Court Opinion

ID: 4484756
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:58.420273+00
Date Added: 2024-06-11T12:10:38.176303
License: Public Domain

Whitaker, J, dissenting: I respectfully dissent. The issue in this case is whether or not the 4-year and 5-year shares of General Digital Corp. issued to petitioner in 1970 are subject to the provisions of section 83. By its terms, section 83 applies where property (i.e., stock) is transferred to a person "in connection with the performance of services.” On the facts found, the majority concludes that the transfer of the stock to petitioner was in connection with the performance of services for the company. However, nowhere is the phrase "in connection with the performance of services” defined. We must, therefore, look to the legislative history for assistance in deriving the congressional intent. Tufts v. Commissioner, 70 T.C. 756, 769 (1978), revd. on other grounds 651 F.2d 1058 (5th Cir. 1981), cert. granted 456 U.S. 960 (1982); Ziegler v. Commissioner, 70 T.C. 139, 143 (1978); Sheppard & Myers, Inc. v. Commissioner, 67 T.C. 26, 28 (1976). Section 83 was added to the Code as a part of the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 588. Section J of H. Rept. 91-4131 describes the problem which section 83 (section 85 of the original House bill) was designed to cure in the following language: Present law. — Present law does not contain any specific rules governing the tax treatment of deferred compensation arrangements known as restricted stock plans. A restricted stock plan, generally, is an arrangement under which an employer transfers stock to one or more of his employees (often without the payment of any consideration), where the stock is subject to certain restrictions which affect its value. * * * [Emphasis supplied.] * * * * * * * The existing Treasury regulations generally provide that no tax is imposed when the employee receives the restricted stock. Tax is deferred until the time the restrictions, lapse; at that time, only the value of the stock when it was transferred to the employee (determined without regard to restrictions) is treated as compensation, * * * Thus, under existing regulations there is a deferral of tax with respect to this type of compensation, and any increase in the. value in the stock between the time it is granted and the time when the restrictions lapse is not treated as compensation. General reasons for change. — The present treatment of restricted stock plans is significantly more generous than the treatment specifically provided in the law for similar types of deferred compensation arrangements. * * * The House report goes on to emphasize the disparity in treatment under then-existing law between nonqualified deferred trusts of various sorts where the employee is currently taxed as compensation on the value of the stock at the time of the transfer and restricted stock plans where the tax is deferred. The report also points to the qualified stock option arrangements then in the Code which "were designed to decrease the compensatory nature of stock options” by, among other provisions, requiring that the stock subject to the option must have an option price equivalent to fair market value at the time of issuance of the option, requiring the employee upon exercise to pay at least the market value as of the date when the option was received. The report comments that "restricted stock, on the other hand, may be given to an employee for no consideration at all.” In describing the new provision, the report first states that where property is transferred by reason of the performance of services and it is either transferable or not subject to a substantial risk of forfeiture, the transferee is required to include in income "the amount by which the fair market value of the property exceeds the amount (if any) he paid for the property.” While the report refers to property, it is clear that the committee was talking in essence about restricted stock.2 Thus, section J of the House report was intended to alter the tax treatment of restricted stock, that is, stock which is issued subject to a restriction which has a significant depressant effect on its value. The Technical Explanation of the bill which accompanies the House report confirms this interpretation in the following language: Under existing regulations if property is transferred subject to a restriction which has a significant effect on value, no part of the amount attributable to the transfer of such property is included in gross income until the time the restriction lapses or the property is sold or exchanged, whichever occurs earlier. Under new subsection (a), in such a case, the amount attributable to the transfer of property shall be included in gross [62] income * * * . Therefore, under new subsection (a) even if property transferred is subject to a restriction which has a significant effect on value, if the beneficial interest in such property is not subject to a substantial risk of forfeiture, the amount attributable to such transfer shall be included in gross income for the taxable year in which such beneficial interest is transferred. [1969-3 C.B. 340, at 376. Emphasis supplied.] The solution adopted by the House was to defer the tax only when the restrictions made the property subject to a substantial risk of forfeiture or not transferable. Thus, if such a restriction were not present, the difference between the amount paid and fair market value, determined without regard to lapse restrictions, was immediately taxable. Otherwise, the tax was computed and paid in the year the restrictions lapsed. S. Rept. 91-5523 uses substantially the same introductory language as the House report, defining a restricted stock plan as one "where the stock is subject to certain restrictions which affect its value.” While there are minor differences between the House and Senate bills, it is explicitly clear from the Senate report that it, too, was considering only that situation where the employee receives property like restricted stock subject to restrictions which depress its value. The major difference in the taxing scheme adopted by the Senate was to defer the tax not only so long as the employee’s rights were subject to a substantial risk of forfeiture but also until the property was transferable without the transferee being subject to the forfeiture restriction. The Senate modifications also included section 83(b), which allowed "recipients of restricted property the option of treating it as compensation in the year it is received.” (Emphasis supplied.) The restricted property provisions of the bill as enacted substantially conform to the Senate version. From this legislative history, it is apparent that property is not to be deemed to be issued in connection with the performance of services except where on the date of issue there is a discrepancy between the fair market value of the property subject to the restrictions and its fair market value without restrictions. The statute was designed to counter the then-existing practice of attaching lapse restrictions to stock in order to reduce temporarily its value, thus creating the compensation element which was deferral of tax on the economic gain at the time of purchase, that is, the difference on the date of issue between the fair market value without lapse restrictions and the amount paid for the property. The congressional cure was to defer the incidence of tax until the restrictions lapse, at which point both the economic gain at the time of issuance and the normal appreciation thereafter were subject to tax at ordinary income rates. However, section 83 is not limited to the deferral circumstance. Where property is issued subject only to restrictions which do not lapse, section 83 imposes an immediate tax upon the bargain element, in that case, on the difference between the price paid and the fair market value of the restricted property on the date of issuance. In both instances, however, the statute is focusing only on property transfers subject to restrictions which materially affect value. If the restrictions do not affect the value, or if there are no restrictions, under then-existing law, an employee purchasing property paid tax, as now, on the bargain element, if any. No avoidance of tax was present in that case and a legislative cure was unnecessary. The only abuse at which section 83 was directed arose where restrictions which lapse depressed the value artificially or made valuation too uncertain to determine, thus causing a deferral of tax under then-existing Treasury regulations. In this case, the parties have stipulated that the restrictions did not affect fair market value on the date of issue, that the 4-year and 5-year shares were worth the same price paid by petitioner as well as other persons for nonrestricted stock. While this fact may seem highly artificial, the parties, as well as the majority, have accepted the stipulation without apparently realizing that this fact removes the case from section 83. Petitioner argues that section 83(b), in referring to the excess of fair market value over the amount paid, demonstrates that section 83 was not intended to apply to a transfer at fair market value. The majority disagrees, suggesting that in petitioner’s circumstance, the election should be made to report and pay tax on zero compensation received in the year of issuance. The majority also points to section 1.83-2(a), Income Tax Regs., which specifically provides that payment of full value for the property transferred does not preclude the use of the section 83(b) election. I find that my interpretation of the "somewhat limited scope” of section 83(a) is not inconsistent with section 83(b) or with this section of the regulations. Neither do I disagree with the majority’s conclusion that in some cases a taxpayer should exercise the election and report zero compensation income. It must be remembered that the House and Senate committees considered that in the usual case, the employee would make a bargain purchase, paying little or nothing for stock under a restricted stock plan. Where the property is subjected only to restrictions which do not lapse, the bargain element under section 83(a) is taxable in the year of receipt. If there were no bargain element, the employee would have no tax to pay. But if the property carries lapse restrictions (with or without nonlapsing restrictions) section 83(a) defers the tax unless the section 83(b) election is made. And only by making that election, as the majority points out, can the employee avoid tax on appreciation between the date of issue and the date on which the restrictions lapse. Certain language in the regulations applying to section 83(b) is of significance: If property is transferred (within the meaning of sec. 1.83-3(a)) * * * the person [the employee] * * * may elect to include in gross income under section 83(b) the excess (if any) of the fair market value of the property at the time of transfer (determined without regard to any lapse restriction, * * * over the amount (if any) paid for such property, * * * . The fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election as provided for in this section. * * * [Sec. 1.83-2(a), Income Tax Regs. Emphasis supplied.] It is not unreasonable to suppose that some employees would be required to pay the "full value” for the property, that is, the value of the property with the restrictions in place, and it is at least possible that an employee might be required to pay a premium, i.e., full value without taking into account the lapse restrictions. The language of section 1.83-2(a), Income Tax Regs., simply makes it clear that the election is available in those circumstances where the employee does not, in fact, make a bargain purchase,4 that is, he pays full value for the restricted stock, or where the purchase price is the same as the price paid by others who purchase free of restrictions, thus paying a premium. The fact that an employee does not realize a "bargain element in the transaction” does not mean the employee will have no tax to pay, since the election requires including in income the fair market value without regard to any lapse restrictions. If the employee were to pay a premium, it would be even more important to make the election, reporting possibly a zero tax in order to avoid tax on the appreciation when the restrictions expired. The trouble with petitioner’s approach, and that of the majority, is the focus on the amount paid for the stock, rather than on the intended scope of the statute. That results directly from the artificiality of the transaction as stipulated, since commonsense tells us that restrictions such as the ones imposed in this case would certainly depress the value of the shares vis-a-vis unrestricted stock. Thus, section 83 should perhaps apply since petitioner, in reality, paid a premium for his restricted shares. But in view of the stipulation, accepted by the majority, section 83 simply cannot apply because in this unreal factual context the parties have agreed that the restrictions did not affect value. Thus, the stock issued to the particular group of employees, including petitioner, was not part of a restricted stock plan.5  For these reasons, I would find for the petitioner on this issue. Featherston and Goffe, JJ., agree with this dissenting opinion.   1969-3 C.B. 200, at 254.   H. Rept. 91-413 (1969), 1969-3 C.B. 255, includes the following comment: "Restrictions which by their terms never lapse, for example, a requirement that an employee sell the stock back to the employer at book value or a formula price if he terminates his employment, are not, in your committee’s opinion, tax-motivated and should be distinguished from restrictions designed to achieve deferral for tax saving purposes.”    1969-3 C.B. 423,500-502.   See, e.g., Gresham v. Commissioner, 79 T.C. 322 (1982), where we recognized that for purposes of the minimum tax, the fair market value of lettered stock was the price at which it could be sold on the date of issue and subject to the SEC mandated restriction.   In this case, I do not reach the issue of whether sec. 83 applies in every case in which an employee purchases stock subject to restrictions affecting value. Sec. 1.83 — 3(f), Income Tax Regs., states in part: “The existence of other persons entitled to buy stock on the same terms and conditions as an employee, whether pursuant to a public or private offering may, however, indicate that in such circumstances a transfer to the employee is not in recognition of the performance of, or the refraining from performance of, services. * * * ” Petitioner argues that payment of the issue price shows that the stock was not issued as compensation, but in connection with an investment. The determination whether stock is issued as compensation, as opposed to being acquired as an investment, requires an analysis of all facts and circumstances surrounding the transfer of the restricted stock. Here, the majority has found that the stock was not purchased as an investment. I do not think the facts as found necessarily require that determination, but in my view it is unnecessary and, therefore, unwise to make a factual analysis since the transfer was entirely outside the scope of sec. 83 by reason of the stipulation as to the value of the restricted stock. The circumstances under which a purchase by an employee of restricted stock may not be subject to sec. 83 because acquired for investment purposes must await a proper case with real, not artificial, facts.