Strom v. United States
641 F.3d 1051
| 9th Cir. | 2011Background
- Strom received nonstatutory stock options from InfoSpace with fixed $15 exercise price; most options were unvested at grant and vested over time or upon performance targets.
- She exercised options from 1999 to 2000 as InfoSpace stock price rose, then declined sharply after March 2000.
- InfoSpace underwent three mergers in 1999–2000; pooling‑of‑interests accounting policies allegedly restricted Strom’s stock transfers around mergers.
- Strom reported 1999 income from option exercises; 2000 taxes were not correctly reported; she sought refunds of taxes and Medicare withholding.
- The district court granted summary judgment to Strom on deferment through December 23, 2000 and to the government on deferment beyond that date; this appeal followed.
- The Ninth Circuit reverses the district court’s deferment ruling under §83(c)(3) and remands on pooling‑of‑interests issues under §1.83‑3(k).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Meaning of could subject a person to suit under §16(b) | Strom argues §83(c)(3) allows deferral if §16(b) liability could have arisen | Government contends the standard requires a realistic chance of §16(b) liability | Strom cannot defer under §83(c)(3); requires objective likelihood of §16(b) success |
| Whether vesting of unvested options is a purchase under §16(b) | Options vesting dates could constitute purchases for §16(b) purposes | Purchase occurs when derivative securities are granted, not upon vesting | Vesting is not a §16(b) purchase; §1991 SEC Release governs; no deferral under §83(c)(3) for 1999–2000 |
| Effect of SEC no-action letters on derivative security treatment | Staff letters could create a narrow exception for performance-based conditions | The exception does not apply to Strom’s general vesting scenarios | The general rule applies; no-action letters do not defeat the 1991 Release interpretation for Strom's options |
| Pooling‑of‑interests restrictions under §1.83‑3(k) applying to deferral | InfoSpace policy restrictions during mergers could defer income | District court did not properly apply pooling restrictions across 1999–2001 | Remand to determine whether pooling restrictions apply to entire period; deferral under §1.83‑3(k) remains unresolved |
Key Cases Cited
- Dreiling v. Am. Express Co., 458 F.3d 942 (9th Cir. 2006) (§16(b) is a blunt instrument targeting short-swing profits)
- Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (U.S. 1976) (§16(b) liability applies regardless of motive)
- Citadel Holding Corp. v. Roven, 26 F.3d 960 (9th Cir. 1994) (§16(a) reporting interplay with §16(b) exemptions)
- Theophilos v. Comm'r, 85 F.3d 440 (9th Cir. 1996) (substantial risk of forfeiture framework applies to property rights)
- Montgomery v. Commissioner, 127 T.C. 43 (Tax Ct. 2006) (issue of when a purchase occurs for §16(b) (context))
- Magma Power Co. v. Dow Chem. Co., 136 F.3d 316 (2d Cir. 1998) (acquisition of a fixed‑price option as §16(b) trigger)
- SEC Ownership Reports Release No. 34-28869 (1991), 56 Fed.Reg. 7242 (1991) (derivative securities purchased on grant; unvested treated as purchased)
- Simmonds v. Credit Suisse Sec. (USA) LLC, 638 F.3d 1072 (9th Cir. 2011) (§16(b) four elements for liability)