This year, Sam’s employer, a privately held company, gave Sam ten shares of stock as a way of saying thank you for all his hard work. The fair market value for the ten shares totals $10,000. Sam paid nothing for the stock. The only requirement of the company is that Sam may not be convicted of a crime. If he is convicted, ownership of the stock reverts back to the company. Sam wants to know if he has to recognize the $10,000 in income this year. In researching in the IRC, you discover that Section 83(a) is the critical Code section. The following excerpts from this Code section appear relevant: Section 83 – Property Transferred in Connection with the Performance of Services (a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of – (1) The fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) The amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture. (b) Election to include in gross income in year of transfer (1) In general Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of – (A) The fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over (B) The amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture. (2) Election An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary. (c) Special rules For purposes of this section – (1) Substantial risk of forfeiture The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual. (2) Transferability of property The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture. (3) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934 So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are (A) Subject to a substantial risk of forfeiture, and (B) Not transferable. What language in IRC §83(a) is critical to your understanding of the tax impact to your taxpayer? Is there a definition of these terms anywhere in the Code section? Is the definition sufficient to enable you to answer your client’s question, or will you need to further pursue the meaning of the terms?