[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: 26CFR1.83-6]

[Page 340-342]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.83-6  Deduction by employer.

    (a) Allowance of deduction--(1) General rule. In the case of a 
transfer of property in connection with the performance of services, or 
a compensatory cancellation of a nonlapse restriction described in 
section 83(d) and Sec. 1.83-5, a deduction is allowable under section 
162 or 212 to the person for whom the services were performed. The 
amount of the deduction is equal to the amount included as compensation 
in the gross income of the service provider under section 83 (a), (b), 
or (d)(2), but only to the extent the amount meets the requirements of 
section 162 or 212 and the regulations thereunder. The deduction is 
allowed only for the taxable year of that person in which or with which 
ends the taxable year of the service provider in which the amount is 
included as compensation. For purposes of this paragraph, any amount 
excluded from gross income under section 79 or section 101(b) or 
subchapter N is considered to have been included in gross income.
    (2) Special Rule. For purposes of paragraph (a)(1) of this section, 
the service provider is deemed to have included the amount as 
compensation in gross income if the person for whom the services were 
performed satisfies in a timely manner all requirements of section 6041 
or section 6041A, and the regulations thereunder, with respect to that 
amount of compensation. For purposes of the preceding sentence, whether 
a person for whom services were performed satisfies all requirements of 
section 6041 or section 6041A, and the regulations thereunder, is 
determined without regard to Sec. 1.6041-3(c) (exception for payments 
to corporations). In the case of a disqualifying disposition of stock 
described in section 421(b), an employer that otherwise satisfies all 
requirements of section 6041 and the regulations thereunder will be 
considered to have done so timely for purposes of this paragraph (a)(2) 
if Form W-2 or Form W-2c, as appropriate, is furnished to the employee 
or former employee, and is filed with the federal government, on or 
before the date on which the employer files the tax return claiming the 
deduction relating to the disqualifying disposition.
    (3) Exceptions. Where property is substantially vested upon 
transfer, the deduction shall be allowed to such person in accordance 
with his method of accounting (in conformity with sections 446 and 461). 
In the case of a transfer to an employee benefit plan described in Sec. 
1.162-10(a) or a transfer to an employees' trust or annuity plan 
described in section 404(a)(5) and the regulations thereunder, section 
83(h) and this section do not apply.
    (4) Capital expenditure, etc. No deduction is allowed under section 
83(h) to the extent that the transfer of property constitutes a capital 
expenditure, an item of deferred expense, or an amount properly 
includible in the value of inventory items. In the case of a capital 
expenditure, for example, the basis of the property to which such 
capital expenditure relates shall be increased at the same time and to 
the same extent as any amount includible in the employee's gross income 
in respect of

[[Page 341]]

such transfer. Thus, for example, no deduction is allowed to a 
corporation in respect of a transfer of its stock to a promoter upon its 
organization, notwithstanding that such promoter must include the value 
of such stock in his gross income in accordance with the rules under 
section 83.
    (5) Transfer of life insurance contract (or an undivided interest 
therein)--(i) General rule. In the case of a transfer of a life 
insurance contract (or an undivided interest therein) described in Sec. 
1.61-22(c)(3) in connection with the performance of services, a 
deduction is allowable under paragraph (a)(1) of this section to the 
person for whom the services were performed. The amount of the 
deduction, if allowable, is equal to the sum of the amount included as 
compensation in the gross income of the service provider under Sec. 
1.61-22(g)(1) and the amount determined under Sec. 1.61-22(g)(1)(ii).
    (ii) Effective date--(A) General rule--Paragraph (a)(5)(i) of this 
section applies to any split-dollar life insurance arrangement (as 
defined in Sec. 1.61-22(b)(1) or (2)) entered into after September 17, 
2003. For purposes of this paragraph (a)(5), an arrangement is entered 
into as determined under Sec. 1.61-22(j)(1)(ii).
    (B) Modified arrangements treated as new arrangements. If an 
arrangement entered into on or before September 17, 2003 is materially 
modified (within the meaning of Sec. 1.61-22(j)(2)) after September 17, 
2003, the arrangement is treated as a new arrangement entered into on 
the date of the modification.
    (6) Effective date. Paragraphs (a)(1) and (2) of this section apply 
to deductions for taxable years beginning on or after January 1, 1995. 
However, taxpayers may also apply paragraphs (a)(1) and (2) of this 
section when claiming deductions for taxable years beginning before that 
date if the claims are not barred by the statute of limitations. 
Paragraphs (a) (3) and (4) of this section are effective as set forth in 
Sec. 1.83-8(b).
    (b) Recognition of gain or loss. Except as provided in section 1032, 
at the time of a transfer of property in connection with the performance 
of services the transferor recognizes gain to the extent that the 
transferor receives an amount that exceeds the transferor's basis in the 
property. In addition, at the time a deduction is allowed under section 
83(h) and paragraph (a) of this section, gain or loss is recognized to 
the extent of the difference between (1) the sum of the amount paid plus 
the amount allowed as a deduction under section 83(h), and (2) the sum 
of the taxpayer's basis in the property plus any amount recognized 
pursuant to the previous sentence.
    (c) Forfeitures. If, under section 83(h) and paragraph (a) of this 
section, a deduction, an increase in basis, or a reduction of gross 
income was allowable (disregarding the reasonableness of the amount of 
compensation) in respect of a transfer of property and such property is 
subsequently forfeited, the amount of such deduction, increase in basis 
or reduction of gross income shall be includible in the gross income of 
the person to whom it was allowable for the taxable year of forfeiture. 
The basis of such property in the hands of the person to whom it is 
forfeited shall include any such amount includible in the gross income 
of such person, as well as any amount such person pays upon forfeiture.
    (d) Special rules for transfers by shareholders--(1) Transfers. If a 
shareholder of a corporation transfers property to an employee of such 
corporation or to an independent contractor (or to a beneficiary 
thereof), in consideration of services performed for the corporation, 
the transaction shall be considered to be a contribution of such 
property to the capital of such corporation by the shareholder, and 
immediately thereafter a transfer of such property by the corporation to 
the employee or independent contractor under paragraphs (a) and (b) of 
this section. For purposes of this (1), such a transfer will be 
considered to be in consideration for services performed for the 
corporation if either the property transferred is substantially 
nonvested at the time of transfer or an amount is includible in the 
gross income of the employee or independent contractor at the time of 
transfer under Sec. 1.83-1(a)(1) or Sec. 1.83-2(a). In the case of 
such a transfer, any money or other property paid to the shareholder for 
such stock shall be considered to be paid to the corporation

[[Page 342]]

and transferred immediately thereafter by the corporation to the 
shareholder as a distribution to which section 302 applies. For special 
rules that may applyto a corporation's transfer of its own stock to any 
person in consideration of services performed for another corporation or 
partnership, see Sec. 1.1032-3. The preceding sentence applies to 
transfers of stock and amounts paid for such stock occurring on or after 
May 16, 2000.
    (2) Forfeiture. If, following a transaction described in paragraph 
(d)(1) of this section, the transferred property is forfeited to the 
shareholder, paragraph (c) of this section shall apply both with respect 
to the shareholder and with respect to the corporation. In addition, the 
corporation shall in the taxable year of forfeiture be allowed a loss 
(or realize a gain) to offset any gain (or loss) realized under 
paragraph (b) of this section. For example, if a shareholder transfers 
property to an employee of the corporation as compensation, and as a 
result the shareholder's basis of $200x in such property is allocated to 
his stock in such corporation and such corporation recognizes a short-
term capital gain of $800x, and is allowed a deduction of $1,000x on 
such transfer, upon a subsequent forfeiture of the property to the 
shareholder, the shareholder shall take $200x into gross income, and the 
corporation shall take $1,000x into gross income and be allowed a short-
term capital loss of $800x.
    (e) Options. [Reserved]
    (f) Reporting requirements. [Reserved]

[T.D. 7554, 43 FR 31919, July 24, 1978, as amended by T.D. 8599, July 
19, 1995; T.D. 8883, 65 FR 31076, May 16, 2000; T.D. 9092, 68 FR 54352, 
Sept. 17, 2003]