once the controversy in this case is the determination of the correct determination of the point in time that the transfer takes place for an employee exercise as an employee stock option pledges the stock and does not have personal liability for repayment of the loan or borrowings that were used to purchase the stock that is the question the government position is took takes place at the time of the exercise the option ours is that doesn't take they all they want to pay the full amount of the difference between the strike price and the gain at the time the shares were sold on margin call every bit of every penny due and at ordinary income tax rates the key here a case of the first impression dealing with the subject of application of the capital gains tax to these transactions this is a case of statutory construction it requires this court to view the evidence and the interpretation of the statutes most favorably to the upholding of the purpose of the remedial statute the purpose of the regulation that we by the stock purchased that he should not receive capital gains treatment in any of this again the way this works is that if you know under rule or c e three if the exercise made on day one and market prices for market value is higher there's ordinary income tax paid on the difference between the strike price and the fair market value it's the starkest then hell for two years or whatever and then sold but it shouldn't be allowed to those who are just out along for the ride and have put their own funds in risk and this case mr top and mr miller collateralized a loan from their broker to buy the stuff they have no uncle if there is not an obligation to repay that loan that is likely to be called on then it is considered to be alone and watched there is not personal liability repaid and the itself says that the courts will look to the courts of the transaction maybe in substance the same as the grant of an option the determination of the substance of the transaction is based upon the facts and circumstances of the stamp but there's a big language i think that when i think i wouldn't necessarily disagree with them here's the here's the thing it says the determination of the substance of the transaction is based upon all the facts and circumstances and the substance of these transactions is with the courts at all well but there is a chance of being off if you don't qualify that in court and and you can avoid think that that's the problem with your interpretation it is much easier to say look more personal liability that there is a person live building that says you're liable we're not going to give invoke this provision which allows the government to claim ordinary income tax and you're going to get the benefits of being  a purchaser for value who put their own funds at risk the reason for my argument is that the court is called upon to exercise its statutory construction rules  purpose of the remedial purpose of the regulation that is that if you don't put your funds at risk you're not going to get capital gains treatment that interpretation if there's any risk you'd have to repay at all of voids the mandate of the reams and pieces are all cited in our brief and they go through detailed analysis saying well as a practical matter if there repayment if you are indeed by a third party then you're not really at risk as a practical matter if the shares are going to be sold on margin and there is obligated to interpret this matter in a way that fulfills a remedial purpose of the regulation to wit to prevent people from going around the side and getting the benefit of capital gains treatment who haven't really a please the court and my colleagues from the justice department's i think the fundamental problem here is that the taxpayers arguments about recourse worse non recourse test are both wrong but more fundamentally irrelevant because transfer of property is an indebtedness secured by the transfer of property that's not what happened here he didn't pay with an indebtedness he borrowed money from a broker in a third party transaction but as we  at that point the risk of loss in the stock transferred to the employee and that's the whole point of this regulation in the statute at that point the stock belong to the employee e and that's actually illustrated by example to which they rely so heavily in example two it says when the w c sells one hundred shares of stock for a fair market value in exchange for a ten thousand dollars note that's not painted a note is not payment a promise to pay and the point of example too is that the employee in that situation is able to walk away from that transaction with no harm that's why it's essentially a grant of an option or continue with work microsoft a real networks it has already been paid it has cash it doesn't have anything at risk anymore as to the stock the entire risk has transferred to the employee either and if it does happen that he got the money in some has never done this to my knowledge i guess i don't know as i don't think they've cited anything that i've seen where the i r s has done that i think this regulation in fact generally does benefit taxpayers in a rising market because the transfer t lay that off on a third party he had an uncle be a stockbroker or whatever that doesn't really matter from the standpoint of the tax code which is looking at did the ownership interest transfer from the employer to the employee and  made by the broker i don't see how that has any real bearing on it i think in these kind of action plans it's usual that the companies are working with some kind of a stock broker just a facilitator mechanics but it doesn't make it again it goes back to the shifting we possibly we could get into the facts and circumstances of that kind of situation but that doesn't seem to apply to the little language of the regulation i guess it might depend on why the book was friendly with an employer if there was other seventeenth but an option to purchase the stock has been granted but we know that isn't true it's a fiction it's a fiction established by law to protect the capital gains treatment and restricted to those who put their funds at and under the fiction here there's been no shift of risk of loss because there is no risk of loss because an option to purchase the stock has been granted the purchaser the shareholder now is an option holder in the eyes of the law