Rev. Rul. 58-269

Advice has been requested whether the value of stock issued by a corporation to its officers as compensation for services rendered prior to its incorporation constitutes taxable wages for purposes of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954), and for the Collection of Income Tax at Source on Wages (chapter 24, subtitle C, Internal Revenue Code of 1954).

In the process of forming the instant corporation, the organizers rendered services which contributed to its incorporation. Upon issuance of the charter the organizers became officers of the corporation and the corporation issued stock to them in exchange for the services they rendered prior to its formation.

In order for the compensation paid to the organizers to constitute taxable wages for purposes of the Federal Insurance Contributions Act, the organizers would have to be employees of the corporation at the time such services were rendered. Section 3121(d) of the Act provides, in part, that an `employee' is any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.

It is well settled as a matter of law that a contract of agency or employment cannot be created on behalf of a nonexistent principal. The corporation was nonexistent and incapable of entering into contracts of agency or employment or of exercising the degree of control necessary to constitute it an employer prior to its incorporation. Therefore, there could not be any employer-employee relationship existing between it and the organizers when the services in question were rendered.

Accordingly, it is held that the value of the stock which was issued by the corporation to the organizers as compensation for services rendered prior to its incorporation, although includible in gross income for Federal income tax purposes for the year in which received, does not constitute taxable wages for purposes of the Federal Insurance Contributions Act taxes. Likewise, the value of the stock does not constitute wages for purposes of the Collection of Income Tax at Source on Wages. However, the fair market value of any stock which such individuals receive for services as officers of the corporation constitutes taxable wages for purposes of such taxes at the time the stock is transferred to such individuals.