Shareholder-to-employee stock recast Explained
In the actual transaction, a shareholder who holds 100% of Corp A transfers 5% of the Corp A shares to an employee of Corp A in consideration for services the employee performed for the corporation. On its face this is a single, direct transfer from the shareholder to the employee.
Treas. Reg. § 1.83-6(d)(1) does not respect that direct path for tax purposes. Because the shareholder is compensating the employee for services rendered to the corporation, the transfer is treated as two deemed steps: first, the shareholder is deemed to contribute the 5% of Corp A shares to the capital of Corp A; and immediately thereafter, Corp A is deemed to transfer that same stock to the employee under the § 83 property-for-services rules of paragraphs (a) and (b) of the section.
This deemed contribution-and-transfer treatment applies where the transferred property is substantially nonvested at the time of transfer, or where an amount is includible in the employee’s gross income under § 1.83-1(a)(1) or § 1.83-2(a). The result aligns the transaction with the normal compensatory framework: the corporation is the deemed transferor of compensatory stock, and the shareholder is treated as having made a capital contribution rather than a direct gift or payment to the worker.
The reg also addresses money paid the other direction: any cash or other property paid to the shareholder for such stock is considered paid to the corporation and then distributed to the shareholder in a distribution to which section 302 applies. These rules apply to transfers of stock and amounts paid for such stock occurring on or after May 16, 2000.
