1938 BTA LEXIS 892 | B.T.A. | 1938
Lead Opinion
The respondent contends that the option granted the petitioner “by its terms was strictly an employment of service contract” and that the difference between the price paid for the shares of stock and their fair market value on the date of purchase was additional compensation received by him as an employee of Continental Can Co. The petitioner contends that his purchase of stock was a “bargain” purchase and that such acquisition does not result in the realization of gain until the shares are sold or otherwise disposed of at a profit. In the alternative, he contends that if the transaction did constitute the payment of compensation, such compensation was received either when the option was originally granted or on the respective dates when the right to acquire the various allotments of stock matured.
Numerous cases which resemble the instant case in many respects have been decided and the results in many of them can not be reconciled as to conclusions of fact or conclusions of law. The disposition of such cases has become increasingly difficult because of the effort to
Normally the purchase of property does not result in the realization of taxable gain, but rather in the acquisition of an asset with a view to the later realization of gain or profit through its use or subsequent sale, and upon sale the general rule is that no taxable gain is realized until the seller has recovered his cost or capital. Burnet v. Logan, 283 U. S. 404. Certainly the above principle is applicable in the instant case in so far as the stock acquired by the petitioner under the option granted to him by his employer was acquired at a cost to him of $30 per share in cash. It is also equally obvious that the petitioner did not at the time of or in the year of purchase recover any part of such cost. Our question then is whether on the facts presented it must be said that some undivided part of the 640 shares of Continental Can acquired by the petitioner was acquired by purchase and in respect of that part no taxable gain is realized until the stock is sold or otherwise disposed of and the petitioner has recovered his cost, while saying that the remaining undivided part of the said shares was received as the payment of compensation and must be reported as income in the year received to the extent of the fair market value of such undivided part. If so, it must be because of the fact that the price paid was lower than the price at which the same stock
If the agreement between an employer and employee shows that the amount of money which is to be paid by the employee in connection with the acquisition of stock in the employer is fixed or controlled by services rendered or to be rendered and further shows that the employee agrees to receive payment of his compensation in the form of stock, the parties should not be heard to say that the excess of the fair market value of the stock over the cash paid by the employee should not be treated for income tax purposes as compensation paid. Albert Russel Erskine, 26 B. T. A. 147. Cf. W. M. Ritter Lumber Co., 30 B. T. A. 231. It is also possible that even in the absence of such a definite understanding or expressed declaration in the agreement between the employer and employee, the circumstances surrounding the agreement may be such as to render unreasonable and absurd any conclusion that the acquisition of the stock at the price named did not constitute the payment of compensation to the extent of the difference between the amount paid and the fair market value of the stock. Such, however, is not the case before us. It is true that the prospective purchasers were selected solely because they were valued employees of Continental Can Co., and there is no doubt that the added interest of these employees and the proprietary attitude toward the company which would result from their ownership of the stock constituted one of the motives for the granting of the option. It is equally obvious, however, that the continued employment of the petitioner was not dependent upon the receipt by him
The conclusion stated makes it unnecessary to consider the petitioner’s alternative contentions.
Decision will be entered for the petitioner.