Rev. Rul. 69-368

The majority stockholder of a corporation contributed some of his stock to the corporation for it to retire or to hold as treasury stock and use as it saw fit.

Under a plan formulated by the executives of the corporation in a later year, the corporation used the contributed stock to pay a bonus to employees. The number of shares issued to each employee was determined by reference to his length of service and his compensation. The total compensation, including the fair market value of the shares distributed, was reasonable compensation for services rendered by the employees.

Held, under these circumstances, (1) the transfer of the stock to the corporation by the shareholder is a contribution to capital by the shareholder under section 118 of the Internal Revenue Code of 1954 and section 1.118-1 of the Income Tax Regulations, (2) the stock distributed to the employees is includible in the gross income of each employee under section 61 of the Code to the extent of the fair market value of the stock at the date of the distribution, and (3) the fair market value of the stock distributed is deductible by the corporation as compensation under section 162 of the Code.

Compare Revenue Ruling 69-369, this page, relating to a transfer of stock to employees pursuant to a prearranged plan formulated by a corporation and its majority stockholder.