•  
  •  

Home > Journals > Michigan Law Review > MLR > Volume 50 > Issue 3 (1952)

 

Abstract

The taxation to an employee of the difference between the fair market value of a share of stock transferred to him by a corporate employer, pursuant to the employee's exercise of an option to acquire it at a price below the value of the share, has for years been a matter of dispute between taxpayers and the Commissioner of Internal Revenue. This dispute has involved not merely, as in the case of many of the hardy tax perennials such as reasonableness of compensation, a question as to the application of facts to a well-defined principle of law, but rather a question of the correct legal concept. The deductibility of such difference by the corporate employer has been viewed as a corollary of the employee's tax liability and hence in that field the same controversy has prevailed. That conflict has been in part, although only in part, resolved by the enactment of section 130A of the Internal Revenue Code, which under certain circumstances exempts income which might be derived by the employee from the exercise of a stock option, but at the sacrifice by the corporation of any deduction it might otherwise have. In cases where the corporation's objective is to induce its employees to make an investment of their own funds in the stock of the corporation, in the belief that a proprietary interest in the enterprise will stimulate their efficiency and productivity, it will undoubtedly find it advantageous to devise a plan meeting all of the requirements of the new statutory provisions. On the other hand, if the arrangement is avowedly compensatory and a corporation in a 77 or 82 per cent tax bracket is more interested in securing a deduction than in protecting the employee from the realization of taxable income upon exercise of the option, it will have to be certain that the new statute will not apply. In either event, a full understanding of the statutory provisions is necessary. All of the implications of the statute, however, cannot be seen without an understanding of the evolution and status of the law as it existed prior to the enactment of the statute. Many able discussions have been written on the case law of employee stock options and, accordingly, only a relatively brief summary will be presented here.

Download

Share

COinS