An employer gave to its employee as compensation for his
services an option to purchase shares of stock at a price not less
than the then value of the stock. The option had no value at that
time, and the compensation contemplated by the parties was the
transfer to the employee of the shares of stock after their value
had increased to more than the option price.
Held, under § 22(a) of the Revenue Act of 1938 and of
the Internal Revenue Code, the employee received "compensation for
personal service," and hence taxable income in each year in which
stock was acquired, through effective exercise of the option in
that year, in the amount of the difference between the pt.ion price
and the then market value of the stock. P.
324 U. S.
181.
142 F.2d 818, reversed.
Certiorari, 323 U.S. 696, to review the reversal of a decision
of the Tax Court which sustained the Commissioner's determination
of a deficiency in income tax.
MR. CHIEF JUSTICE STONE delivered the opinion of the Court.
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).
Upon a petition to review the Commissioner's finding of a tax
deficiency against respondent for those years, the Tax Court
sustained the Commissioner. The Court of Appeals for the Ninth
Circuit reversed, 142 F.2d 818, holding that there was no finding,
and no evidence to support a finding, that the option was intended
to enable respondent to make a "bargain purchase," or that the
stock was issued to him as compensation for services. It concluded
that the exercise of the option was a mere purchase of a capital
investment which could result in taxable income only upon sale of
the stock. We granted certiorari, 323 U.S. 696, on a petition which
asserted conflict of the decision below with the decision of the
Court of Appeals for the Sixth Circuit in
Connolly's Estate v.
Commissioner, 135 F.2d 64.
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.
Respondent, in the course of his employment by Western, was
active in the reorganization of the Hawley Company. As compensation
for his services, the president of Western, in December, 1934, gave
respondent an oral option to purchase a part of the Hawley stock,
to be acquired by Western under its contract. This action was
confirmed by resolution of the Board of Directors of Western
pursuant to which Western, as of December 10, 1934, and "in
consideration of services rendered" by respondent prior to that
date, agreed in writing to sell to respondent, at his option at 10
cents a share, a specified proportion of such shares of common
stock as it might be entitled to receive under its contract with
Hawley. On March 18, 1938, Western became entitled to the
stipulated number of shares of the Hawley stock as provided by the
contract with Hawley. In that and the following year, respondent,
by the exercise of his option, acquired from Western large amounts
of the stock on payment of the option price.
The Tax Court found that, at the date of the option, the market
price of the stock did not exceed the option price, but that, in
1938, the market value of the stock then acquired by respondent
exceeded its option price by $81,021, and the value of that
acquired in 1939 exceeded the option price by $71,663. The court
found from the option itself, the resolution of Western's Board of
Directors, and from petitioner's own testimony, that "Western gave
the option to petitioner [respondent here] as compensation for
services rendered in effecting the reorganization plan of Hawley."
It held that the excess of the market value of the shares over the
option price in the years when the shares were received by
respondent was compensation for his services, taxable as income in
those years.
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.
Section 22(a) of the Revenue Act defines "gross income" subject
to the Act as including "gains, profits, and income derived from
salaries, wages, or compensation for personal service . . of
whatever kind and in whatever form paid. . . ." Treasury
Regulations 101, Art. 22(a)-1 provides:
"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. . . ."
Section 22(a) of the Revenue Act is broad enough to include in
taxable income any economic or financial benefit conferred on the
employee as compensation, whatever the form or mode by which it is
effected.
See Old Colony Trust Co. v. Commissioner,
279 U. S. 716,
279 U. S. 729.
The regulation specifically includes in income, property
"transferred . . . by an employer to an employee, for an amount
substantially less than its fair market value," even though the
transfer takes the form of a sale or exchange, to the extent that
the employee receives compensation.
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.
The Tax Court thus found that the option was given to respondent
as compensation for services, and implicitly that the compensation
referred to was the excess in value of the shares of stock over the
option price whenever the option was exercised. From these facts it
concluded that the compensation was taxable as such by the
provisions of the applicable Revenue Acts and regulations. We find
no basis for disturbing its findings, and we conclude it correctly
applied the law to the facts found. Its decision is affirmed, and
the judgment of the Court of Appeals below, reversing it, is
Reversed.
MR. JUSTICE ROBERTS is of opinion that the judgment should be
affirmed for the reasons stated by the Circuit Court of Appeals,
142 F.2d 818.