Document: 351 U.S. 243 76 S.Ct. 800 100 L.Ed. 1142 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.Philip J. LO BUE. No. 373. Argued March 6, 1956. Decided May 28, Mr.Philip Elman, Washington, D.C., for petitioner. Mr. Richard F. Barrett, New York City, respondent. Justice BLACK delivered the opinion of Court. 1 This case involves federal income tax liability respondent LoBue years 1946 and 1947. From 1941 to 1947 was manager Sales Division Michigan Chemical Corporation, a producer distributor chemical supplies. In 1944 company adopted stock option plan making 10,000 shares its common available distribution key employees at $5 per share over 3-year period. number other were notified that they had been tentatively chosen be recipients nontransferable options contingent upon their continued employment. LoBue's notice told him: 'You may assigned greater or less amount based entirely your individual results entire organization.' About 6 months later he definitely awarded an buy 150 in recognition his 'contribution efforts operation Company successful.' As future allotments 'It is up you justify participation during next two years.' work so satisfactory course 3 him covering 340 shares. He exercised all these 1947,1 paying only $1,700 having market value when $9,930. Thus, end transactions, employer worth $8,230 stockholders more than before.2 The deducted this sum as expense returns but did not report any part it income. Viewing gain compensation personal services Commissioner levied deficiency assessment against him, relying on § 22(a) Internal Revenue Code 1939, 53 Stat. 9, amended, 574, 26 U.S.C.A. 22(a), which defines gross including 'gains, profits, derived from * service whatever kind form paid *.' 2 petitioned Tax Court redetermine deficiency, urging 'The said intended by Corporation petitioner constitute additional granted permit acquire proprietary interest provide with successful deriving ownership interest.' held taxable if designed 'a business.' Finding after hearings give corporation, services' LoBue. 22 T.C. 440, 443. Relying finding Appeals affirmed, saying: 'This factual issue peculiar responsibility resolve. our examination evidence we cannot say clearly erroneous.' Cir., 223 F.2d 367, 371. Disputes taxability transactions such are longstanding.3 We certiorari consider whether given too narrow interpretation. 350 893, 151. have repeatedly defining 'gross income' broadly Congress 'tax gains except those specifically exempted.' See, e.g., v. Glenshaw Glass Co., 348 426, 429—430, 75 473, 476, 99 483. exemption provided very comprehensive definition could possibly application here gift 22(b)(3). But there slightest indication detached disinterested generosity might 'gift' statutory sense. These transfers bore none earmarks gift. They made engaged operating business profit, found achieve profitable operations providing 'with incentive promote growth permitting them participate success.' page 445. Under circumstances properly refrained treating transfer giving something away nothing.4 4 Since employer's employee much stock's gift, seems impossible compensation. no income, however, ground one purpose confer 'proprietary interest.'5 word indicates broad coverage should narrowed because intention enlist efficient proprietors business. view basis test established courts below. When assets transferred secure better plainly It makes difference rather money. Section taxes 'in paid.' And another 'is enough include economic financial benefit conferred compensation, mode effected.' Smith, 324 177, 181, 65 591, 593, 89 830. received substantial prompted desire get him. 'compensation service' within meaning 22(a). 5 nonetheless argues treat transaction mere purchase 'realized' year purchase. true taxing system has ordinarily treated arm's length property even bargain price rise See Palmer Revenue, 302 63, 69, 58 67, 82 50. reality Government under unlike between strangers. Instead arrangement valuable services. hold realized purchased stock.6 A question remains time measured. gave promissory notes first 300 until cash.7 lower cash paid. measured contends wrong, either given. 7 possible recipient realize immediate gain. Interal 181—182, readily ascertainable free sell option. case. three transferable8 right remaining exercised. Moreover, uniform Treasury practice since 1923 measure subject contingencies sort exercised.9 relied 830; Id., 695, 891, 1295. 1950 Act affording limited benefits 'restricted plans' same standard measurement gains. 130A, 64 942. see 421, 1954, 68A 142. reason departing practice. granted. 8 bona fide delivery binding note mark completion date. neither nor passed judgment reversed remanded instructions remand further proceedings. 9 Reversed remanded. 10 FRANKFURTER CLARK, concurring. 11 join main issue. However, acquired taxed before Appeals. case, certainly fron general rule whereby abstains passing raised time. Helvering Minnesota Tea 296 378, 380, 56 269, 270, 80 284; Tex-Penn 481, 498, 57 569, 577, 81 755. 12 HARLAN, who BURTON joins, concurring dissenting part. 13 my view, event grant each option, exercise. unconditional price, asset immediately realizable value, least equal then-existing spread price. corporation At exercise 'gave' nothing; simply satisfied previously-created legal obligation. That transaction, merely converted into stock, consequence purposes. given, subsequent through appreciation sale transferable, exercise, attributable capital and, requirements satisfied, sould gain.1 Any result division total ordinary (compensation) (sale asset) dependent solely fortuitous circumstance exercises option.2 14 last exercisable, thus present problems. somewhat different circumstances. Respondent January 1945 'allotted' June 30, 1945, do then expressly still being employed His allotment vested stated condition, 15 Accordingly, while I concur reversal below Court, would granting events There some 1946. discussion, infra, completed. assessed $8,680 although record figures show $8,230. No explanation discrepancy appears record. Durkee Welch, 49 339; Erskine B.T.A. 147; Geeseman 38 258; Evans 1406. also Miller, Treasury's Proposal Employee's Bargain Purchases, Yale L.J. 706; Note, 269; 93 Cong.Rec. A4060—A4066; Surrey Warren, Federal Income Taxation (1955 ed.), 653—674. Robertson United States, 343 711, 713—714, 72 994, 996—997, 96 1237; Bogardus 34, 61, 32. noted 'that practically cases us, both element Present.' 258, 263. statute requires taxation unnecessary us rely Regulations reach conclusion. Apparently regulations applicable options. CFR, Rev. 1953, 39.22(a)—1(c); 1939—1 Cum.Bull. 159; 1946—1 15—18. occurred prior establishing special treatment relevance. 942, 130A. 142, 421. 40 Cf. McNamara 210 505. II—1 50; 15—18; Dillavon, Employee Stock Options, 20 Accounting Review 320; 706, 713—715. Valuation Option Subject Repurchase Options Restraints Sales, 62 832; Effects Absence Market Value 21 U. Chi.L.Rev. 464. 1295, does require opposite result. Smith's employer, Western, undertaken management reorganized Hawley, contract Western receive managerial specified Hawley reducing Hawley's indebtedness amount. turn, active reorganization, buy, fixed contract. successfully performed, Western—the substantially enhanced performance contract—was sold Smith facts case—more analogous assignment anticipated proceeds usual plan—the Court's accrue 'compensation' doubt amply justified. upholding finding: follow itself, compensation.' 182, 593. Suppose $5, current value. sells $15. second holds year, it, Admittedly $10 gain; fail how can other.

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