Thomas R. Pledger and Phyllis R. Pledger v. Commissioner of Internal Revenue

stipulated only worth were MORGAN, Before FAY and FRANK M. JOHNSON, Jr., pursuant Judges. if sold Circuit their market value 4(2) brought appel- act. 15 This of the Act of 1933 § case is in the name Securities wife, Phyllis Pledger, 77d(2). private R. lant because Stock issued these § U.S.C. they jointly commonly offerings filed with the Internal Revenue “lettered” referred years question. stock, Service in the tax Because re- certain restrictions Pledger primary party Thomas R. is the in this regulations garding sale under the rules case, opinion will refer him hereinafter may be the securities laws. This stock sold taxpayer. as the year holding period a two after are to restrictions other conditions met. 2. This action was in order for the trans- taken 144(d)(1), Rule 17 C.F.R. 203.144 § qualify offering, private exempt- action to as a registration requirements ed from under the during parties agree a two- what is income. All private placement another purchase. after year period purchase stock was option calculated the year the taxable purchase for services and excess the discounted value of the Taxpayer stock was a taxable event. as- paid over the amount the stock and serts, however, is uti- government $195,363.3 The reported as income Commis- lizing 83(a) of the Internal Revenue Section 5 the amount of sioner on audit increased value, e., nonexisting to tax a i. Code $239,137 based on the dif- compensation by of market value of the stock excess the fair the full fair ference between 83(a) over the discounted value. Section taxpayer’s market value exceeded the cost in provides the value of taxpayer and the amount of taxes the had property the form of stock or other From paid.4 this the Commissioner deter- taxation is to deter- purposes of income $155,- in the amount deficiency mined a of market value by mined reference to the fair adjusted 416 accordingly taxpayer’s property regard any of the “without in basis the stock. than a restriction which restriction other Appellant lapse.” for a redetermi- its terms will never 26 U.S.C. petition filed 83(a). allows deficiency degree nation of in the United To the this statute States § Tax upheld Court. The Tax Court the defi- taxation of an amount in excess of the ciency taxpayer appealed and the to this could sell value for which restriction, court. during taxpay- the time of pow- exceeds the argues er the statute I. Congress ers of to tax under the Sixteenth 1, The first Article 8 of the appel issue raised Amendment and Section presents recurring question lant of Relying Constitution.6 on the classic defini- Appellant compen- performed, such calculated the amount of whom services are the excess sation as follows: of— (1) property the fair market value of such Value of Stock on Dates of (determined restriction (per appraisals)......... $395,363 Exercise other than a restriction which its terms Amount Paid for Stock on lapse) rights will never the first time the of 200,000 Dates of Exercise ............... person having the beneficial interest property such are transferable or are not Amount Determined to be forfeiture, to a substantial risk Compensation (excess of earlier, whichever occurs over paid) $195,363 value over amount ......... (2) (if any) prop- paid the amount for such erty, gross shall be included in the income of 4. The Commissioner calculated the amount of person performed who services in such as follows: year rights the first taxable in which the Value of Stock on Dates person having the beneficial interest (per value) $634,500 Exercise market ...... property such are transferable or are not Amount Paid for Stock on forfeiture, to a substantial risk 200,000 Dates of Exercise ............... applicable. preceding whichever is The sen- apply person tence shall Amount if such sells or Determined to be Compensation.................. disposes $434,500 otherwise of such in an length rights arm’s transaction before Reported Amount on 1970 such subject become transferable or not $195,363 Form 1040 ..................... to a substantial risk of forfeiture. Deficiency....................... $239,137 government argues 6. The appropriate 83(a) (as by 321(a) concedes even the tax is not 5. 26 § U.S.C. added § Amendment, 1969, 91-172, Tax Reform 487). under the Act of P.L. Stat. Sixteenth the tax could 83 provides pertinent upheld general taxing provisions part The statute under the 1, follows: of Article Section 8 if uniform. government arguing Property is correct in that the per- transferred connection with progressive taxation scheme of the income tax formance of services. (a) If, finding General does not affect the the tax connection with the Rule.— performance services, property in this case is is transfer- uniform. See Knowlton v. any person Moore, person 41, 747, red to other than the 178 U.S. 20 44 969 S.Ct. L.Ed. full percent of the market value or the in Eisner v. presented income tion of 189, 189, purposes value was received for 252 U.S. fair market Macomber7 argues Eisner does (1920), taxpayer language 64 L.Ed. of taxation. The gain value is realized that the excess not control case. ... de

“something exchangeable of Eisner language does not contravene the these con Id. With property.” rived from income under Sixteenth defining tentions, we disagree. did, Amendment, the lan- if it even where a controlling is not guage of Eisner First, the Sixteenth we note presented. different issue expand limit or Amendment did not Article power Congress to tax under in this challenge to the one In a similar Brusha Section 8 the Constitution. held Circuit in Sakol case the Second R., S.Ct. ber v. Pac. R. (2d Cir.), Union cert. Commissioner, 574 F.2d L.Ed. The Sixteenth 859, 99 58 L.Ed.2d denied 439 U.S. for taxation of simply provided Amendment 83(a) did not violate (1978), 168 that Section In Eisner apportionment. income without that case In the Sixteenth Amendment. 189, Macomber, 40 v. S.Ct. supra, 252 U.S. as compensation the received taxpayer 189, 521, attempted to 64 L.Ed. the Court a lesser value what she claimed to be used, but the “income” left define term purchased the market value of stock undefined, Amendment. the Sixteenth option plan a stock pursuant case, a taxing In struck down that the court the on contractually imposed attempted the that it ground statute on lan that the sale. The court considered not income tax stock dividends were to be real “gain” guage requiring of Eisner meaning of within the the Sixteenth had modi ized for “income” to exist been distinguished case be Amendment. The the upholding by subsequent decisions fied focusing capital tween income and v. accounting, Burnet accrual method particularly compensation on the issue of 359, Co., 51 S.Ct. Brooks 282 U.S. Sanford & presented defining In income this case. 150, (1931), 383 the doctrine 75 L.Ed. value,” “something exchangeable the Bowers, 281 receipt, v. constructive Corliss income, not stating Court was what was (1930), 376, 336, L.Ed. 916 74 U.S. 50 S.Ct. the received. defining amount of income prohibiting assignment rules and the tax developments in the law reveal Later tax Horst, 61 income, Helvering 311 v. U.S. was not intended that definition (1940). Id. at 700. 85 L.Ed. 75 income. all-encompassing implication power of that the Con The court concluded Co., Glass See Commissioner Glenshaw tax gress a realistic and workable to create 99 L.Ed. was suffi avoidance prevent scheme to Note, “Apparent (1955). 483 generally See permit taxation ciently broad to Concept of Abandonment of a Definitive 8 83(a).7 of Section Income,” 1072 Harv.L.Rev. taxpayer when the parties agree in this income was case case received; he received some- question option, is whether 65 the stock only obtained in, employed, being (1900); coming Penn invested Mutual Indem. Co. v. Commis- sioner, is, (1959), (3d 32 T.C. 277 F.2d 16 aff’d received or drawn “derived” 1960). However, use, argu- (the taxpayer separate the real recipient Cir. because for his in this disposal; ments case center on the issue in- that is derived benefit and income come, analysis we base our decision on an property. (Emphasis original). from under the Sixteenth Amendment. our on Sak- 8. The dissent stresses that reliance Relying misplaced on be- two earlier cases the Court ol is because of distinction Eisner govemmentally stated: tween Although imposed restrictions. gain defined Income as the derived solely rely labor, we rationale of capital, do from from or from both com- case, cases is gain, something distinction between two profit, bined .... a [It is] require exchangeable proceeding a different result. insufficient value from the accompanying property, capital, text infra. severed from the note 14 and however upon sale thing purchased capi- of value. When he taxed at the more favorable stock, gains percent tal rate. This 35 value the value of his is not capital an investment increase could be determined purposes of taxation designed gains tax benefit. Assum- by reference to the fair market value of the value, ing that the stock maintained its purchase. Although stock on the day percent value was certain to when accrue taxpayer argues that the stock however, lapsed. Appellant, the restriction only worth securities restrictions was value, argues that if the stock decreased in value, percent taxpayer of its fair market the taxpayer initially would be taxed at regard- the fact that ignores stipulation for the full value but ordinary rates ing pertained only the 65 value only any would be allowed to deduct de- the discounted value if the stock were sold fact capital crease in value as a loss. This private placement stip- another sale.9 A part but is arguably true11 the risk ulation as to the value of if sold pur- stockholder encounters when he under certain circumstances does neces- pur- corporate employee chases stock. A sarily reflect the value of the option to a stock chasing pursuant the hands of the current owner.10 Al- not entitled receive tax benefits special though could receive stock cannot general purchaser percent of the fair market value of the receive, corporate employee and indeed the stock if sold of the re- during period that he is complain should not be heard to striction, follow necessarily it does not taxed on the full fair market value unfairly received as stock, of his when the with percent was 65 of the stock’s consent, knowledge is sub- implicit and fair market value. The full value of the ject temporary restrictions. In order to purchase; stock existed from the moment of practical achieve a workable and solution only temporarily subject it was to a diminu- taxation, constitutionally Congress may exchanged tion in value if because of the tax the full fair market value at the time of Despite taxpayer’s securities restrictions. temporary purchase without to the claim to the was no non- contrary, there Commissioner, supra, restriction. v. Sakol existent which was taxed. upon he value is not Although 574 F.2d at 700. this problem primarily this case is one upon the value imme- taxpayer can receive timing rather than value of what was sale, this val- Congress may diate establish taxpayer If were taxed on received. ue as the taxable value without contraven- 65 percent the fair market value at the ing the Amendment. Sixteenth purchase, time of but held the stock until II. lapsed, remaining 35

percent of the fair market value which was argument In addition to his based Amendment, also compensation taxpayer appellant to the would be chal- Sixteenth stipulation property given 9. The stated as follows: such as this where the as com- pensation temporary diminutions respective petitioner 11. On the dates that previously, in value. acquired Sims, As noted the definition in Bumup the shares of Inc. & Eisner did not establish how much income was option, under if he had offered said received, but whether income was re- private placement, shares for sale in another case, although something ceived. In such shares this would have been to a received, exchangeable value was the value of discount of 35 from the fair market Sims, Bumup purposes value of & the income for of taxation Inc. stock traded could exchangeable over the counter because of the restrictions its immediate determined imposed by petitioner’s investment letter value. representations. Rec. at 71. that a 11. The Second Circuit Sakol noted glance phrase “something 10. At first taxpayer in a would such capital situation be entitled exchangeable value” in the definition of income at least to a The Internal Revenue loss. imply under Eisner seem to that the ex- yet published position Service has not its as to changeable property. value is the value of the ordinary capital whether treat- treatment or Although be the standard measure for would ment be afforded. income, apply value of it does not in a case 292 Salfi, 749, 2457, 83(a) ger v. 422 95 of Section un- 45

lenges application U.S. S.Ct. process (1975), clause and v. Turner Usery der the due Fifth L.Ed.2d 522 1, Co., 96 Mining on Heiner 428 Relying primarily Amendment. Elkhorn U.S. S.Ct. 358, 2882, Donnan, 312, (1976), indicating L.Ed.2d 285 52 49 752 v. U.S. S.Ct. 76 matters” the rational (1932), Schlesinger “purely v. economic L.Ed. 772 and Wiscon- sin, relationship apply test shall as the standard 270 70 L.Ed. 557 U.S. and (1926), of review. At one commentator12 two cases which struck down stat- least gifts- recognized one these conclusively utes court13 have presuming certain death, have presumption recent irrebuttable cases contemplation were tax- made validity of Heiner and 83(a) probably eroded the payer argues operates as Section Nevertheless, either Schlesinger. under presumption conclusive that “lettered” Supreme has Fifth or the Court stan- stock received Circuit as dard, statutory scheme as it is clear that registered counterpart. same value its fiction, enti- by Congress established taxation taxpayer Because this value is a and great tled to deference the courts argues, deprives taxpayer the statute arbitrary shall and without law. not be disturbed unless process due capricious and a reasonable basis in Fifth The standard of review the Cir Commissioner, supra, fact. 574 See Sakol v. governing challenge cuit process due to a F.2d at 698. concedes, taxing is, statute applying the standard arbitrary applicable whether the statute is so Court, case we a denial facts of the before first capricious statutory question note process. due Staley, Carr Inc. v. United parame- (5th does not fall within the States, Cir.), necessarily F.2d 1375 cert. denied, presumption ters of the irrebuttable doc- S.Ct. trine. The does not establish an statute also Brushaber L.Ed.2d v. face, on its R., presumption irrebuttable 24-25, Union R. Pac. supra, U.S. irrebuttable arguably does not establish an at 244. upon The cases does not presumption all. The statute relies, v. Don primarily Heiner the actual value of held dictate nan, supra, Schlesinger 285 F.2d taxpayer, simply provides the as a but Wisconsin, 260, supra, 270 46 U.S. matter of substantive law the manner in standard, 70 holding L.Ed. which of income it shall taxed. Taxation that pre the creation of an irrebuttable Congress is an in is area allowed sumption in the in legislation question was flexibility to tax great in order eliminate arbitrary capricious. and in The court Carr Nevertheless, assuming avoidance. that Staley, States, Inc. v. supra, United 496 does the statute establish an irrebuttable F.2d cases considered these but statutory we that presumption, hold held in that case that the earlier cases were and and arbitrary capricious scheme is not controlling not a and that “reasonable basis in reasonable basis fact. supported a in fact” statutory would scheme. justify Thus, presumption the irrebuttable doc in v. As the noted Sakol Second Circuit trine, cases, degree taxing it exists in Commissioner, ap- supra, 574 F.2d clearly holding not a require any does relationship test of plying the rational presumption per Co., irrebuttable se unconsti Mining Usery supra, Elkhorn v. Turner arbitrary capricious tutional as an stat 1, Congress have legitimately 428 could U.S. utory scheme. This view received further 83(a) enacted to eliminate Section support Supreme from the subse of restricted through Court’s tax avoidance the use quent pronouncements concerning the irre in such as options. Although stock a case presumption present utilizing buttable in Weinber- motive for doctrine one the sole Commissioner, Tribe, supra, 12. 13. Sakol v. 574 F.2d at See L. American Law Constitutional 16-32, (the (1978) early n. 698 § 25 n. 10. cases good “plainly today.) are law III. be tax avoid- option plan may a stock stock allows ance, “lettered” issuance to constitutional In addition employee compensate corporation argument claims, makes the final income, except for Section with tax-favored statutory “any term restriction” of the use 83(a). choice on “lettered” corporation’s does not include restrictions securities both under the federal plan may imposed include stock of a “lettered” argues statute Taxpayer laws. registra- avoiding motive of securities imposed re applies tax-fa- providing motive of tion consideration such as those under strictions Thus, rationale in compensation. vored Commissioner, supra, 574 F.2d v. Sakol regarding the Section purpose Sakol Congress well. 83(a) applies in this case as attempt eliminate tax legitimately First, plain of the statute language as security avoidance full market apply seems to contractually imposed restrictions. well as purchased pursuant value of stock Treásury Regu- we Secondly, note option plan restrictions un- specifically include lations restrictions, contractually imposed whether basis Thus the than a posed merely ject only ever, lated value was was tion I of this 83(a) given inution in value. As we what stipulated tions. the full value of the Taxpayers ticipate mate reason exists sioner, supra, distinction between the under Section with full awareness or The tax Sakol imposed immediately “Congress may clothe the has a reasonable basis received by fact. As the v. compensation is Congress more taxing scheme has the stock value. Commissioner, supra, in both situations portion temporary under securities opinion, could receive 83(a). more received as sold. The The F.2d at 699. No option plan presumably taxes property purchased than Second the tax restrictions and making indeed income sub- accurately monetary explained types Sakol the 65 percent taxpayer, if the under compensation. choose to percent stipu- Circuit stated a reasonable regulations.14 consequences tax inciden- fact scheme im- 574 F.2d at v. of restric- sharp Commis- reflects Section in Sec- legiti- how- dim- par- line on the use of tions in or avoidance. Whether the statute was enacted to ^[1969] Although News posed Cong. & marily reprinted referring These no distinction between H.R.Rep.No. 1st strictions comport 83(a). Treas.Reg. der federal and state securities tained Fulman ample sistent with the through Congress Session, language 91st 1645; regulations (3). to U.S.Code unless Finally, issuing Ad. with the contractually imposed the committee 841, 845, to be Cong., legally United utilization These “any 91-413, News S.Rep.No. ^[1969] reprinted was to plainly of Section “lettered” disregarded under Section Cong. & Ad. imposed restrictions. See 1st language restriction.” § States, regulations are both reasonable and language legislative 2027; Cong.Rep.No. 91- U.S.Code 1.83(h), 91st unreasonable 55 L.Ed.2d Session, prohibit this occurs 91-552, Cong., contractually im reports securities 83(a) concerning stock, the intent ^[1969] § history makes U.S. 1.83-5(c), Ex- Cong. Ad. must prevent reprinted tax abuses. the statute. News restrictions, 91st 1st laws refer U.S.Code or incon- through Session, restric statute & Cong., sus- pri re- to with a [nonqualified plans] tal therefore, restriction,” includes re “any custom-tailored, ready-made, rather and state imposed by the federal strictions laws, im- suit.” such as the restrictions securities supra. 14. See note 8 were what it would were the be of the Tax in this case. decision

posed placed on it. Petition- legal restrictions not Court is position is responds er Service’s AFFIRMED. interpreta- erroneous premised wholly on a tax such tion of 83 and that Code § dissenting: FAY, Judge, Circuit gain is unconstitu- admittedly non-existent holds that a tax today This Court tional. exercise gain on from the purported levied considering specific statute Before options though even of certain stock fundamental question, a review certain (Service) stip- has Internal Revenue Service helpful might truisms of tax law options of those ulated that the actual value begin with focusing the issues. To properly event would not at the time of the taxable Congress accepted power it is that the of income realization assert- give rise to the Prior to the taxes is not without limit. levy gain ed to be Service were Amendment, a adoption of the Sixteenth measured the difference between so far though very time which so close is options value and the cost of the actual tax was imposition of an income respectfully away, I dissent. petitioner-taxpayer. its Subsequent unconstitutional. very straight The facts of this case are to insti was authorized adoption, Congress received, 1970, petitioner In forward. tax, the ex but progressive tute a option employment, income. In tent the tax 30,000 of his em- purchase shares of stock is, classically it was defined come ployer company. petitioner exer- Macomber, S.Ct. Eisner shares, options purchased cised his “gain (1920), derived 64 L.Ed. $200,- paying agreed option price labor, from both com capital, from from by petitioner 000. The stock received was at 193. bined.. .” 252 at U.S. solely “lettered.” This was the result of the “something exchangeable pro It is requirements 4(2) of section of the Securi- from, coming ... and ceeding 1933, relating disposition ties Act of to the is, in, received or being ‘derived’ place- of stock distributed in a “private (the taxpayer) drawn recipient ment.” That section makes it unlawful to use, benefit, disposal separate publicly private trade stock issued in a —that Nothing property. is income derived from placement years two period for a of at least descriptions.” else answers the U.S. parties from the date of issuance.1 Both 207, 40 significant I it at 103. think agree that options the exercise of the that, definition of although remember giving the taxable event rise to the realiza- in re complex become more income has tion of compensation by petitioner. intricate tax laws and tax sponse to the that, significantly, parties agree Most both therefrom, when the problems resulting event, at the time of the taxable the restric- something as in government seeks to tax placed by peti- tions on the stock received come, it do so to the extent being tioner resulted in its actual value2 value” was de “something exchangeable number 35% less than the value of the same capital. By way labor or rived from such shares that were not A, attor simple example, it is clear that 4(2) imposed by section P, will in ney, agrees painter’s, to draft Securities Act. The nonetheless Service $200, that, for a worth pursuant exchange painting contends to section 83 of the (Code), gives P A a peti- Internal Revenue of 1954 the end of the transaction Code tioner for a may though be taxed as the value of would be worth but painting that $200 value, By subject 1. 2. actual I mean the amount which the Stock to the restrictions of section automatically 4(2) freely parties stipulated not of does become as the fair market value two-year period. tradeable at the end of the stocks so restricted. prescribes The Securities Act certain additional conditions that must be satisfied. Those condi- appeal. tions have no relevance to this thereon, placed and the canvas, making price it fact in the that hole $100, only be to may question A taxed The then be- paid for the stock.4 worth A may only be taxed extent of $100. the comes whether section was intended to received, actually what he the value of on which “lettered stock” by affect the amount property would on the value the not and, so, whether be would taxed affecting condition such had but for a have constitutionally permissible. I re- effect is value. negative. in solve both those issues the com- general The rule for the taxation of part: in provides pertinent Section receipt prop- upon income the pensation If, performance in with the connection cash, simple. The very rather than is erty, services, any is to property transferred fair be taxed on the market taxpayer may for whom person other than person any received less property value of the performed, the excess such services are paid which the have amount of— gain Taxable property. receive the to “(1) proper- of such the fair market value minus basis. Fair fair market value equals re- (determined regard any without ty would “price is that which market value than a restriction which striction other willing, a seller agreed upon by probably at first lapse) its terms will never sell, and a compulsion, but under no having the person of the rights time compulsion, to but under no buyer willing, property are beneficial interest such knowledge where have reasonable buy, both subject not to a sub- transferable or are of the facts.”3 forfeiture, whichever oc- stantial risk of indisputable last most truism is earlier, curs over pay not like to people generally do “(2) (if such any) paid the amount end, To often taxpayers taxes. have in the gross included property shall be great lengths devise gone schemes performed who such person income of the whereby can avoid taxation on what they in which year first taxable services properly should be taxable. Such schemes person having bene- rights of the known “tax devices.” are as avoidance are trans- ficial interest in such Congress, legislation, Both the Ser- or to a substantial ferable are vice, by regulation, may such recharacterize forfeiture, applicable. whichever risk primary purpose their is tax schemes when taxpay- avoidance or deferral. Individual to the extent surely It must be clear that prevented agreeing ers are from thereby present 83 is case Code § out tax-free tax- carry transactions in a or a tax on an impose such a manner as reducing form when the substance of the difference be- greater amount properly transaction should be structured as stipulated stipulat- value and the tween the fully taxable event. stock, the statute uncon- price ed simply stitutional. Service question, it Turning to the transaction of the value of unrestricted tax the excess that, appears equivocation without but for of the restricted stock stock over the value Code, only gain section is, that excess actually received. Whatever petitioner would be taxable is the To certainly say, it most is not income. difference between the fair market value of stock, case, “[wjhile value in this as that is decreased the Tax Court did imposed only Newberry, value BTA feet on would when 3. lapsed or sold arm’s-length recognizable transaction. The measure This is the standard measure gain. adoption ordinary gain point of section income Prior actually have taxed would been less fair value was the lesser of the market acquisition, than this standard This re- measure. was the stock at the time of its determined operation regulations adopted restrictions, sult of the 1959, 1.421-6(d)(2), Regs., provid- Income Tax the time the restrictions market ing bargain purchases that the tax on of stock lapsed, over stock. the cost significant having to restrictions ef- of a bond whose ten-year that the holder may result inequity some unfairness 83, Congress at of section is and whose value operation present from the value $100 that such a the rationally have concluded taxed at could is could be maturity $200 the ease and certain- justified by result was val- lower present value because its greater is to absolve operation,” ty of the section’s Secondly, condition. temporary ue was a duty of their Congress and the both Service unsupported majority totally makes the the parameters the es- impose taxes within present the diminution assumption that by the Constitution. tablished When the condition. temporary value is a suggests that this its value will majority opinion lapse, restrictions on the the to determine requires case Court value. That existent market be the then incor- stock. That is appellants’ than, value and is more or less may tax- by stipulated rect. The value was as, present to be the same unlikely percent of the payer and Service as It is conceivable market value. freely an number of equal market value of high at the all-time stock had reached an shares. The issue in this case tradeable to its value. parties agreed time the government whether the can tax should be situation, unfair to grossly it would be greater undisputed than the val- only the stock was the value of say property ue of the received. Rather temporarily diminished. question, majority says, confront and the Tax that this To the extent Court stipulation “A as to the value of if Commissioner, 574 Court relied Sakol certain circumstances does not sold under (2d 1978), aff’g 67 T.C. 986 F.2d 694 Cir. necessarily reflect the value of the denied, (1978), (1977), cert. owner, (foot- of the current the hands here, reached I conclude justify the results omitted) Although note could Moreover, misplaced. is that their reliance only percent receive of the fair market misunder a fundamental it demonstrates during period value of the stock if sold adoption of the reasons for standing restriction, of the it necessarily does not involved a contractual Code 83. Sakol § follow that value the employer employee agreement between received as was of the transferability restricted the the stock’s fair market value.” At 291. did not involve purchased. Sakol While those be true in a statements legal stock whose value was affected contested, case in which valuation I am at Act. imposed by restrictions Securities a loss to understand their relevance to this 83 could be constitu said that section Sakol case, on the value parties agree because tionally applied so as to value the stock Moreover, property received. which it would equal an amount stipulat- there is some value other than that have had without the created parties, majority gives ed to no holding The rational for that restrictions. majority hint as to what it be. The be consti simply was that the statute could opinion goes say, on to “The full value of con privately created tutionally pur- stock existed from the moment of agree because such tractual chase; it only temporarily subject to a as a tax historically ments had been used diminution in exchanged value if because of disguise deferral device to avoidance or tax the securities restrictions.” Id. Not existed. In its actually income where it contrary parties’ stip- that statement Sakol, Circuit Court ulation, holding Second logically unsupportable. it is In the specifically justified applica Appeals place, first how can it said that the full contractually created tion of section 83 to value existed It is purchase? time non- saying, on stock “Because undisputed that could not appellant have the vehicles of qualified plans have been anyone give found him that full value in exchange Congress may for the clothe the restricted shares. The tax avoidance logic of the with rath majority opinion ready-made, would lead to incidental to them conclusion, custom-tailored, suit.” 574 F.2d by way simple example, er than a said, to po- deci- later “... minimize the of both courts’ Court language at 701. however, that unequivocal, to sions makes it tax avoidance and tential for continued to apply to the statute was intended restricted discourage the use of further restrictions, privately created contractual a means of obtain- purchase plans stock restrictions. In fram- legally imposed not ing employer, in one’s equity interest Circuit, Judge issue for Second ing the the income Congress decided to measure “Is saying, it began opinion by Oakes arrangements without derived from such em- corporate in a constitutional ... imposed by regard transitory to restrictions purchase his of in connection with ployee (em- purchased.” parties on the shares stock, to into employer’s not take clear, is added) 67 It phasis T.C. 99. any diminution in value account application therefore, allows the that Sakol by present virtue may stock restric- privately of section 83 to created on transfer restrictions temporary those only because tions on stock transfer employer's underlying purchase avoidance may operate as tax plan?” (emphasis added) 574 F.2d at 695. gov- cannot be said of schemes. The same discussing Congress in which the manner on imposed restrictions lly ernments operate, 83 to the Court intended section transfer. went on to say, requires gross It a to include It me is a critical distinc- seems to there cost ty included in the income of the transferee Tax Court an amount which (emphasis opinion with the tractual ferable on the restrictions, ket a substantial less tual value of the stock taxpayer’s interest chase termining tions, transferred, value the fair market value affirmed plan. other than restriction performance added) Id. said, fair market over excess Nevertheless, risk transferred “[t]he open its exceeds the Second permanent, nonlapsing of stock cost, section at 695-96. of services is to its forfeiture. be considered in no market because value. arguably longer subject disposition....” stock’s fair as soon as the the employees’ the stock readily these ^[83] Circuit, connection provides The ac- may be proper- restric- In the trans- mar- pur- con- de- are constitutional. tunate that unconstitutional whose purposes and tics such ty tills to a combination effect is to tax income Our ing disguise not exist. The Service because such ments that tion between constitutionally be tions on the transfer and bureaucratic convenience that section government does could fundamental has governmentally that amount. stipulated restrict existence of possibly justify agreements are holding interpretation government’s position Court applied principle.6 the transfer proper not have that section that such that does chooses to constitutionally be semantic income, and hold- In this case stock, when the imposed restric- private agree- interpretation often used to our to a statute the authori- It is unfor- value does neither of violating gymnas- give an 83 may exist.5 stock, dis- added) 67 989. The Tax (emphasis Accordingly, respectfully T.C. at I dissent. majority the value the stock at the time it 5. The dismisses the distinction I draw becomes freely present equal between the created restrictions its value of 65 tradeable governmentally imposed value, taxpayer may re- in Sakol and the re- of market require $239,137 deficiency strictions dif- coup paid, here as “insufficient he has as a ferent result.” am somewhat of a loss capital majority loss. What the fails to note significant understand that, how such a difference assuming appellant can take the maxi- disposed can be of with so little consideration. $3,000, capital provided mum annual loss Opinion accompanying notes and 14 and section entire amount Code text. recouped slightly eighty under could be great years. imagine offers I cannot that this that, majority points its even with out taxpayer. solace ruling, taxpayer. all is not lost Should

Case Details

Case Name: Thomas R. Pledger and Phyllis R. Pledger v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Apr 2, 1981

Citation: 641 F.2d 287

Docket Number: 79-3279

Court Abbreviation: 5th Cir.