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An Overview of the New Section 457(f) Regulations

On June 22, 2016, the Internal Revenue Service (IRS) issued proposed regulations under Section 457(f) of the Internal Revenue Code of 1986, as amended (Code). These long-awaited regulations were first previewed in IRS Notice 2007-62. In that Notice, the IRS announced its intention to issue proposed regulations that would harmonize the rules for deferred compensation plans of tax-exempt organizations (and state and local governments) under Section 457(f) with the then-new special rules for all deferred compensation arrangements under Section 409A. After nine years, the proposed regulations now issued address three principal issues, although with some unexpected changes and opportunities.

Read the full article here.




Section 457(f) Proposed Regulations – Not What We Expected (In a Good Way)

The very long awaited release of the new proposed regulations for Internal Revenue Code (the ‘‘Code’’) Section 457(f) plans arrived at the end of June and presents welcome and surprising new opportunities with respect to tax-exempt and governmental entities’ ‘‘ineligible nonqualified deferred compensation’’ arrangements.

The Proposed Regulations present some unexpected and surprising opportunities with respect to the ability to electively defer compensation and to have deferred compensation paid out, contingent on a valid covenant not to compete and upon a rolling risk of forfeiture.

Read the full article here to learn more.




IRS Issues Final Regulations Clarifying Substantial Risk of Forfeiture Under Section 83 of the Internal Revenue Code

The Internal Revenue Service (IRS) recently released new final regulations under Section 83 of the Internal Revenue Code (the Code) that confirm  several positions  that it has successfully taken in litigation about what is  a substantial risk of forfeiture (SRF) under Section 83 of the Code.    The new regulations are substantially the same as proposed regulations issued in May 2012.  While these regulations became effective as of January 1, 2013, it is reasonable to expect that the IRS will enforce Section 83 in audits for prior periods consistent with these regulations.

The final regulations clarify the following:

  1. A SRF may be established only through a service condition, a condition related to the purpose of the transfer or potential Section 16(b) “short swing” profit liability.
  2. A risk of forfeiture will be an SRF only if both (a) the likelihood that the forfeiture event will occur is substantial and (b) enforcement of  the forfeiture condition is likely.  Whether these requirements are met depends on the facts and circumstances – drafting of the equity award, by itself, does not ensure an SRF.  A typical situation that requires a facts and circumstances analysis is when restricted stock is granted subject to employer-related performance conditions, such as sale of a company or meeting an operational or financial objective.
  3. Transfer restrictions such as lock-up agreements, insider trading policies and potential liability under Rule 10b-5 do not create a SRF – in other words, they do not defer the taxable event – even if there is a potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated.  Transfer restrictions under Section 16(b) that avoid short swing profit liability are only an SRF due to an amendment to Section 83 specifically providing for that treatment.

The regulations provide new examples illustrating when transfer restrictions will – and will not – constitute a SRF.  These regulations under section 83 apply to transfers of property on or after January 1, 2013.




New Proposed Section 83 Regulations Clarify What Constitutes a Substantial Risk of Forfeiture

by Joseph S. Adams and Andrew C. Liazos

Earlier today, the Internal Revenue Service (IRS) released new proposed Section 83 regulations, which clarify several points including:

  1. A substantial risk of forfeiture (SRF) may be established only through a service condition or a condition related to the purpose of the transfer.  Citing the U.S. Court of Appeals for the First Circuit’s opinion in Robinson, the preamble noted that “[s]ome confusion has arisen as to whether other conditions may also give rise to a substantial risk of forfeiture.”  The proposed regulations retain the language from Section 83 final regulations that refraining from service may be a service condition.
  2. In determining whether a SRF exists, it is necessary to consider both (a) the likelihood that the forfeiture event will occur, and (b) the likelihood that the forfeiture will be enforced.  All of the facts and circumstances must be evaluated to determine whether a performance-based vesting condition for a restricted stock award will be treated as a substantial risk of forfeiture for purposes of Section 83.
  3. Transfer restrictions such as lock-up agreements, Rule 10b-5 insider trading restrictions) do not create a SRF – in other words, they do not defer the taxable event – even if there is a potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated.  The only exception to this rule is with respect to Section 16(b) “short swing” profit liabilities.  The proposed regulations provide three new examples illustrating when transfer restrictions will – and will not – constitute a SRF.  The proposed regulations incorporate the IRS’ position in Revenue Ruling 2005-48.

These regulations under section 83 are proposed to apply to transfers of property on or after January 1, 2013. Taxpayers may rely on the proposed regulations for property transfers occurring after the publication of the proposed regulations until further notice.  Comments are due by August 28, 2012.

Further details on the newly proposed regulations will be provided in subsequent McDermott publications.




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