Court Opinion

ID: 4615732
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:33:00.541943+00
Date Added: 2024-06-11T07:54:59.839793
License: Public Domain

IRVING D. ROSSHEIM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rossheim v. CommissionerDocket No. 57503.United States Board of Tax Appeals31 B.T.A. 857; 1934 BTA LEXIS 1021; December 13, 1934, Promulgated *1021  1.  Treasury regulations (art. 51 of Regulations 74) can not create income where none in fact exists, when measured by the statutory definition of gross income, following Taplin v. Commissioner, 41 Fed.(2d) 454; Commissioner v. Van Vorst, 59 Fed.(2d) 677, affirming George W. Van Vorst, Executor,22 B.T.A. 632">22 B.T.A. 632; and James William Everhart,26 B.T.A. 318">26 B.T.A. 318. 2.  The petitioner, as president of a corporation, was given an option to purchase stock at less than market.  Held, that upon the purchase of the stock the difference between cost and market value represented additional compensation.  Lawrence A. Baker, Esq., for the petitioner.  Paul E. Waring, Esq., for the respondent.  MCMAHON *858  This proceeding involves income tax for the calendar year 1928, in the amount of $45,690.83.  The petitioner alleges that respondent erred in that he has erroneously added to the net income reported by petitioner for 1928 the sum of $186,212.50 as additional compensation received by petitioner during 1928.  By an amended answer respondent admits that he erred in increasing petitioner's*1022  income for 1928 by $186,212.50, and alleges that net income should have been increased by $243,800, being the profit realized from the exercise of an option to purchase stock and additional compensation received during 1928 over and above the amount reported.  FINDINGS OF FACT.  The petitioner is a graduate of the Wharton School of Finance, and the Law School of the University of Pennsylvania, being admitted to the practice of law in the latter state in 1911, the year he graduated from the law school.  After completing his law course petitioner immediately became associated with the law firm of Henry J. Scott, and also taught general economic subjects, primarily accountancy, money and banking, corporation finance and corporation law at the Wharton School of Finance, which continued for a period of about ten years.  After one year with Henry J. Scott petitioner became associated with Wessell & Aaron, then practiced alone for a couple of years, and finally, between 1915 and 1918, entered the firm of Stern & Wolf as a law clerk.  Petitioner's legal duties with this firm had to do particularly with a group of corporate clients then engaged in the extension of motion pictures in*1023  Philadelphia and its environs.  The corporate aspects of these clients, their leases, and the arrangements leading up to the combination and consolidation of the several companies into the Stanley Co. of America occupied petitioner's time during 1918 and 1919.  After the formation of the latter company in 1919 petitioner found his time taken up more and more with conducting the business of the Stanley Co. from an accounting and administrative standpoint.  As a law clerk petitioner received a salary of $75 a week from Stern & Wolf, but in the latter part of 1919 he was taken over by the Stanley Co. because his time was devoted almost entirely to its *859  business.  Thereafter, petitioner continued his duties with the latter company, but acted as liaison officer between the Stanley Co. and Stern & Wolf.  Petitioner performed his duties without official recognition from the Stanley Co. until 1926.  The business of the Stanley organization was conducted in a very informal manner.  In its organization were a number of men with diverse interests, some of them representing real estate interests and some exposition interests, who did not recognize the usual limitations surrounding*1024  corporate activities.  In many instances their plans and ideas were carried through and completed as a result of informal discussions among themselves.  Such formal action as was taken by the organization was largely due to the sense of responsibility of its president, Mastbaum, who secured the ratification by the board of directors of the transactions that benefited the corporation.  The board was fairly large and rarely met more than once a month, with the result that most of the business was not discussed at the meetings, but the transactions were simply recited, approved, and ratified.  The death of Mastbaum, in December 1926, marked the end of a period of very rapid expansion by the Stanley Co., during which the organization grew to several times its original size.  The motion picture groups acquired during this period included the Stanley-Fabian Theatres in New Jersey, the Stanley-Mark Theatres in New York, Stanley-Davis-Clark Theatres in upper Pennsylvania, and the Stanley-Crandall Theatres in Washington, D.C.  These acquisitions brought men into the Stanley organization who had as much experience in the motion picture field as, and larger investments than, any of the original*1025  members.  Mastbaum was succeeded by John J. McGuirk, who remained president of the Stanley Co. until January 1928.  During McGuirk's regime the business of the organization was conducted with even less formality than before and a definite resentment began to crystallize against McGuirk and his methods of attempting to do business without consulting the other members of the directorate.  This resentment was elected president as a compromise candidate by the opposing was elected president as a compromise condidate by the opposing factions.  Prior to his elevation to the presidency, petitioner had received official recognition from the board of directors in December 1925, when he was made assistant treasurer of the Stanley Co. with a salary of $25,000 per annum, commencing January 1, 1926.  In April 1927 his salary was increased to $800 per week, and in July 1927 he was made treasurer of the company at the same salary.  Petitioner's salary as president was $65,000 per annum, plus $10,000 *860  for expenses, being the same salary received by McGuirk during his incumbency.  Petitioner was reelected president of the Stanley Co. at the same salary in July 1928, at the first meeting*1026  of the newly elected board of directors.  In May 1928 petitioner discussed with some of the directors and largest stockholders of the Stanley Co. the granting of an option to him by that company whereby he would have the right to purchase $10,000 shares of Stanley stock at a price of 40 when the stock sold on the open market in an amount of not less than 1,000 shares at 55.  At or about the time this discussion occurred petitioner owned approximately 100 shares of stock and at no time prior to his purchase under the option did he own more than 515.3 shares of stock.  The price range of Stanley Co. common stock during May 1928 was, high 45, low 30 1/2.  As a result of this discussion Rossheim understood that he would be granted an option to buy the stock.  During 1928 the Stanley Co. found it necessary to obtain new financial backing, as the company was in straitened circumstances, having between $5,000,000 and $6,000,000 of quick liabilities.  New banking connections were established with Goldman, Sachs & Co., who were also bankers for Warner Brothers Pictures, Inc., through the efforts of Morris Wold, of the firm of Stern & Wolf, and certain directors of the Stanley Co. who were*1027  heavily interested in the company.  Petitioner took very little part in these negotiations, as he was busily engaged in operating the company and attempting to reorganize certain operating features.  At or about this time preliminary negotiations began relative to the taking over of the Stanley Co. by Warner Brothers Pictures, Inc.  These negotiations were first handled informally by some of the directors and stockholders, who later presented the result of their negotiations to the board of directors, and the deal was consummated.  Rumors of the contemplated acquisition of the Stanley Co. by Warner Brothers resulted in a very active market for Stanley Co. common stock and the price thereof rapidly approached the figure upon which discussions regarding petitioner's option had been based.  Having in mind the proposed absorption of the Stanley Co. by alien interests, Rossheim urged that the option, the granting of which had been assured him by certain directors, be put in writing in order to protect his own interests.  Accordingly, certain resolutions were adopted on September 12 and 26, 1928, which appear in the agreement dated October 15, 1928, entered into between Rossheim and*1028  the Stanley Co. of America, as follows: WITNESSETH THAT: At a meeting of the Board of Directors of Stanley held on the 26th day of September, 1928, pursuant to notice, a quorum being present a resolution was *861  unanimously adopted by said Board for the purpose of carrying into effect a resolution adopted at an informal meeting of the Board of Directors and the larger stockholders of the Company held September 12, 1928.  The resolution of the meeting of September 12, 1928, reads as follows: RESOLVED, That it is the opinion of the directors and stockholders of Stanley Company of America present at this meeting that Irving D. Rosshein should be given the option to purchase up to 10,000 shares of the unissued stock of Stanley Company of America at the price of $40. per share at any time up to and including December 31, 1929, provided that at the time the option is exercised the bid price for stock of Stanley Company of America on the New York Stock Exchange for not less than 1000 shares of stock shall be not less than $55. a share, and provided also that if Irving D. Rossheim resigns as president of Stanley Company of America before the exercise of this option the option*1029  thereupon shall become null and void.  FURTHER RESOLVED, that the foregoing matter be presented for formal ratification by the Board of Directors at its next meeting.  The resolution of the meeting of September 26, 1928, reads as follows: RESOLVED, That Irving D. Rossheim be and he hereby is given an option to acquire up to 10,000 shares of the unissued capital stock of Stanley Company of America, or at the option of the Board up to 10,000 shares of the issued capital stock of Stanley Company of America to be acquired by this Company by purchase in the open market for such price and on such terms as to the Board may seem expedient and to be sold and delivered to Irving D. Rossheim against payment therefor at the sum of $40. per share at any time up to and including December 31, 1929 (the price of $55. having already been bid and paid for the capital stock of Stanley Company of America for more than 1000 shares); provided, however, that if the said Rossheim shall resign as president of Stanley before the exercise of this option, the option thereupon shall become null and void.  * * * The agreements hereinafter referred to are about to be concluded or may have been concluded*1030  between Warner Brothers Pictures, Inc., and such of the stockholders of Stanley as may desire to become parties thereto and to exchange their stock in Stanley for preferred and common stock of Warner pursuant to the terms of said agreements.  Now, THEREFORE, in consideration of the premises it is hereby mutually covenanted and agreed between Stanley and Rossheim as follows: 1.  In the event the Exchange, Deposit and Purchase Agreements for the acquisition by Warner Bros. Pictures, Inc. of a majority of the shares of capital stock of Stanley shall be consummated, Stanley hereby agrees to purchase from Goldman, Sachs & Co., New York City 8,000 shares of preferred stock and 800 shares of common stock of Warner Bros. Pictures, Inc. for a gross consideration equal to the purchase price paid by Goldman, Sachs & Co. on September 26, 1928 for 10,000 shares of Stanley, with interest at the rate of 6% per annum to the date of delivery of Warner stock, less credit on account of said purchase price for the amount of cash due under the Deposit and Exchange Agreements to stockholders of Stanley.  2.  In such event and in satisfaction of said option Rossheim covenants and agrees with Stanley*1031  to purchase from Stanley (on or before the expiration of *862  15 days after Stanley shall have acquired from Goldman, Sachs & Co. the securities set forth in Paragraph 1 hereof and shall have notified Rossheim in writing that it is prepared to make delivery of said securities), and Stanley agrees to sell and deliver to Rossheim 8000 shares of preferred stock and 800 shares of common stock of Warner Bros. Pictures, Inc. for the price of sum of two hundred eighty-five thousand Dollars ($285,000), payment to be made by Rossheim against delivery of certificates therefor.  * * * This agreement shall extend to and bind the Stanley Company, its successors and assigns, and Rossheim, his heirs, executors, and administrators.  The vice president and the secretary signed the agreement for the Stanley Co. of America.  Under date of October 9, 1928, Goldman, Sachs & Co. notified the Stanley Co. of America that they had purchased the 10,000 shares of Stanley Co. stock "in the open market on September 26th" at a cost of $585,712.50, plus interest "at the rate of 6% from said date to the date of delivery of such shares to you, but only provided that a majority of the shares of the stock*1032  of Stanley Company of America shall be exchanged for stock of Warner Bros. Pictures, Inc. in accordance with plans now in contemplation." Under date of October 17, 1928, the Stanley Co. requested Goldman, Sachs & Co. to deposit the 10,000 shares under the exchange agreement between the Stanley Co. and Warner Bros., and to deliver the equivalent in Warner Bros. preferred and common stocks, less the sum of $115,000.  Under date of October 22, 1928, Goldman, Sachs & Co. replied in part as follows: In accordance with your request, we will deposit such 10,000 shares of stock of Stanley Company of America and understand that upon the consummation of the exchange of such stock there will be deliverable to you 8,000 shares of Preferred Stock and 800 shares of Common Stock of Warner Bros. Pictures, Inc. for which you agree to pay to us $585,712.50 plus interest thereon at the rate of 6% per annum from September 26, 1928, to date of payment, less the amount of cash received by us upon the exchange of stock of your Company pursuant to the terms of the Deposit Agreement.  This amount of cash, we understnad to be $115,000 less a deduction of not more than $500 for transfer stamps.  Delivery*1033  of the 8,000 shares of Preferred Stock and 800 shares of Common Stock of Warner Bros. Pictures, Inc. shall be made by us to you against payment therefor at our office in New York funds as soon after the exchange as shall be reasonably possible.  Under date of December 17, 1928, Goldman, Sachs & Co. demanded payment of the Stanley Co. in New York funds on December 20, 1928, in the sum of $479,510.10 against delivery of 8,000 shares of preferred and 800 shares common of Warner Bros. Pictures, Inc., and stated that "we expect to receive the above-mentioned shares on said date, together with cash in the amount of $114,500 ($115,000.00, less $500.00 for transfer stamps), in exchange for certificates of deposit *863  for 10,000 shares of Capital Stock of Stanley Company of America." A memorandum of the account reads as follows: September 26, 1928 Dr$585,712.50Int. at 6% per annum to 12/20/288,297.60-------------$594,010.10Less cash114,500.00-------------Due us Dec. 20, 1928$479,510.10Under date of December 20, 1928, the treasurer of the Stanley Co. advised Rossheim that the aforesaid Warner Bros. stock had been received, payment of $479,510.10*1034  had been made therefor to Goldman, Sachs & Co., and demanded payments from Rossheim of $285,000 in accordance with the agreement of October 15, 1928, which payment was due on or before January 4, 1929.  Rossheim had no resources approximating even a fraction of the $285,000, but was able to borrow $142,500 from the Pennsylvania Co. for Insurance of Lives and Granting Annuities and $150,000 from the Market Street National Bank, using the stock as collateral.  The Stanley Co. of America shows on its books of account, under date of December 28, 1928, the receipt of $289,450 cash in payment for this stock.  Ninety-day notes were given by petitioner for these loans, one of which was curtailed from time to time, with a new note given for the balance.  The stock market conditions in the fall of 1929 necessitated new banking arrangements by petitioner with respect to the balance of the Market Street National Bank loan.  During 1929 petitioner sold some of the collateral held for the other loan, the proceeds of which were applied to reduce the loan.  The profits resulting from these sales were reported as income by petitioner for 1929.  Further sales were made of collateral in 1930, the proceeds*1035  being used to reduce the respective loans.  The profits were reported as income for 1930.  At or about the time that the Stanley Co. of America was taken over by Warner Bros. pictures, Inc., the former company entered into a contract with petitioner under date of December 22, 1928, whereby Rossheim was employed for a period of three years from January 1, 1929, at a salary of $100,000 per year.  The agreement for the Stanley Co. was signed by Albert Warner, vice president, and Joseph Sloane, assistant secretary.  As or October 1, 1929, Rossheim resigned from the presidency of the Stanley Co. of America, the latter company agreeing to deposit $130,769.20 with the Manufacturers Trust Co., no part of which sum was to be vested in Rossheim before January 2, 1930.  This sum was reported as income by petitioner for the year in which it was paid over to him.  *864  The Stanley Co. of America did not make it a practice to pay its employees a bonus, nor did it pay bonuses to any of its officers.  It treated authorized salaries as compensation in full of all its officers, even to the extent of not making salary contracts with its officers or employees.  The only exception was the*1036  salary contract which was made upon the taking over of the company by Warner Brothers Pictures, Inc., which was initiated by petitioner for his own protection.  As stipulated by the parties, the Commercial & Financial Chronicle and the Wall Street Journal showed the following quotations of Warner Borthers Pictures, Inc., stock on the dates set forth: CommonPreferred---------------------------------------------------SharesShares1928soldLowHighsoldLowHighDec. 2245,0001221276,5005456Dec. 2455,600124 5/8129 3/46,50055 1/457 1/4Dec. 26------120 1/4126 1/27,20052 1/456Dec. 2736,700117122 1/41,50052 1/454 1/2Dec. 2822,300121123 1/21,3005454 5/8Using the quoted value of 121 for common and 54 for preferred, respondent determined that petitioner received stock having a total fair market value of $528,800 at a cost of $285,000, which resulted in additional compensation for 1928 in the sum of $243,800, being the amount alleged in respondent's amended answer.  OPINION.  MCMAHON: In this proceeding the respondent based his original deficiency*1037  upon a determination that petitioner received additional compensation in 1928 in the amount of $186,212.50, being the difference between the fair market value of certain stock and the cost thereof to petitioner.  By an amended answer respondent has increased the amount of additional compensation so received to $243,800, and asks the Board to increase the deficiency accordingly.  Respondent relies upon articles 51 and 53 of Regulations 74, 1Treasury Decision 3435, C.B. II-7, p. 50, and our decision in Albert R. Erskine,26 B.T.A. 147">26 B.T.A. 147. *1038  The respondent contends that the provisions of article 511 of Regulations 74 require that the difference between cost and fair market value of the stock purchased by petitioner, under the facts *865  and circumstances disclosed in the instant proceeding, should be included in gross income.  Article 51 is the successor to, and is identical with, article 31 of Regulations 65 and 69, interpreting corresponding provisions of the 1924 and 1926 Acts, respectively.  It should also be noted that article 31 of Regulations 65 and 69 and article 51 of Regulations 74 were first promulgated by the Treasury Department as Treasury Decision 3435, and thereafter appeared as a part of Regulations 65, 69, and 74.  Treasury Decision 3435 has been carefully considered by the courts in Taplin v. Commissioner, 41 Fed.(2d) 454; and Commissioner v. Van Vorst, 59 Fed.(2d) 677, affirming George W. Van Vorst, Executor,22 B.T.A. 632">22 B.T.A. 632, and by the Board in the latter case and in James William Everhart,26 B.T.A. 318">26 B.T.A. 318. These cases and authorities therein cited adequately support the view that article 51 of Regulations 74 cannot*1039  create income where none, in fact, exists when measured by the statutory definition of gross income.  We cannot agree with the contention of the respondent based on article 51. The respondent further contends that the resolutions of September 12 and 26, 1928, which are set forth in the agreement of October 15, 1928, constitute a contract of employment between petitioner and the Stanley Co. of America, and that the difference between cost and fair market value was additional compensation.  Petitioner contends that these resolutions permitted him to buy stock at a bargain price, and that no contract of employment was intended or resulted.  The petitioner testified that he thought he was being offered an opportunity to become a substantial stockholder, since he owned very little stock in the corporation.  Except for the inference which may be drawn from all the facts disclosed in this proceeding, the record throws no light upon the influences which moved the directors to grant this option to the petitioner.  Between 1915 and 1918 the petitioner was employed as a law clerk by the firm of Stern & Wolf.  His duties with that firm, however, had to do particularly with a group of*1040  corporate clients then engaged in the extension of motion pictures, which group in 1919 was combined and consolidated into the Stanley Co. of America.  In the latter part of 1919 he was taken over by that company because his time was devoted almost entirely to its business.  In December 1925 the petitioner became assistant treasurer of the company, with a *866  salary of $25,000 per annum, commencing January 1, 1926.  In April 1927 his salary was increased to $800 per week, and in July 1927 he was made treasurer of the company at the same salary.  In January 1928, because of dissatisfaction of members of the board of directors of the company with McGuirk, the then president of the company, on account of his method of attempting to do business without consulting them, the petitioner was elected president of the company.  He was chosen as a compromise candidate by the opposing factions.  His salary was $65,000 per annum plus $10,000 for expenses, which was the same salary theretofore paid to McGuirk.  In May 1928 the option as expressed in the resolution of September 28, 1928, was first discussed by the petitioner with some of the directors and largest stockholders of the company. *1041  As a result of this discussion the petitioner understood that he would be granted such option.  In July 1928, at the first meeting of the newly elected board of directors, the petitioner was reelected president.  Thus it appears that petitioner was, after 1915, actively interested in the business of the Stanley Co. and its predecessor companies.  The business of the Stanley Co. was conducted in a very informal manner and from December 1926 until January 1928 the business of the company was conducted with even less formality than before.  It never made any salary contracts with any of its employees or officers.  In fact the option which the petitioner understood he was to be given was not reduced to writing until the petitioner, in view of the contemplated absorption of Stanley Co. by Warner Brothers Pictures, Inc., urged that this be done in order to protect his own interests.  It also appears that the Stanley Co. did not make it a practice to pay its employees or any of its officers a bonus, but treated authorized salaries as compensation in full.  Whatever the practice of the company may have been in the conduct of its business, it does appear that the petitioner was not only*1042  able to induce the directors to grant him an option giving him the right to purchase stock of the company at $40 when the bid price for such stock for not less than 1,000 shares would be not less than $55 a share, but also was able to have the agreement put in writing.  In fact the agreement was reduced to writing at a time when the price of $55 had already been bid and paid for more than 1,000 shares while the petitioner could purchase at $40.  The right that Rossheim acquired under the written agreement was a right to purchase up to 10,000 shares of stock at $40 per share.  The right expired in any event after December 31, 1929, and no provision was made for purchases of a portion of the stock in subsequent years.  Cf. Phillip W. Haberman,31 B.T.A. 75">31 B.T.A. 75. Actually *867  petitioner acquired the right, exercised it, and purchased the stock, all during the taxable year 1928, so that the question of the value of the right need not be considered.  In reference to petitioner's relationship with the corporation, there is found a proviso that if petitioner "resigns as president of Stanley Company of America before the exercise of this option the option thereupon*1043  shall become null and void." In fact, unless his continued services with the Stanley Co. be deemed the consideration for such option, such option upon its face appears to have been given without consideration whatever.  It is a well-established rule that an option contract, to buy or sell, as in the case of other contracts, must be supported by a valuable consideration, 55 C.J. 109, and cases cited.  As stated in Albert Russel Erskine,26 B.T.A. 147">26 B.T.A. 147, 157: * * * The officers and directors of the corporation had no lawful right to make a gift to the petitioner of any part of the value of the shares of stock, or to "sell" them to the petitioner at a price known to be considerably less than their cost or market value.  We must assume that the officers and directors did not act unlawfully.  Noel v. Parrott, 15 Fed.(2d) 669. So we must assume here that the directors and officers did not act unlawfully.  Here the consideration moving from petitioner to the corporation was services.  It seems to us that the members of the board of directors and stockholders considered the petitioner a valuable employee and were anxious to retain his services, especially*1044  at a time when friction arose among them.  This is obvious from the fact that he was chosen as president in January 1928 by the opposing factions.  Furthermore, the petitioner had been actively engaged in the business of the company for many years.  Taxation is a practical matter and we must look to the substance rather than the form.  Business men acting as directors and officers of corporations ordinarily do not give away the funds in corporate treasuries without adequate consideration.  We are well satisfied that the petitioner would not have been given the option in question if he were not president of the corporation, under all the facts and circumstances as shown by the proof.  The mere fact that the provisions of the option were not woven into a formal contract of employment is not sufficient to establish that the contention of the respondent in this respect is unsound.  In our view this proceeding is controlled by the underlying principles of Albert Russel Erskine, supra, and Omaha National Bank et al., Executors,29 B.T.A. 817">29 B.T.A. 817, notwithstanding that there are some differences in the facts and circumstances and more particularly that there*1045  were more formal contracts in those cases.  We are impressed by the failure of the petitioner to show that the difference between the cost to him and market value of the stock was not taken as a deduction by the Stanley *868  Co. in 1928.  Cf. Haskell & Barker Car Co.,9 B.T.A. 1087">9 B.T.A. 1087, and Commercial Investment Trust Corporation,28 B.T.A. 143">28 B.T.A. 143. No question of a gift of the difference between the cost and fair market value is involved here, such as was considered in Harry F. Robertson,5 B.T.A. 748">5 B.T.A. 748, and Joseph W. Robinson,21 B.T.A. 907">21 B.T.A. 907, reversed in Robinson v. Commissioner, 59 Fed.(2d) 1008. Reviewed by the Board.  Decision will be entered for the respondent.MURDOCK, SEAWELL, GOODRICH, and LEECH concur in the result.  BLACK dissents.  SMITH SMITH, dissenting: I can not agree that the petitioner received taxable income for 1928 in the amount of $243,800 by exercising an option to purchase 10,000 shares of the unissued capital stock of Stanley Co. of America.  According to the findings, the petitioner discussed with some of the directors and largest stockholders of*1046  the Stanley Co. the granting of this option in May 1928.  During that month the stock sold as high as $45 per share and as low as $30.50 The petitioner was not to exercise the option until the stock sold on the open market in an amount of not less than 1,000 shares at $55 The petitioner understood that the option would be granted him This informal understanding was carried into effect at a meeting of the board of directors on September 26, 1928.  It appears that by that time 1,000 shares of the stock had sold at a price of $55 Even if the contract made by the board of directors with the petitioner on September 26, 1928, was a contract for compensation for services performed or to be performed, it seems to me that the only amount which could be included in the gross income of petitioner for 1928 was the value of the option contract at the date it was acquired by the petitioner.  The findings do not show any cash value for the contract at that date.  By the option contract the petitioner was not given shares of stock in payment for his services.  Prior to the end of 1928 the stock advanced in price by leaps and bounds.  In December 1928 the petitioner exercised his option and acquired*1047  the shares of stock.  These shares of stock cost him something.  It seems to me that when he sold them the basis for the computation of gain or loss was the price that he paid for them and not the fair market value on the date when he exercised the option.  I can not see that the principle applied by the Board in Albert Russel Erskine,26 B.T.A. 147">26 B.T.A. 147, is applicable here.  To my mind that case is clearly distinguishable from the present one.  The facts in this case are substantially those which obtained in D. C. Bothwell,27 B.T.A. 1351">27 B.T.A. 1351, in which we held that where the optionee sold his *869  stock the basis for computing his gain was the purchase price for the shares.  I am also of the opinion that the Board's decision in this case is contrary to Rose v. Trust Co. of Georgia, 28 Fed.(2d) 767; Taplin v. Commissioner, 41 Fed.(2d) 454; Durkee v. Welch, 49 Fed.(2d) 339; and Commissioner v. Van Vorst, 59 Fed.(2d) 677. Footnotes1. ART 51.  * * * Where property is sold by a corporation to a shareholder, or by an employer to an employee, for an amount substantially less than its fair market value, such shareholder of the corporation or such employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value.  In computing the gain or loss from the subsequent sale of such property its cost shall be deemed to be its fair market value at the date of acquisition by the shareholder or the employee.  This paragraph does not apply, however, to the issuance by a corporation to its shareholders of the right to subscribe to its stock, as to which see article 58.  ART. 53.  * * * Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income.  * * * Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash.  * * * ↩