Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-13

1965-1 C.B. 87

Sec. 162

IRS Headnote

Expenses incurred in obtaining and filing semi-annual reports required by the Securities and Exchange Commission in connection with an employee stock option offering are deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954.

I.T. 3026, C.B. XV-2, 83 (1936), and I.T. 1836, C.B. II-2, 158 (1923), distinguished.

Full Text

Rev. Rul. 65-13

The Internal Revenue Service has been requested to consider whether expenses incurred in obtaining and filing semi-annual reports required by the Securities and Exchange Commission in connection with an employee stock option offering and deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954.

In 1962, M corporation granted its employees a stock option. As required by law, M filed an offering circular with the Securities and Exchange Commission (S.E.C.), registering the number of shares of stock to be issued pursuant to the option. M was subsequently informed by the S.E.C. that the offering was effective and that certain reports would be required within thirty days after the end of each six months' period following the date of the original offering circular.

In obtaining and filing the necessary information for its semi-annual report during the taxable year 1963, as required by the S.E.C., M incurred expenses in the amount of 50 x dollars.

Section 162 of the Code provides, in part,

(a) IN GENERAL.-There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *

The issue in the instant case is analogous to one of the issues before the Tax Court of the United States in The Chesapeake Corporation of Virginia v. Commissioner , 17 T.C. 668 (1951), acquiescence, C.B. 1952-1, 1. There a corporation was required to pay an annual fee to the New York Stock Exchange to maintain the listing of the corporation's stock. The court, in allowing a deduction for the fee, stated that the fee was an annually recurring cost for the annual maintenance of the listing. The court indicated that it was not concerned with a listing fee which is an item paid only once, and any benefits flowing therefrom presumably lasting over a period of years but, rather, it was concerned with an annually recurring expense the benefits of which do not last more than one year.

When the principles of the Chesapeake case are applied to the facts in the instant case, it is clear that expenses for such reports are semiannually recurring costs, the benefits of which do not last more than one year.

Based on the foregoing, it is held that the expenses of 50 x dollars, incurred by M in obtaining and filing semi-annual reports required by the S.E.C. in connection with an employee stock option offering, are deductible as ordinary and necessary business expenses under section 162 of the Code.

In reaching this conclusion consideration was given to I.T. 3026, C.B. XV-2, 83 (1936), involving a fee paid by a corporation to the S.E.C. for registration of its securities, and I.T. 1836, C.B. II-2, 158 (1923), involving a fee paid by a corporation to a stock exchange for purposes of listing its stock. Those Rulings involve expenses which are paid only once, the benefits of which extend over a period of years and are distinguishable from the expenses in the instant case which are recurring expenses paid semi-annually, the benefits of which do not extend over more than one year.