Source: https://supreme.justia.com/cases/federal/us/324/177/case.html
Timestamp: 2017-05-27 04:12:56
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Matched Legal Cases: ['§ 22', '§ 22', '§ 22', '§ 22', 'Art. 22', '§ 22', 'Art. 19', '§ 22', 'Art. 22']

Commissioner v. Smith (full text) :: 324 U.S. 177 (1945) :: Justia U.S. Supreme Court Center Log In
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Commissioner v. Smith 324 U.S. 177 (1945)
U.S. Supreme CourtCommissioner v. Smith, 324 U.S. 177 (1945)Commissioner of Internal Revenue v. SmithNo. 371Argued January 30, 31, 1945Decided February 26, 1945324 U.S. 177CERTIORARI TO THE CIRCUIT COURT OF APPEALS
Respondent's employer gave to him, as compensation for his services, an option to purchase from the employer certain shares of stock of another corporation at a price not less than the then value of the stock. In two later Page 324 U. S. 178 tax years, when the market value of the stock was greater than the option price, respondent exercised the option, purchasing large amounts of the stock in each year. The question for decision is whether the difference between the market value and the option price of the stock was compensation for personal services of the employee, taxable as income in the years when he received the stock, under § 22(a) of the Revenue Act of 1938, c. 289, 52 Stat. 447, and § 22(a) of the Internal Revenue Code, 26 U.S.C. § 22(a).
The Tax Court found that, for many years and at all relevant times, respondent was employed by the Western Cooperage Company. In 1934, Western took over the management of the Hawley Pulp and Paper Co. pursuant to a plan for its reorganization. Hawley was then in financial difficulties, with an indebtedness amounting to $2,790,150. Under its contract with Hawley, Western was to retire annually a certain amount of Hawley's indebtedness. In the event of success in this undertaking, and when the amount of Hawley's indebtedness had been reduced by the sum of $1,400,000, Western was to receive Page 324 U. S. 179 specified amounts of the Hawley Company's capital stock as compensation for the services thus rendered.
Since the Tax Court found that the market price of the stock on the date of the option did not exceed the option Page 324 U. S. 180 price, it is evident that its finding that the option was given as compensation for respondent's services had reference to the compensation to be derived from exercise of the option after the anticipated advance in market price of the stock. Respondent testified that, if the option could have been sold at the time he received it, it would have been for only a "negligible" or "nominal" amount. He has never contended that the option itself had value when given, and there was no finding by the Tax Court that it then had value. The Tax Court, in stating the principle which it deemed applicable to the present case, quoted from Estate of Edward J. Connolly, 45 B.T.A. 374, as follows: "If the options had never been exercised, the optionees would never have received any additional compensation." The option could be exercised only when Western's contract with Hawley had been successfully performed by the reduction of a large part of Hawley's indebtedness, which would result in an increase in the value of Hawley's capital stock to be received by Western subject to respondent's option. Moreover, the Tax Court concluded as a matter of law that the facts which it found, and which we have detailed, brought the case, for the tax year 1938, within the provisions of § 22(a) of the Revenue Act of 1938, and of the interpretative Treasury Regulations 101, Art. 22(a)-1, and for the tax year 1939, within the identical provisions of § 22(a) of the Internal Revenue Code, and Treasury Regulations 103, Art. 19.22(a)-1.
"If property is transferred . . . by an employer to an employee, for an amount substantially less than its fair market value, regardless of whether the transfer is in Page 324 U. S. 181 the guise of a sale or exchange, such . . . employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value to the extent that such difference is in the nature of (1) compensation for services rendered. . . ."
In certain aspects an option may be spoken of as "property" in the hands of the option holder. Cf. Helvering v. San Joaquin Fruit & Investment Co., 297 U. S. 496, 297 U. S. 498; Shuster v. Helvering, 121 F.2d 643, 645. When the option price is less than the market price of the property for the purchase of which the option is given, it may have present value and may be found to be itself compensation for services rendered. But it is plain that, in the circumstances of the present case, the option, when given, did not operate to transfer any of the shares of stock from the employer to the employee within the meaning of § 22(a) and Art. 22(a)-1. Cf. Palmer v. Commissioner, 302 U. S. 63, 302 U. S. 71. And, as the option was not found to have any market value when given, it could not itself operate to compensate respondent. It could do so only as it might be the means of securing the transfer of the shares of stock from the employer to the employee at a price less than their market value, or possibly, which we do not decide, as the option might be sold when that disparity in value existed. Hence, the compensation for respondent's services, which the parties contemplated, plainly was not confined to the mere Page 324 U. S. 182 delivery to respondent of an option of no present value, but included the compensation obtainable by the exercise of the option given for that purpose. It, of course, does not follow that, in other circumstances not here present, the option itself, rather than the proceeds of its exercise, could not be found to be the only intended compensation.