Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of July 2005. See Rev. Rul. 2005-38, page 6.

C.B. (Vol. 2) 851; Joint Committee on Taxation Staff, General Explanation of the Revenue Provisions of the Deficit Re- duction Act of 1984, 98 ^th Cong. 2d Sess. (1984) at 203. The vesting of payments contingent on a change in control frequently provides substantial benefits to an individual without regard to whether an election under § 83(b) has been made. This concern, however, is not present when determining whether a change in ownership or control has occurred.

ANALYSIS

The regulations under § 280G have generally adopted objective rules to determine whether a change in ownership or control has occurred. Pursuant to § 1.280G–1, Q/A–27(c), vested stock underlying a vested option is considered owned by the individual who holds the vested option. Thus, the vested shares subject to vested options held by the former Corporation X employees and the Corporation Y employees are considered outstanding for purposes of determining whether a change in ownership or control occurred. However, the substantially nonvested shares underlying vested options held by the former Corporation X employees and the Corporation Y employees are not considered outstanding for purposes of determining whether a change in ownership or control occurred.

In determining whether a change in ownership or control has occurred, § 1.280G–1, Q/A–27(c) generally implements an expansive rule for determining the shares treated as owned by an individual, treating, for example, shares subject to a vested option as owned by the holder of the option. Accordingly, an employee should be considered the owner of unvested shares of restricted stock for which an election under § 83(b) has been made for purposes of § 1.280G–1, Q/A–27 because the regulations under § 83(b) treat stock transferred to an employee in connection with the performance of services as substantially vested when the employee makes an election under § 83(b), and the employee is considered the owner of the stock for that purpose. However, restricted stock with respect to which an election under § 83(b) has not been made is not considered outstanding for purposes

of determining whether a change in ownership or control occurred.

Consequently, the shareholders of Corporation X and Corporation Y, along with the employees holding vested options to receive vested stock and holding restricted stock that has been subject to an election under § 83(b), will be treated as acting as a group with respect to their acquisition of stock or assets. Applying the above-described rules, the Corporation X shareholders acquired ownership of Corporation Y stock ($108 x ) that has more than 50 percent of the total fair market value of the Corporation Y stock ($215 x ) outstanding immediately after the merger. Thus, there is a change in control of Corporation Y under § 1.280G–1, Q/A–27.

Turning to Corporation X, all of the assets of Corporation X were transferred to Corporation Y in exchange for Corporation Y stock. Because more than 50 percent of the fair market value of the outstanding stock of Corporation Y is owned by the former shareholders of Corporation X (immediately after the exchange), the transfer of assets to Corporation Y is not treated as a change in ownership of a substantial portion of the assets of Corporation X under § 1.280G–1, Q/A–29(b)(1).

Additionally, for purposes of determining the amount of stock owned by an individual under §1.280G–1, Q/A–17, the same rule as described above applies. Thus, an individual who holds restricted stock with respect to which an election under § 83(b) has been made is considered to hold the outstanding stock under § 1.280G–1, Q/A–17.

HOLDINGS

1. In determining whether a corporation has experienced a change in ownership or control under § 280G(b)(2)(A)(i) of the Internal Revenue Code, unvested shares of restricted stock for which an election under § 83(b) has been made are treated as outstanding stock.

2. In determining the amount of stock held by a shareholder for purposes of testing whether the shareholder is a disqualified individual under §1.280G–1, Q/A–17 of the Income Tax Regulations, unvested shares of restricted stock for which an election under § 83(b) has been made are treated as outstanding stock.

2005–27 I.R.B. 3 July 5, 2005