Rev. Proc. 78-18

Rev. Proc. 77-30, 1977-2 C.B. 539, contains operating rules for the issuance of an advance ruling by the Internal Revenue Service that a proposed sale of employer stock to a related qualified defined contribution employee plan of deferred compensation will be a sale of the stock rather than a distribution of property, taxable under section 301 of the Internal Revenue Code of 1954 to the selling shareholder.

Section 4 of Rev. Proc. 77-30 sets forth several conditions that must be satisfied before an advance ruling will be issued. Section 4.02 requires that any restrictions on disposition of the employer stock held by the employee plan and on employer stock received by employees from the employee plan (other than restrictions imposed by Federal or state securities laws) are no more onerous than the disposition restrictions on at least a majority of the shares of employer stock held by other shareholders of the employer.

The Service recognizes that in order to protect the interests of the employer it may be necessary for the employer stock held by the employee plan or received by employees from the employee plan to be subject to a right of first refusal. Accordingly, a right of first refusal will not be considered a restriction on disposition within the meaning of section 4.02 provided the right of first refusal (i) applies to employer stock that is not publicly traded at the time the right is exercised (see section 54.4975-7 (b)(1)(iv) of the Income Tax Regulations); (ii) is in favor of the employer, the employee plan, or both, in any order of priority; (iii) does not provide for a selling price and other terms that will be less favorable to the seller than the greater of (a) the fair market value of the employer stock or (b) the purchase price and other terms offered by a buyer (other than the employer or the employee plan) making a good faith offer to purchase the employer stock; and (iv) will lapse no later than a total of 14 days after the stockholder gives written notice to the holder or holders of the right that an offer by a third party to purchase the employer stock has been received.

Rev. Proc. 77-30 is clarified.