Rev. Rul. 68-627

Advice has been requested whether options, warrants, and convertible debentures can be considered to be part of a "class of stock" as that term is defined in section 4920(b)(2) of the Internal Revenue Code of 1954.

A foreign corporation issued a class of its stock that met the requirements of section 4920(b)(1) of the Code and as a result thereof was not considered a foreign issuer with respect to such class of stock for purposes of the interest equalization tax imposed by section 4911 of the Code. Subsequently, the corporation issued options and warrants to acquire additional shares of the above class of stock and issued debentures convertible into the shares of such class of stock. The specific question in the instant case is whether the additional shares obtainable on the exercise of the options and warrants and on the conversion of the debentures together with the options, warrants, and debentures themselves would be considered part of the above class of stock.

Section 4920(b)(1) of the Code provides an exemption from the interest equalization tax imposed by section 4911 of the Code with respect to a particular class of stock of a foreign corporation if such class of stock meets the requirements of subparagraph (A) or subparagraph (B) of section 4920(b)(1) of the Code.

Section 4920(b)(2) of the Code defines the term "class of stock" as all shares of stock of a corporation issued and outstanding as of the corporation's latest record date before July 19, 1963, which are identical with respect to the rights and interest such shares represent in the control, profits, and assets of the corporation. Such term also includes additional shares possessing rights and interests identical with the rights and interests of shares described in the preceding sentence if such additional shares shall have been issued in the manner described in subparagraphs (A), (B), (C) or (D) of section 4920(b)(2) of the Code.

Subparagraph (D) of section 4920(b)(2) of the Code provides for the additional issuance of shares after November 10, 1964, if the requirements of clauses (i) through (v) thereof are satisfied. Furthermore, the final sentence of section 4920(b)(2) of the Code provides as follows:

For purposes of subparagraph (D), the issuance of an option or similar right to acquire stock, or of any debt obligation convertible into stock, shall be treated as the issuance of the stock which may be obtained on the exercise of such option or similar right or the conversion of such debt obligation.

It is held that the foregoing quoted material means that for purposes of applying the requirements set forth in clauses (i) through (v) of section 4920(b)(2)(D) of the Code the issuance of options or similar rights to acquire stock or debt obligations convertible into stock will be treated as the issuance of the stock that may be obtained on the exercise of the options or similar rights or the conversion of the debt obligations. Thus, if a foreign corporation with an exempt class of stock issues employee stock options to acquire such stock that are exercisable from the date of issue and for a period of five years, the requirements of clauses (i) through (v) of section 4920(b)(2)(D) of the Code must be met as of the time the options are issued. This is not to say, however, that the options themselves are to be considered part of the exempt class of stock insofar as the exemption itself is concerned. The exempt class of stock includes only shares of stock which are identical with respect to the rights and interest such shares represent in the control, profits, and assets of the corporation.

Since the options in the instant case do not meet the foregoing test, the options, warrants, and convertible debentures issued by the corporation will not be considered part of an exempt class of stock as that term is defined in section 4920(b)(2) of the Code notwithstanding the fact that the options and warrants are exercisable to obtain shares of the exempt class of stock and the convertible debentures are convertible into shares of the exempt class of stock. However, the additional shares obtainable on the exercise of the options and warrants and on the conversion of the debentures will be considered part of the exempt class of stock if the requirements of clauses (i) through (v) of section 4920(b)(2)(D) of the Code are satisfied.