SERVICE PROVIDES CHECKLIST FOR RULING REQUESTS UNDER SECTION 1001 ON EMPLOYEE-SHAREHOLDER SALES OF EMPLOYER STOCK TO A QUALIFIED PLAN.

Rev. Proc. 87-22

                              CONTENTS

The purpose of this revenue procedure is to update Rev. Proc. 77- 30, 1977-2 C.B. 539, as clarified by Rev. Proc. 78-18, 1978-2 C.B. 491, and Rev. Proc. 78-23, 1978-2 C.B. 503. Rev. Proc. 77-30, as clarified, sets forth the information that must be included in a request for a ruling that a proposed sale of stock of an employer to a related qualified defined contribution employee plan of deferred compensation ("plan") will be treated as a sale of the stock by the selling shareholder rather than as a distribution of property taxable under section 301 of the Internal Revenue Code.

For sales of stock to stock ownership plans or certain cooperatives that may qualify for tax-free treatment under certain circumstances, see section 1042 of the Code.

SEC. 2. BACKGROUND

The Internal Revenue Service receives many requests for rulings in which the information relating to the proposed transaction is not sufficient to permit a determination to be made. In these cases, it is necessary to obtain additional facts from the taxpayer before the request for ruling can be considered. Obtaining these additional facts is time consuming for both Service personnel and taxpayers and delays issuance of the ruling.

This revenue procedure will facilitate the filing and processing of requests for rulings by setting forth specific information and representations to be included so that the requests will be as complete as possible when initially filed. Because the information and representations necessary to rule on a particular transaction depend upon all the facts and circumstances, information or representations in addition to those set forth in this revenue procedure may be required.

This revenue procedure is intended only to assist taxpayers and their representatives in preparing requests for rulings. It does not define, as a matter of law, the circumstances under which a sale of stock is treated as a corporate distribution of property under section 301 of the Code.

The authority and general procedures of the National Office of the Internal Revenue Service with respect to the issuance of rulings are outlined in Rev. Proc. 87-1, 1987-1 I.R.B. 7. This revenue procedure, along with the present revenue procedure, are subject to periodic updating by the Service. Therefore, careful attention should be given to ensure usage of the most current procedure.

SEC. 3. DEFINITIONS

For purposes of this revenue procedure only:

01 The term "employer" means the corporation that is maintaining the plan to which the stock of the employer is to be sold.

02 The term "related qualified defined contribution employee plan of deferred compensation" means a defined contribution plan that is maintained by the employer for the exclusive benefit of the employer's employees and is qualified under section 401(a) of the Code.

03 The term "covered compensation" of an employee means the employee's compensation upon which allocations of employer contributions to the employee's account are based.

04 The "account balance" of an employee consists of the amounts contributed to the employee's account in the plan and the employee's allocable share of forfeitures, income, and gains, less the employee's allocable share of expenses and losses.

05 The term "related persons" means the spouse, parents, grandparents, children, and grandchildren of the selling shareholder.

SEC. 4. INFORMATION AND REPRESENTATIONS TO BE INCLUDED IN REQUESTS FOR RULINGS ON SALES OF STOCK OF THE EMPLOYER TO A PLAN

If the requested information and representations are supplied, a ruling will usually be issued that a proposed sale of stock of the employer to a plan will be a sale of stock, rather than a distribution of property taxable to the selling shareholder under section 301 of the Code.

Each of the items in this section should be specifically addressed in the request for a ruling. If an item is not applicable, so state and briefly explain why. Standard representations are set forth throughout this section and are highlighted by the word "representation" in boldface type. These representations are of equal importance with the other factual information requested herein. The representations function to ensure that specific statutory and judicial requirements and administrative ruling guidelines are satisfied. Each representation set forth in this section should be submitted precisely in the language requested. If a representation cannot be submitted as requested, an explanation must be given. Variations of the language of the representations may delay processing the request for a ruling and will not be accepted unless reasons satisfactory to the Service are submitted. Submission of the information and representations should follow the format of this revenue procedure as closely as possible, with appropriate descriptive headings. Care must be taken to ensure that all the facts relating to the transaction are submitted.

01 EMPLOYER INFORMATION.

1 Name of employer.

2 State of incorporation.

3 Employer identification number.

4 Brief description of the employer's business.

02 INFORMATION REGARDING THE STOCK OF THE EMPLOYER.

1 A complete description of the stock that is the subject of the transaction.

2 The number of shares of stock of each class outstanding prior to the transaction.

03 INFORMATION REGARDING EACH SELLING SHAREHOLDER.

1 Name.

2 Social security number.

3 A description of the position held with the employer.

4 A list of other shareholders of the employer who are related persons and the number of shares and classes of stock of the employer each owns.

5 The number of shares, class, and percentage of the stock of the employer owned of each class by each selling shareholder.

6 Jurisdiction. -- Identify the District Office that will have audit jurisdiction over the return (in which the transaction is reflected) of the selling shareholder (referred to below as "taxpayer"). State whether, to best knowledge of the taxpayer and the taxpayer's representatives (if any) the identical issue is in a return of the taxpayer (or of a related taxpayer within the meaning of section 267 of the Code, or a member of an affiliated group of which the taxpayer is also a member within the meaning of section 1504) and, if so, whether the issue (1) is being examined by a District Director, (2) has been examined by a District Director and (a) the statutory period of limitation either on assessment or for filing a claim for refund or credit of tax has not expired and (b) a closing agreement covering the issue or liability has not been entered into by a District Director, (3) is being considered by an Appeals Office in connection with the taxpayer's return for an earlier period, (4) has been considered by an Appeals Office and (a) the statutory period of limitation either on assessment or for filing a claim for refund or credit of tax has not expired and (b) a closing agreement covering the issue or liability has not been entered into an Appeals Office, or (5) is pending in litigation in a case involving the taxpayer or a related taxpayer. The request must contain a statement whether, to the best knowledge of the taxpayer and the taxpayer's representatives, the identical or similar issue has been (i) submitted to the Service, but withdrawn before a ruling was issued, or (ii) ruled on by the Service to the taxpayer or the taxpayer's predecessor and, if so, when and with what results. If, after the request is filed but before a ruling is issued, the taxpayer knows that an examination of the issue by a District Director has been started, the taxpayer must notify the National Office of this action. If a return is filed before a ruling is received from the National Office concerning the issue that is the subject of the request for ruling, a copy of the request must be attached to the return. This alerts the District Office and avoids premature District action on the issue.

04 DESCRIPTION OF THE PLAN.

Submit a written copy of the plan.

05 INFORMATION REGARDING EACH SALE OF STOCK TO THE PLAN.

1 The number of shares and class of stock of the employer to be sold to the plan.

2 The purchase price to be paid for the stock. In addition, submit the following REPRESENTATION: In the case of each purchase of stock of the employer by the plan, the purchase price will be equal to the fair market value of the stock exchanged.

3 Details as to the manner by which the plan will finance the purchase of stock.

06 REQUIRED REPRESENTATIONS.

Submit each of the following REPRESENTATIONS:

1 There is no plan, intention, or understanding for the employer to redeem any of the purchased stock from the plan.

2 The combined beneficial interest in the plan of each selling shareholder and all related persons will not exceed 20 percent, based on the following:

(a) The combined covered compensation of each selling shareholder and all related persons will not exceed 20 percent of the total covered compensation under the plan;

(b) The total of the account balances (vested and nonvested) of the selling shareholder and related persons will not exceed 20 percent of the total of all employee account balances (vested and nonvested) in the plan; and

(c) The combined interest (vested and nonvested) of the selling shareholder and related persons in any separately managed fund or account within the plan (not taking into account a separately managed fund or account within the plan that at no time may be credited with stock of the employer) will not exceed 20 percent of the total net assets in that fund or account.

3 The restrictions on disposition of the shares of stock to be distributed to employee-participants from the plan (other than restrictions imposed by federal or state laws) will be no more onerous than the disposition restrictions on at least a majority of the shares of stock held by other shareholders of the employer. For purposes of this representation, any right of first refusal with respect to the stock to be distributed from the plan will not be considered a restriction on disposition, if the right of first refusal will:

(a) apply to shares of stock that are not publicly traded (within the meaning of section 54.4975-7(b)(1)(iv) of the Pension Excise Taxes Regulations) at the time the right is exercised;

(b) be in favor of the plan, the employer, or both, in any order of priority;

(c) not provide for a selling price and other terms that will be less favorable to the seller than the greater of (1) the fair market value of the stock or (2) the purchase price and other terms offered by a purchaser (other than the employer or the plan) making a good faith offer to purchase the stock of the employer; and

(d) lapse no later than 14 days after the shareholder gives written notice to the holder or holders of the right that an offer by a third party to purchase the stock has been received.

SEC. 5. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Associate Chief Counsel (Technical and International), Attention: CC:C:3:10, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SEC. 6. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 77-30, Rev. Proc. 78-18, and Rev. Proc. 78-23 are superseded.

SEC. 7. EFFECTIVE DATE

This revenue procedure is effective May 18, 1987, the date of its publication in the Internal Revenue Bulletin.