Rev. Rul. 81-45

1981-1 C.B. 483, 1981-6 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

       WITHHOLDING; STOCK TRANSFERRED TO CORPORATE EMPLOYEES BY PARENT'S
                              MAJORITY SHAREHOLDER

                          Published: February 9, 1981

26 CFR 31.3401(d)-1: Employer

  Withholding; stock transferred to corporate employees by parent's majority shareholder.  When a corporation's majority shareholder transfers stock of the corporation to an employee of its subsidiary, the shareholder is the employer for purposes of withholding income tax on the fair market value of the stock. However, the subsidiary, which withholds taxes on the employee's regular wages, may withhold the additional tax due.  Rev. Rul. 80-76 amplified.

ISSUE

  When a corporation's majority shareholder transfers stock of the corporation to an employee of the corporation's subsidiary, who is the employer under section 3401(d) of the Internal Revenue Code for the purpose of income tax withholding?

FACTS

  Rev. Rul. 80-76, 1980-1 C.B. 15, holds that when a corporation's majority shareholder transfers stock in the corporation to an employee of the corporation's subsidiary, and the total compensation received by the employee during the year, including the fair market value of the stock, is compensation for the services performed for the subsidiary, the fair market value of the stock at the time of transfer is includible in the employee's gross income and is subject to income tax withholding.

LAW AND ANALYSIS

  Section 3401(d)(1) of the Code provides that if the person for whom the individual performs or performed services does not have control of the payment of the wages for such services, the term 'employer' (except for purposes of the definition of 'wages') means the person having control of the payment of such wages.

HOLDING

  Since the shareholder has control of the payment of the stock to the employee, the shareholder is the employer for purposes of withholding income tax on the fair market value of the stock. However, the Internal Revenue Service will interpose no objection if the subsidiary, which withholds income taxes on the regular wages paid to the employee, withholds the additional tax due on the fair market value of the stock.

  The subsidiary is allowed a deduction under section 162 of the Code, as provided in Rev. Rul. 80-76, regardless of whether the shareholder or the subsidiary withholds on the fair market value of the stock.  No deduction is available to the shareholder for the payment to the employee.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 80-76 is amplified.

Rev. Rul. 81-45, 1981-1 C.B. 483, 1981-6 I.R.B. 8.