Tax Facts

3538 / What is “a substantial risk of forfeiture” under IRC Section 83?

A person’s rights in a Section 83 funded plan, where there has been a “transfer of property,” are subject to a substantial risk of forfeiture1 requirement under the IRC Section 83 definition. Full enjoyment of the property must be conditioned on the future performance (or the refraining from performance) of substantial services by any individual.2

On February 25, 2014, the IRS issued final regulations3 clarifying the Section 83 definition of “substantial risk of forfeiture” as follows:

A risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer.

Both the likelihood of a forfeiture event and the likelihood the forfeiture will be enforced must be considered in evaluating whether a service condition is related to a purpose of the transfer in establishing whether there is a Section 83 substantial risk of forfeiture.

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