Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 61-48

1961-1 C.B. 516

Caution: Obsoleted by Rev. Rul. 69-227

IRS Headnote

Under certain described circumstances involving the purchase of shares of stock by a group of underwriters, the registration in the name of the `managing underwriter' of certain over-allotted shares constitutes a transfer of the right of the defaulting underwriter to receive the shares, which transfer is not exempt from the documentary stamp tax by the provisions of section 4322(a)(1) of the Internal Revenue Code of 1954.

Full Text

Rev. Rul. 61-48

Advice has been requested whether the transfer of certain shares of stock under the circumstances described below is exempt from the documentary stamp tax by the provisions of section 4322(a)(1) of the Internal Revenue Code of 1954.

Several stockholders of a domestic corporation sold to a group of underwriters a certain number of shares of stock in the corporation. In order to carry out this transaction, the purchasing group entered into an `agreement among underwriters' which designated one member of the group as `managing underwriter.'

The `managing underwriter' was authorized to enter into an `underwriting agreement' with the selling stockholders; to fix the price to be paid to the selling stockholders for the shares of stock; to extend, at the discretion of the `managing underwriter,' the effective date of the registration statement and the closing date; to act as the underwriters' representative in the purchase, sale, and distribution of the stock; to exercise all authority and discretion vested in the underwriters by the `underwriting agreement'; to obtain loans or to advance its own funds for the underwriters' accounts; and to take such action as the `managing underwriter' believed desirable to carry out the provisions of the `underwriting agreement.'

Each underwriter agreed, severally and not jointly, to purchase from the selling stockholders a specified number of shares at the price stated in the `underwriting agreement.' Each underwriter authorized the `managing underwriter' to receive certificates for its share of the stock, to be registered in the name of the underwriter or in any other name, as the `managing underwriter' deemed desirable. The `managing underwriter' received a management fee of a designated amount for every share purchased by the underwriters.

It is recognized by the parties to this transaction that the documentary stamp tax imposed by section 4321 of the Code applies to the sale of the shares of stock by the selling stockholders to the underwriters and to the subsequent sale of the shares by the underwriters. However, under the terms of the `agreement among underwriters,' if it should be determined prior to the closing that any underwriter was unable to dispose of the number of shares which he had agreed to purchase, the `managing underwriter' was authorized for itself or any other member or members of the group to take up and pay for the over-allotted shares which the defaulting underwriter had agreed to purchase. In this case, the over-allotted shares were registered in the name of the `managing underwriter' rather than in the name of the defaulting underwriter. The question is whether the transfer to the `managing underwriter' of the defaulting underwriter's right to receive the shares may be considered as exempt under section 4322(a)(1) of the Code as a transfer to a broker for sale.

Illustratively, one of the underwriters agreed to purchase 10,000 shares but found, immediately before closing, that he was able to dispose of only 8,000 shares. Under the terms of the `agreement among underwriters,' the right to purchase 2,000 shares was transfered to the `managing underwriter.' Consequently, the `managing underwriter' directed the selling stockholders to deliver 8,000 shares registered in the name of the underwriter and 2,000 shares registered in the name of the `managing underwriter.' The `managing underwriter' then sold the 2,000 over-allotted shares and delivered to the purchaser a bill of sale which shows that the `managing underwriter' made the sale `as representative.' The `managing underwriter' received no commission or other compensation for this transaction other than the management fee which was received as representative of the underwriters.

Section 4321 of the Code imposes a tax on each sale or transfer of shares or certificates of stock, or of rights to subscribe for or to receive such shares or certificates, issued by a corporation.

Section 4322(a)(1) of the Code provides that the tax imposed by section 4321 shall not apply to any delivery or transfer of shares, certificates, or rights to a broker or his registered nominee for sale of such shares, certificates, or rights.

Under the circumstances described above, the `managing underwriter' has authority to fix the price for the shares, has discretion in determining when the registration statement will become effective and in determining the closing date, has all authority and discretion which the underwriters might exercise, and receives compensation of a designated amount for every share purchased by the underwriters.

Accordingly, it is held that the `managing underwriter' is not acting in the capacity of a `broker' for the defaulting underwriter with respect to the registration of the over-allotted shares but instead is acting either for itself or for any other member or members of the underwriting group pursuant to authority conferred by the defaulting underwriter under the `agreement among underwriters.' Hence, the transaction involves a transfer of the right of the defaulting underwriter to receive those shares. Accordingly, this constitutes a taxable transfer which does not come within the scope of the exemption provided by section 4322(a)(1) of the Code.