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amount that the fair market value of the shares he or she
receives exceeds the exercise price that he or she pays. Sec.
83(a).
For the taxpayer to be taxed at the time he or she exercises
the option and receives the shares, the shares must be
transferred to and substantially vested in the employee. Sec.
1.83-3(a), Income Tax Regs. A transfer to the employee occurs
when the employee acquires a beneficial ownership interest in the
property. Facq v. Commissioner, supra; Miller v. United States,
345 F. Supp. 2d 1046, 1049 (N.D. Cal. 2004); sec. 1.83-3(a),
Income Tax Regs. The shares are substantially vested in the
employee when the shares are either transferable or not subject
to a substantial risk of forfeiture. Facq v. Commissioner,
supra; Miller v. United States, supra; sec. 1.83-3(b), Income Tax
Regs.
The shares are subject to a substantial risk of forfeiture
when the owner’s rights to their full enjoyment are conditioned
upon the future performance of substantial services by any
individual. Sec. 83(c)(1); Facq v. Commissioner, supra; Miller
v. United States, supra; sec. 1.83-3(c)(1), Income Tax Regs.
Whether a risk of forfeiture is substantial depends on the facts
and circumstances. Sec. 1.83-3(c)(1), Income Tax Regs. The
shares are transferable only if a transferee’s rights in the
property are not subject to a substantial risk of forfeiture.
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Last modified: May 25, 2011