IRS Revenue Ruling
2001-1

 Code Secs. 312, 56, 83

<<FULL TEXT>>

26 CFR 1.312-6: Earnings and profits.
(Also sections 56, 83; section 1.83-6.)

E & P adjustments on exercise of option. This revenue ruling announces
that the earnings and profits of a corporate employer are reduced to
reflect the deduction the corporation takes when an employee receives
stock upon exercise of a nonstatutory stock option.


REV. RUL. 2001-1

If a corporation transfers stock upon exercise of an option that was
granted in connection with the performance of services and to which
section 421 of the Internal Revenue Code does not apply (a nonstatutory
stock option), and the option did not have a readily ascertainable fair
market value at the time of grant, the earnings and profits of the service
recipient are reduced by the amount of the deduction allowed to the
service recipient under sections 83(h) and 162 by reason of such exercise.
Because this item reduces earnings and profits, section 56(g)(4)(C)(i)
does not disallow the deduction of the item in computing adjusted current
earnings for purposes of alternative minimum tax.

The principal author of this revenue ruling is Russell P. Subin of the
Office of Associate Chief Counsel (Corporate). For further information
regarding this revenue ruling, contact Mr. Subin at (202) 622-7790 (not a
toll-free call).

<<END RULING>>

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