Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 71-80

1971-1 C.B. 132

Sec. 83

Sec. 421

IRS Headnote

An employee does not realize compensation upon the exchange, under a section 368(a)(1)(B) reorganization, of stock in the employer corporation's subsidiary acquired under a restricted stock bonus plan prior to July 1, 1969, for the employer's own stock containing identical restrictions.

Full Text

Rev. Rul. 71-80

Advice has been requested whether income was realized in the exchange of stock under the circumstances described below.

The taxpayer was a shareholder in Y corporation, having acquired his stock in that corporation in 1968 pursuant to a restricted stock bonus plan of his employer, corporation X. All of the outstanding stock of corporation Y, with the exception of the shares issued pursuant to the foregoing restricted stock bonus plan, was owned by corporation X. Under the restricted stock bonus plan, the shares of Y stock acquired by the taxpayer had been transferred to him subject to restrictions precluding his sale or other disposition of the stock during his employment with X.

During 1970, in a reorganization within the meaning of section 368(a)(1)(B) of the Internal Revenue Code of 1954, corporation X acquired all of the outstanding shares of Y stock that it did not already own. In this reorganization, each share of Y stock held by the taxpayer was exchanged for a share of X stock. The shares of X stock transferred to the taxpayer in the reorganization contained restrictions identical to the restrictions which had been attached to his Y stock.

Section 83 of the Code governs the treatment of property that is transferred after June 30, 1969, in connection with the performance of services. However, section 83(i)(5) of the Code provides that section 83 of the Code shall not apply to property transferred in exchange for property transferred before July 1, 1969, if the property received in such exchange is subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject.

Since the Y stock exchanged for X stock was transferred before July 1, 1969, and since the X stock is subject to restrictions identical to those to which the Y stock was subject, section 83 of the Code is not applicable to the exchange.

Where section 83 of the Code is not applicable and stock received from an employer as compensation is subject to a restriction having a significant effect on its value, the time and amount of compensation paid the employee are determined by application of the rules prescribed by section 1.421-6(d)(2) of the Income Tax Regulations prior to any amendments thereto resulting from the addition of section 83 of the Internal Revenue Code by the Tax Reform Act of 1969, (83 Stat. 588) Public Law 91-172, C.B. 1969-3, 10.

Under the provisions of section 1.421-6(d)(2) of the regulations, compensation is realized when the restrictions on the stock lapse or when the stock is sold or exchanged in an arm's length transaction, whichever occurs earlier. However, where the stock is exchanged in connection with a corporate reorganization within the meaning of section 368(a)(1)(B) of the Code for stock having identical restrictions, such exchange does not result in the realization of compensation.

Accordingly, in the instant case, the exchange of Y stock for X stock did not result in the taxpayer receiving compensation at the time of the exchange.