Rev. Rul. 69-369

Advice has been requested whether a corporation is allowed a deduction under section 162 of the Internal Revenue Code of 1954 as a result of the transfer of stock to its employees under the circumstances described below.

Pursuant to a plant formulated by the majority stockholder of a corporation, he transferred to it some of his stock of the corporation. In accordance with this plan, the corporation then transferred the stock to certain of its employees, the number of shares transferred to each being dependent on the number of years of his service to the corporation. The corporation had no obligation to pay additional compensation to the employees.

Under these circumstances the transfer of the stock by the corporation to its employees will be treated for Federal income tax purposes as if the transfer had been made directly by the majority stockholder to the employees of the corporation.

Accordingly, the value of the stock transferred by the corporation to employees in the instant case is not deductible by the corporation under section 162 of the Code. The fair market value of such shares is includible in the gross income of the employees under the provisions of section 61 of the Code. See Revenue Ruling 69-140, C.B. 1969-1, 46, which holds that shares of stock transferred by the majority stockholder of a corporation to employees of the corporation, the number of shares being dependent on the number of years of service of the employee to the corporation, are not gifts within the meaning of section 102(a) of the Code. It further holds that the value of such shares is includible in the gross income of the employees under section 61 of the Code.

Compare Revenue Ruling 69-368, this page, relating to a contribution of stock to a corporation and the use of such stock, at the sole discretion of the corporation, to pay bonuses to employees.