Opinion ID: 703228
Heading Depth: 3
Heading Rank: 2

Heading: The 1981 Option Held by the Trust

Text: 60 Appellants did not file Sec. 83(b) elections to include the value of the 1981 option in ordinary income in the year of grant. However, they argue that the value of that option was includable in ordinary income in the year of grant pursuant to Sec. 83(a), because it was not subject to a substantial risk of forfeiture. They argue it was not subject to that risk because only the separate agreement among beneficiaries, not the actual terms of the options, provided that each appellant could be divested of his allocable share of the option if he left the employ of IMED. They argue that this separate agreement does not affect the tax treatment of the 1981 option. 61 We need not address this argument. Rather, we conclude that regardless of whether the separate agreement among beneficiaries affects the tax treatment of the 1981 option, Sec. 83(a) did not apply to that option until its sale in 1982. The actual terms of that option, as opposed to the agreement among beneficiaries, provided that it could only be exercised in increments in 1983, 1984 and 1985. Therefore, it was not immediately exercisable, and condition (ii) of Reg. Sec. 1.83-7(b)(2) was not satisfied. Accordingly, that option lacked a readily ascertainable fair market value, Sec. 83 did not apply until sale in 1982, see I.R.C. Sec. 83(e)(3); Reg. Sec. 1.83-7(a), and that sale produced only ordinary income. We affirm the Tax Court's decision upholding the deficiency with respect to this option. 62