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Full Text Citation: LTR 9810005; Doc 98-8395 (7 pages)"
Pension & Benefits Update
Vol. 9, No. 7 -- March 30, 1998
The Service has ruled that an exempt organization's adoption of a supplemental
retirement plan will not cause any amount to be included in the gross income
of the participants and beneficiaries.
A taxable corporation Y provides services to a charitable organization
X. Y operates a nonqualified supplemental retirement benefit plan. X and
Y propose that X will provide funds to a trust from which Y can satisfy
claims under the supplemental plan.
Absolute Must Reading to Understand More Completely What All of this
Page 36 / JOURNAL OF DEFERRED COMPENSATION
transfers conditioned on refraining from performance of substantial services are also considered substantial risks of forfeiture.46 Therefore, noncompete clauses that require forfeiture only if the employee accepts a job with a competing firm may, in certain circumstances, be a substantial risk of forfeiture. The regulations state, however, that there is a rebuttable presumption against classifying noncompete clauses as substantial risks of forfeiture. They will ordinarily not be considered substantial risks of
forfeiture unless the facts and circumstances indicate to the contrary,
taking into account such factors as: the age of the employee, the availability of alternative employment, the likelihood of obtaining such employment, the degree of the employee’s skill, the employee’s health, and the practice of the employer in enforcing such covenants.47 The regulations give an example of a 45 year old computer salesman who is granted employer stock in connection with his termination of employment. Retention of the stock is conditioned on his noncompetition with the employer for a five-year period in the three-state area where he had previously sold the employer’s products. Such a restriction is considered substantial.48 If the employee was 65 years old, the result would very likely be different.
The presumption against a noncompete clause as a substantial risk
of forfeiture is based on the fact that such conditions are wholly
the employee’s control and may often be merely a camouflage to delay
income.49 Since the determination of whether a noncompete clause is
COMPENSATORY TRANSFERS OF RESTRICTED STOCK / Page 37
Possibility of Forfeiture Must be Substantial
Even though a condition may appear to be a substantial risk of forfeiture,
it may not be considered so if it is unlikely that the condition will
be enforced. The regulations provide that a substantial risk of forfeiture
exists only when the possibility of forfeiture is substantial should
condition not be satisfied.51 This requirement is particularly relevant
the employee/shareholder situation where it is very possible that even
the condition is not satisfied the property will not actually be forfeited.52
In determining whether a possibility of forfeiture is substantial when the property is transferred to an employee who owns a significant amount of the voting power or value of stock of the employer, the regulations list the following factors that must be taken into account: (1) the employee’s relationship to other stockholders;
(2) the position of the employee in the corporation;
(3) the employee’s relationship to the officers and directors;
(4) the persons who must approve the employee’s discharge; and (5) past actions of the employer in enforcing the restrictions.53 The IRS will not rule on whether a restriction is a substantial risk of forfeiture where the employee is a controlling shareholder.54
Transfers that are conditioned on the occurrence of a “condition
related to a purpose of the transfer,” rather than on the performance
55 The regulations cite as an example a transfer of property subject
the requirement that it be returned if the total earnings of the employer
not increase.56 This relates to the purpose of the transfer, because
property is presumably being transferred to provide an incentive to
53. Treas Reg § 1.83-3(c)(3). The prolongation by
the employer and employee of the period during
which stock is nonvested does not cause any adverse tax
consequences. See PLR 9431021(where the
vesting of restricted stock, which was to vest after
the fifth, sixth, and seventh year of employment,
was postponed the employee was not subject to taxation
presuming future services required were and
continue to be substantial). Other IRS officials have criticized this ruling and are of the opinion that rolling vesting to avoid taxation will not be effective. See, e.g. 79 BNA Daily Tax Rep G-5 (Apr 25, 95) and 22 BNA PenRptr 1319 (June 5, 1995) (comments from Brisendine).
54. Rev Proc 2000-3 § 3.01(3), 2001-1 CB 111.
55. Treas Reg § 1.83-3(c)(1).
56. Treas Reg § 1.83-3(c)(2).]
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employees to increase earnings.57 Such transfers of restricted stock conditioned on the attainment of specific performance goals will become more prevalent than the typical earn-out type of restrictions due to the enactment by the Omnibus Budget Reconciliation Act of 1993 (OBRA) of Code Section 162(m), which provides that the deduction limit on employee remuneration in excess of $1 million will not apply to performance-based compensation.58