Private Letter Ruling 8138071, IRC Sec(s). 1
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UIL No. 0001.01-00
Headnote:
Reference(s): Code Sec. 1
Private Letter Ruling 8138071
Code Sec. 1 INDIVIDUAL TAX RATES -- individual and head of household -- loss of
citizenship under unconstitutional law.
A was born in foreign country X to U.S. citizens. A lived in X his entire life
until moving to U.S. in 1978. Earlier, U.S. consulate had told A that he lost
his U.S. citizenship due to voting in X elections, under Sec. 401(e) of 1940
Nationality Act. Sec. 401(e) was declared unconstitutional by AFROYIM V RUSK (1967), 387 U.S. 253. A discovered this in 1977 when he
attempted to get resident alien status. A filed Form 1040 for
1978. RULED: Following REVRUL 75-357, 1975-2 CB 5, U.S. citizen losing
citizenship under unconstitutional act has always been U.S. citizen and is
liable for tax. REVRUL
75-357 is
applicable only after 12-31-75. So A must file tax returns for all years after
12-31-75. Sec. 7805(b) relief for earlier years was denied, since, following REVRUL
75-357,
estoppel was only allowed as defense until 1-1-76.
Full Text:
June 24, 1981
This is in response to the January 17, 1980, request
for a ruling by your authorized representative. He asks whether you must file
federal income tax returns for the year 1976 and period prior to May 1977. If
so, he asks that pursuant to the authority granted by section 7805(b) of the
Internal Revenue Code, the ruling be applied without
retroactive effect for the year 1976 and period prior to May 1977.
A was born in the country of X to parents of United States citizenship. Thus A
became at birth a citizen of both the United States and X. A resided in X his
entire life until 1978 when he moved to the United States.
During the 1960s A confirmed with the United States Consulate in X his
longstanding belief that his United States citizenship had been lost as a
result of voting in X in an election. This advice was probably based on section
401(e) of the Nationality Act of 1940 (and its successor, section 349(a)(5) of
the 1952 Act), which provided an American citizen would lose his or her
citizenship if he or she voted in a political election in a foreign state.
Section 401(e) of the Nationality Act of 1940 was ruled unconstitutional by the
Supreme Court's 1967 decision in AFROYIM V. RUSK , 387 U.S.
253.
The Supreme Court stated that citizenship is a vested right protected by the
Fourteenth Amendment to the Constitution, and a citizen cannot be divested of
citizenship without voluntary relinquishment.
Thus contrary to what A believed and what A had
initially been told by the U.S. Consulate, A is and always has been a citizen
of the United States. He was first made aware of this in 1977 when he decided
to inquire about the procedure for obtaining resident alien status so he could
retire in the United States.
A filed Form 1040, U.S. Individual Income Tax Return, for 1978, but requests he
not be assessed U.S. Income Tax for years prior to May
1977.
Section 1 of the Internal Revenue Code imposes an income tax on the taxable
income of every individual, except that in the case of a nonresident
alien individual, the tax imposed by section 1 of the Code shall apply only as
provided by section 871 or section 877 of the Code.
Sections 1.1(b) and 1.871-1 of the Income Tax Regulations provide that all
citizens of the Unites States, wherever resident, and all resident alien
individuals are liable for the income taxes imposed by the Internal Revenue
Code whether the income is received from sources within or without the United
States.
Revenue
Ruling 75-357,
1975-2 C.B. 5 provides a nativeborn U.S. citizen who
lost his or her citizenship under an Act declared unconstitutional, is and
always has been a U.S. citizen liable for tax on income from sources both
within and without the United States.
Pursuant to the authority granted by section 7805(b) of the Code, Rev.
Rul. 75-357 is
applicable only for taxable years or quarters beginning after January 1, 1976.
The invididuals who lost their citizenship by
operation of section 401(e) of the 1940 Act (and itssuccessor,
section 349(a)(5) of the 1952 Act) are not liable for federal income and gift
taxes as citizens of the Unites States for taxable years or quarters beginning
prior to January 1, 1976. This exception does not apply to individuals who
prior to January 1, 1976, but after the time of specific conduct which was
mistakenly deemed to have resulted in loss of citizenship, affirmatively
exercised a specific right of citizenship.
Accordingly, A is required to file federal income tax returns for all years
beginning after December 31, 1975.
A's request for relief under section 7805(b) of the Code is denied. Estoppel is
only allowed as a defense until January 1, 1976, as
in the case of Rev.
Rul. 75-357.
This ruling is directed only to the taxpayer who requested it. Section
6110(j)(3) of the Internal Revenue Code provides that it may not be used or
cited as precedent. June 24, 1981 0083.08-00; 1348.00-00
This is in reply to a letter dated February 22, 1981,
and subsequent correspondence, submitted by your representative, concerning the
federal income tax consequences of the substitution of nonqualified stock
options in the transaction described below. Separate ruling requests were
submitted to the Reorganization Branch of the Internal Revenue Service
concerning the applicability of Section 368(a)(1)(a) and 368(a)(2)(d) of the
Internal Revenue Code to the proposed plan of reorganization. The pertinent
provisions of the transaction are summarized below.
Bank, a corporation chartered under the national banking law, is a full service
commercial bank. ... is a wholly owned subsidiary of
Bank.
Corporation has been formed to become a bank holding company and to establish
itself as the parent corporation of Bank. New Bank is a wholly owned subsidiary
of Corporation.
In accordance with the Plan of Reorganization and Agreement of Merger (Plan)
between Corporation, New Bank and Bank, Bank will be merged with and into New
Bank pursuant to the national banking laws. Upon the effective date of the
merger, New Bank will acquire substantially all of the assets and will assume
all the liabilities of Bank. New Bank, the surviving corporation, will adopt
Bank's name.
According to the provisions of the Plan, the corporate existence of Bank and
New Bank shall, at the effective time of the merger, be merged into and
hereinafter referred to as the 'Continuing Bank'.
On the effective date of the transaction, shareholders of Bank will receive one
share of Corporation common stock for each share of Bank common stock held by
them.
In accordance with the Plan, Corporation will substitute nonqualified options
with respect to Corporation stock for nonqualified options with respect to Bank
stock that were granted pursuant to Bank's 1974 Stock Option Plan. In a letter
dated February 22, 1981, the following representations were made:
1. Each optionee shall be entitled to receive the
same number of shares of Corporation stock that the optionee
would have been entitled to receive of Bank stock if he exercised the option in
full immediately prior to the merger.
2. The sole changes in the terms of the options will be to substitute the
Corporation stock for the Bank stock.
3. Neither the nonqualified Bank stock options nor the substituted Corporation
stock options have a readily ascertainable fair market value.
4. The option price to the optionee of the
Corporation stock immediately after the substitution will be equal to the
option price to the optionee of the Bank stock prior
to the substitution.
5. The terms and conditions of the substituted nonqualified Corporation stock
Options will be the same in all material respects as the terms and conditions
of the nonqualified Bank stock Options immediately prior to the substitution.
Section 83 of the Internal Revenue Code provides rules for the taxation of
property transferred to an individual in connection with the performance of
services by such individual. Section 83(a) of the Code provides that the excess
of the fair market value of such property (determined without regard to any
restriction other than a restriction which by its terms will never lapse) at
the time the rights of the person having the beneficial interest in the
property are first transferable or are not subject to a substantial risk of
forfeiture, over the amount paid for the property, shall be included in the
employee's gross income for the taxable year in which the property becomes
transferable or ceases to be subject to a substantial risk of forfeiture.
Section 83(e)(3) of the Code provides that section 83 shall not apply to the
transfer of an option that does not have a readily ascertainable fair market
value.
Section 1.83-7(a) of the Income Tax Regulations provides that if the option
does not have a readily ascertainable fair market value at the time of the
grant, section 83(a) and 83(b) shall apply at the time the option is exercised
or otherwise disposed of, even though the fair market value of such option may
have become readily ascertainable before such time.
Section 83(h) of the Code provides that if section 83 applies to the transfer
of property, there shall be allowed as a deduction under section 162, to the
person for whom the services were performed, an amount equal to the amount
included under section 83(a) Under section 1.83-6(a) of the regulations, this
deduction is allowable only to the extent such amount meets the requirements of
section 162 and the regulations thereunder. Furthermore, section 1.83-6(a)(2)
of the regulations states that if the service provider is an employee of the
person for whom services were performed, such deduction is allowed for the
taxable year of the employer in which or with which ends the taxable year of
the employee in which such amount is includible as compensation, but only if
the employer deducts and withholds upon such amount in accordance with section
3402 of the Code. Section 1.83-6(a)(3) of the regulations states that when
property is substantially vested upon transfer, the deduction shall be allowed
to such person in accordance with his method of accounting (in conformity with
sections 446 and 461).
Section 1.83-6(b) of the regulations provides that except as provided in
section 1032, at the time of a transfer of property in connection with the
performance of services the transferor recognizes gain to the extent that the
transferor receives an amount that exceeds the transferor's basis in the
property. Section 1032 of the Code provides that no gain or loss shall be
recognized to a corporation on the receipt of money or other property in
exchange for stock (including treasury stock) of such corporation. Section
1.1032-1(a) of the regulations provides that the disposition by a corporation
of shares of its own stock (including treasury stock) for money or other
property does not give rise to taxable gain or deductible loss to the
corporation regardless of the nature of the transaction or the facts and
circumstances involved.
In Rev. Rul. 80-76, 1980-1 C.B. 15, the Internal Revenue Service considered a
situation in which an individual who owned a majority of the outstanding shares
of a corporation transferred shares of the corporation's stock with a fair
market value of 75X dollars to an employee of a subsidiary of the corporation.
The subsidiary was controlled by the corporation within the meaning of section
368(c) of the Code. The revenue ruling concludes that the subsidiary is allowed
a deduction of 75X dollars and that the subsidiary recognizes neither gain nor
loss on the transfer of the corporation's stock to the employee.
Section 1348 of the Code as amended by the Tax Reform Act of 1976 generally
provides for a 50 percent maximum tax rate on
personal service taxable income. In Rev. Rul. 78-359, 1978-2 C.B. 220, the
Service concluded that ordinary income realized by an employee of a corporation
upon exercise of stock options or stock appreciation rights, under a corporate
nonqualified stock option plan, is personal service income for purposes of
section 1348.
Based on the information and documents submitted, the following rulings are
provided:
(1) Provided neither the nonqualified options to purchase shares of Bank stock
nor the substituted options to purchase shares of Corporation stock have a
readily ascertainable fair market value, the substitution will not result in
the recognition of income, gain or loss, to the option holder. Section 83 of
the Code shall apply upon the exercise of the substituted nonqualified options.
Under section 83(a) of the Code, the excess of the fair market value, on the
date of transfer, of stock transferred to an employee upon the exercise of a
stock option over the option price will be includible in the employee's gross
income as compensation for the taxable year in which the transfer occurs.
(2) Under section 83(h) of the Code, the optionee's
employer, either Corporation or its subsidiaries, will be entitled to a
deduction equal to the amount includible in the gross income of the employee
upon the transfer of Corporation stock to the extent the amount meets the
requirements of section 162 of the Code. Under section 1.83-6 of the
regulations, the deduction will be allowable in accordance with the employer's
method of accounting, provided that the withholding requirement of section 3402
of the Code are satisfied.
(3) Under section 1032 of the Code, no gain or loss will be
recognized by Corporation upon the transfer of its stock pursuant to the
exercise of a substituted nonqualified option. Continuing Bank will not
recognize gain or loss when Corporation stock is transferred pursuant to the
exercise of a substituted nonqualified stock option provided that, on the date
of transfer, the Continuing Bank is controlled by the Corporation within the
meaning of section 368(c) of the Code. See Rev. Rul. 80-76, 1980-1 C.B. 15.
(4) Under section 1348 of the Code, ordinary income realized upon the exercise
of a substituted nonqualified option will constitute personal service income
for purposes of the 50 percent maximum date of tax
under section 1348(b)(1)
This ruling is directed only to the taxpayer who
requested it. Section 6110(j)(3) of the Code provides that it may not be used
or cited as precedent.
In accordance with the power of attorney on file in this office, a copy of this
letter is being forwarded to your authorized representative.
A copy of this letter should be attached to the Corporation's next income tax
return. A copy is enclosed for this purpose.
see also:
RevRul75-357
GCM36736
TAM7605250090A