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acquired corporation. The election would be available if the bus operating authority was held (directly or indirectly) by the taxpayer at the time its stock was acquired. In such a case, a portion of the stock basis would be allocated to the authority only if the corporate or noncorporate taxpayer would have been able to make such an allocation had the authority been distributed in a liquidation to which prior law section 334(b)(2) applied. The election would be available only if the stock was acquired on or before November 19, 1982 (or pursuant to a binding contract in effect on such date) and if no election under section 338 is in effect.

EFFECTIVE DATE

The provisions would be effective retroactively for taxable years ending after November 18, 1982.

REVENUE EFFECT

The provisions of the bill are estimated to reduce fiscal year budget receipts by $7 million in 1985, $6 million in 1986, $3 million in 1987, $1 million in 1988, and a negligible amount in 1989.

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98TH CONGRESS 1ST SESSION

H. R. 3388

To provide that the provisions of section 252 of the Economic Recovery Tax Act of 1981 (relating to transfers of property to employees subject to certain restrictions) shall apply to certain transfers occurring during 1973.

IN THE HOUSE OF REPRESENTATIVES

JUNE 22, 1983

Mr. MATSUI (for himself, Mr. THOMAS of California, and Mr. FAZIO) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To provide that the provisions of section 252 of the Economic Recovery Tax Act of 1981 (relating to transfers of property to employees subject to certain restrictions) shall apply to certain transfers occurring during 1973.

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Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That

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(a) IN GENERAL.-Notwithstanding subsection (c) of 5 section 252 of the Economic Recovery Tax Act of 1981, the 6 amendment made by subsection (a) of such section 252 (and 7 the provisions of subsection (b) of such section 252) shall 8 apply to any transfer of stock to any person if—

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(1) such transfer occurred in November or December of 1973 and was pursuant to the exercise of an

option granted in November or December of 1971,

(2) in December 1973 the corporation granting the option was acquired by another corporation in a transaction qualifying as a reorganization under section 368 of the Internal Revenue Code of 1954,

(3) the fair market value (as of July 1, 1974) of the stock received by such person in the reorganization in exchange for the stock transferred to him pursuant to the exercise of such option was less than 50 percent

of the fair market value of the stock so received (as of

December 4, 1973),

(4) in 1975 or 1976 such person sold substantially all of the stock received in such reorganization, and

(5) such person makes an election under this section at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe.

(b) LIMITATION ON AMOUNT OF BENEFIT.-Subsec20 tion (a) shall not apply to transfers with respect to any em21 ployee to the extent that the application of subsection (a) 22 with respect to such employee would (but for this subsection) 23 result in a reduction in liability for income tax with respect to 24 such employee for all taxable years in excess of $100,000 25 (determined without regard to any interest).

HR 3388 IH

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(c) STATUTE OF LIMITATIONS.

(1) OVERPAYMENTS.-If refund or credit of any overpayment of tax resulting from the application of

subsection (a) is prevented on the date of the enact

ment of this Act (or at any time within 6 months after such date of enactment) by the operation of any law or rule of law, refund or credit of such overpayment (to

the extent attributable to the application of subsection (a)) may, nevertheless, be made or allowed if claim therefor is filed before the close of such 6-month

period.

(2) DEFICIENCIES.-If the assessment of any deficiency of tax resulting from the application of subsection (a) is prevented on the date of the enactment of

this Act (or at any time within 6 months after such

date of enactment) by the operation of any law or rule

of law, assessment of such deficiency (to the extent attributable to the application of subsection (a)) may, nevertheless, be made within such 6-month period.

HR 3388 IH

SUMMARY AND DESCRIPTION

PRESENT LAW

In general

Under the present law rules relating to transfers of property in connection with the performance of services (sec. 83), an employee generally includes in income the fair market value of transferred property, less any amount paid for the property, when the property first becomes either transferable or not subject to a substantial risk of forfeiture.1 Thus, if an employee receives property that is both subject to a substantial risk of forfeiture and is not transferable, the employee generally is not taxed until the property becomes either transferable or not subject to a substantial risk of forfeiture. The amount the employee includes in income is equal to the fair market value of the transferred property (as of the time of taxation), less any amount the employee paid for the property.

However, an employee may elect (under sec. 83(b)) to be taxed when the property is received. In that case, the employee includes an amount in income equal to the fair market value of the property when received less any amount paid for the property.

Effect of restrictions

Generally, under section 83, restrictions on property are not taken into account in determining the fair market value of the property. Also, property is considered transferable for purposes of section 83 when the property would not be subject to a substantial risk of forfeiture in the hands of a subsequent transferee.

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Prior to enactment of section 252 of the Economic Recovery Tax Act of 1981 [ERTA], the U.S. Tax Court had ruled 2 that stock subject to the "insider trading" rules of section 16(b) of the Securities Exchange Act of 1934 was transferable within the meaning of section 83. Thus, although the taxpayer's profit on a sale of the stock within six months of receipt could be recovered by the corporation, the taxpayer was taxable on the fair market value of the stock when received.

As amended by section 252 of ERTA, section 83 provides that stock subject to the restrictions of section 16(b) of the Securities Exchange Act of 1934 is treated as being subject to a substantial risk of forfeiture and nontransferable for the sixmonth period following receipt of the stock during which that section applies. Thus, unless the taxpayer elects (under sec. 83(b)) to be taxed when the stock is received, the taxpayer must include in income (and the employer may deduct), at the expiration of the period during which section 16(b) is applicable, the value of the stock at such time, less any amount the taxpayer paid for the stock. A similar rule is provided for stock subject to restrictions on transfer by reason of complying with the "pooling-of-interests" accounting rules of Accounting Series Releases Numbered 130 (10/5/72) 37 FR 20937; 17 CFR 211.135)).

The amendments made to section 83 by section 252 of ERTA apply to taxable years (of the transferee) ending after December 31, 1981.

EXPLANATION OF THE BILL

Under the bill, the rules of section 252 of ERTA would apply if (1) stock was acquired in November or December of 1973 pursuant to options granted in November or December of 1971, (2) the corporation granting the options was acquired in a reorganization during December 1973, and (3) the fair market value of the stock in the acquiring corporation as of July 1, 1974, received in exchange for the stock acquired on exercise of the option, was less than 50 percent of its value on December 4, 1973. This relief under the bill would be allowed only at the election of a shareholder who during 1975 or 1976 sold substantially all the stock so received.

The bill would not apply with respect to a transfer to any employee to the extent that its application would result in a reduction in tax liability (exclfusive of interest) of such employee in excess of $100,000 for all taxable years.

Also, the bill provides that a refund or credit of any overpayment of tax, or an assessment of any deficiency, which is attributable to provisions of the bill, and which otherwise would be barred within six months after the date of enactment, could be made or allowed to the extent attributable to application of provisions of

1 An employer generally is allowed a business expense deduction, when the employee is taxed, equal to the amount includible in the employee's income (sec. 83(h)).

2 Horwith v. Comm'r, 71 T.C. 932 (1979).

3 15 U.S.C. sec. 78p(b).

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