 
transferred to a person other than the person who performed the 
services, and the transferee dies holding the property while the 
property is still substantially nonvested and while the person who 
performed the services is alive, the

[[Page 330]]

transfer which results by reason of the death of such transferee is a 
transfer not at arm's length.
    (d) Certain transfers upon death. If substantially nonvested 
property has been transferred in connection with the performance of 
services and the person who performed such services dies while the 
property is still substantially nonvested, any income realized on or 
after such death with respect to such property under this section is 
income in respect of a decedent to which the rules of section 691 apply. 
In such a case the income in respect of such property shall be taxable 
under section 691 (except to the extent not includible under section 
101(b)) to the estate or beneficiary of the person who performed the 
services, in accordance with section 83 and the regulations thereunder. 
However, if an item of income is realized upon such death before July 
21, 1978, because the property became substantially vested upon death, 
the person responsible for filing decedent's income tax return for 
decedent's last taxable year may elect to treat such item as includible 
in gross income for decedent's last taxable year by including such item 
in gross income on the return or amended return filed for decedent's 
last taxable year.
    (e) Forfeiture after substantial vesting. If a person is taxable 
under section 83(a) when the property transferred becomes substantially 
vested and thereafter the person's beneficial interest in such property 
is nevertheless forfeited pursuant to a lapse restriction, any loss 
incurred by such person (but not by a beneficiary of such person) upon 
such forfeiture shall be an ordinary loss to the extent the basis in 
such property has been increased as a result of the recognition of 
income by such person under section 83(a) with respect to such property.
    (f) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). On November 1, 1978, X corporation sells to E, an 
employee, 100 shares of X corporation stock at $10 per share. At the 
time of such sale the fair market value of the X corporation stock is 
$100 per share. Under the terms of the sale each share of stock is 
subject to a substantial risk of forfeiture which will not lapse until 
November 1, 1988. Evidence of this restriction is stamped on the face of 
E's stock certificates, which are therefore nontransferable (within the 
meaning of Sec. 1.83-3(d)). Since in 1978 E's stock is substantially 
nonvested, E does not include any of such amount in his gross income as 
compensation in 1978. On November 1, 1988, the fair market value of the 
X corporation stock is $250 per share. Since the X corporation stock 
becomes substantially vested in 1988, E must include $24,000 (100 shares 
of X corporation stock x $250 fair market value per share less $10 price 
paid by E for each share) as compensation for 1988. Dividends paid by X 
to E on E's stock after it was transferred to E on November 1, 1973, are 
taxable to E as additional compensation during the period E's stock is 
substantially nonvested and are deductible as such by X.
    Example (2). Assume the facts are the same as in example (1), except 
that on November 1, 1985, each share of stock of X corporation in E's 
hands could as a matter of law be transferred to a bona fide purchaser 
who would not be required to forfeit the stock if the risk of forfeiture 
materialized. In the event, however, that the risk materializes, E would 
be liable in damages to X. On November 1, 1985, the fair market value of 
the X corporation stock is $230 per share. Since E's stock is 
transferable within the meaning of Sec. 1.83-3(d) in 1985, the stock is 
substantially vested and E must include $22,000 (100 shares of X 
corporation stock x $230 fair market value per share less $10 price paid 
by E for each share) as compensation for 1985.
    Example (3). Assume the facts are the same as in example (1) except 
that, in 1984 E sells his 100 shares of X corporation stock in an arm's 
length sale to I, an investment company, for $120 per share. At the time 
of this sale each share of X corporation's stock has a fair market value 
of $200. Under paragraph (b) of this section, E must include $11,000 
(100 shares of X corporation stock x $120 amount realized per share less 
$10 price paid by E per share) as compensation for 1984 notwithstanding 
that the stock remains nontransferable and is still subject to a 
substantial risk of forfeiture at the time of such sale. Under Sec. 
1.83-4(b)(2), I's basis in the X corporation stock is $120 per share.

[T.D. 7554, 43 FR 31913, July 24, 1978, as amended by T.D. 9092, 68 FR 
54351, Sept. 17, 2003]