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Section 1.83-6(a)(2), Income Tax Regs., provides a "Special
rule" for compensatory transfers of property by "employers" to
"employees". It allows a deduction in the employer's taxable
year that coincides with the year in which the compensation is
"includible" in the employee's income, but "only if the employer
deducts and withholds upon such amount in accordance with section
3402." Id. This regulatory requirement that there be
withholding has no basis in the statutory language or the
legislative history of section 83(h). The majority nevertheless
upholds the validity of this withholding requirement by treating
it as a relaxation of what it believes to be the more explicit
and onerous requirements in the Code. The only basis for this is
the majority's restrictive and erroneous interpretation of the
word "included".9
9The withholding requirement in sec. 1.83-6(a)(2), Income
Tax Regs., is fatally flawed even if one were to accept
respondent's definition of "included". Under this regulation,
deductibility is totally dependent on whether the employer
withheld tax upon the compensatory transfer of property. An
obvious example in which the withholding requirement is
unworkable involves its application to situations where there are
significant restrictions on the employee's rights to the property
at the time of transfer such as a substantial risk of forfeiture.
In that case, the employee generally receives no includible gross
income under sec. 83(a) until those restrictions are lifted.
Therefore, there would be no withholding requirement at the time
of the initial transfer. Indeed, the amount of any reportable
compensation would not be known at the time of transfer. But any
withholding that might be required when the restrictions are
lifted, possibly years later, may be physically or legally
impossible if the employee earned no other compensation in the
later year or was no longer an employee. Withholding would also
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