Hirsch v. Comm'r of Internal Revenue , Docket No. 1287-66.
| Decision Date | 23 October 1968 |
| Docket Number | Docket No. 1287-66. |
| Parties | IRA HIRSCH AND GLORIA HIRSCH, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Joseph Rabin, for the petitioner.
James A. Thomas, for the respondent.
1. In 1961 petitioner received Pacific stock pursuant to his exercise of a ‘nonstatutory stock option,‘ which option had no ascertainable market value when it was issued. When he exercised the option, petitioner was required to, and did, represent that he would not sell the shares for a period of 6 months. Subsequently he was put on notice by the SEC that any sale of the shares without prior registration might be in violation of the Securities Exchange Act of 1933. Held, on the basis of the above facts petitioner acquired and held the stock, at all relevant times, subject to a ‘restriction which has (had) a significant effect on its value’ under 1.421-6(d)(2)(i) of the regulations and was thus not required to recognize income.
2. Held, on the basis of the evidence presented, payments to petitioner by his employer represented compensation for services rendered and to be rendered and thus constituted ordinary income to him; they were not proceeds from the sale or exchange of a capital asset.
Respondent has determined deficiencies in petitioners' income taxes for the years 1961 through 1963 in the following amounts:
+-----------------------------------------+
¦Taxpayer ¦Year ¦Deficiency ¦
+---------------------+------+------------¦
¦Ira Hirsch ¦1961 ¦$4,943.02 ¦
+---------------------+------+------------¦
¦Gloria Hirsch ¦1961 ¦4,799.02 ¦
+---------------------+------+------------¦
¦Ira and Gloria Hirsch¦1962 ¦4,608.66 ¦
+---------------------+------+------------¦
¦Ira and Gloria Hirsch¦1963 ¦13,570.92 ¦
+-----------------------------------------+
Concessions have been made by both parties. The only issues remaining are—
Whether the taxpayers received taxable income upon the exercise of certain stock options.
Whether a $33,000 payment made to Ira Hirsch constituted ordinary income or an amount received from the sale or exchange of a capital asset.
Some of the facts are stipulated and are so found.
The petitioners, Ira and Gloria Hirsch, are husband and wife, residing at the time the petition in the instant case was filed in Sherman Oaks, Calif. Petitioners filed separate returns for the calendar year 1961, and joint returns for the calendar years 1962 and 1963. All the returns were filed with the district director of internal revenue at Los Angeles, Calif.
Both of the issues in this case pertain to Ira Hirsch. Gloria is a petitioner solely because she is the recipient of community property and/or because she signed joint returns in 1962 and 1963. For convenience therefore reference to petitioner hereinafter refers to petitioner Ira Hirsch.
During the years in issue and for a number of years prior thereto, Ira was vice president and sales manager of Pacific Vitamin Corp. (hereinafter sometimes referred to as Pacific). Since October 1964 he has been president and chairman of the board of directors of Pacific.
On March 1, 1961, Ira and Pacific executed an employment agreement covering the period January 1, 1961, through December 31, 1962.
The agreement inter alia called for Ira to receive a salary of $350 per week for the first 4 weeks, and $325 per week thereafter. If net income of the company for any two consecutive quarters fell below $12,000 in each quarter, the company had the right to terminate the employment agreement. It could also terminate the agreement if Ira was absent for 60 consecutive days due to disability or illness.
As additional compensation to Ira, the company obligated itself to the following alternatives:
(1) If on or before April 30, 1963, Pacific stock was issued to the public, Ira would receive an option, exercisable within 1 year, to purchase $26,250 worth of the stock for $1,250. (2) If Ira were still employed on December 31, 1962, and had ‘faithfully performed under the agreement,‘ he was to receive an option on January 1, 1963, exercisable within 18 months to purchase an additional $26,250 worth of Pacific stock for $1,250.
Ira was limited to a total of 25,000 shares under the above two provisions. In addition, Ira was required to execute whatever agreements limiting his rights to dispose or encumber the stock as might be executed by David Vickter (hereinafter sometimes referred to as Vickter), the president and sole shareholder of Pacific at the time the employment agreement was entered into.
If the corporation, on or before April 30, 1963, were to sell all of its assets or if Vickter were to sell all of the issued and outstanding stock and Ira had faithfully performed under the agreement, he was to receive $50,000 and any obligation the company had to employ him or pay him a weekly salary would terminate. In the event that David Vickter sold more than 50 percent of his interest, but less than 100 percent, Ira was to receive only a portion of the $50,000. If none of the designated contingencies took place, Ira was to be entitled to a reasonable bonus to be subsequently determined.
The full agreement reads as follows:
PACIFIC VITAMIN CORPORATION
We should like to take the opportunity at this time to set forth in writing our agreement with respect to your employment by us during the period from January 1, 1961, through December 31, 1962.
1. We hereby agree to employ you for a two-year term beginning January 1, 1961, and ending December 31, 1962. During the first four weeks of said term, your compensation will be Three Hundred Fifty Dollars ($350.00) per week, and during the remaining one hundred (100) weeks of said term, your salary shall be Three Hundred Twenty-five Dollars ($325.00) per week. In consideration for the payment of this salary to you, you agree to render your services to us in an executive capacity on an exclusive basis and to perform such functions as we may direct you to perform in connection with our business.
2. Notwithstanding the provisions set forth in Paragraph 1 hereof, we shall have the right to terminate your employment within forty-five (45) days after the close of any two consecutive calendar quarters in each of which our net income (before income taxes but after deducting all other expenses, including salaries) is less than Twelve Thousand Dollars ($12,000.00). A calendar quarter for this purpose shall be deemed the three-month periods ending on March 31st, June 30th, September 30th and December 31st, respectively, during the calendar years 1961 and 1962.
In the event that we terminate your employment pursuant to the provisions of this Paragraph 2, you shall be entitled to receive your weekly salary up to the date on which your employment is terminated.
3. As additional compensation to you, we further agree to pay to you the following, depending upon which of the alternatives set forth below occurs:
(a) If on or before April 30, 1963, our stock is issued to the public, you shall receive the following options:
(i) An option exercisable on or within one (1) year after the date on which stock is offered to the public to purchase from us for the sum of One Thousand Two Hundred Fifty Dollars ($1,250.00), sufficient shares of our stock, which when multiplied by the original per share issue price to the public shall equal the sum of Twenty-six Thousand Two Hundred Fifty Dollars ($26,250.00). For example, if our stock is issued to the public on June 15, 1961, at a per share price of Ten Dollars ($10.00), then you shall be entitled to purchase from us for the sum of One Thousand Two Hundred Fifty Dollars ($1,250.00), a total of two thousand six hundred twenty-five (2,625) shares of common stock.
(ii) Provided that you have faithfully performed under this agreement and are still employed by us on December 31, 1962, an option exercisable on January 1, 1963, or within eighteen (18) months thereafter to purchase from us for the sum of One Thousand Two Hundred Fifty Dollars ($1,250.00) sufficient shares of our stock, which when multiplied by the original per share issue price to the public shall equal the sum of Twenty-six Thousand Two Hundred Fifty Dollars ($26,250.00). In the event of your death prior to December 31, 1962, but at a time when you shall still be employed hereunder, your successors in interest shall be entitled to exercise that portion of the option granted to you under this Paragraph 3(a)(ii), which the number of days between January 1, 1961, and the date of your death bears to the number of days between January 1, 1961, and December 31, 1962. For example, if our stock is issued to the public on June 15, 1961, at a per share price of Ten Dollars ($10.00), and is selling for a different per share price on the date you exercise your option, then you shall, nevertheless, be entitled to purchase from us for the sum of One Thousand Two Hundred Fifty Dollars ($1,250.00), a total of two thousand six hundred twenty-five (2,625) shares of common stock, regardless of whether you have exercised the option granted to you under Paragraph 3(a)(i) hereof.
(iii) It is understood that in the event of a public issue, you will execute whatever agreements limiting your right to dispose of or encumber our stock as may be executed by Mr. David Vickter.
(iv) Notwithstanding anything herein to the contrary the options granted hereby shall not in any case entitle you to purchase more than 25,000 shares of our stock.
(b) If on or before April 30, 1963, we shall sell all of our assets to a purchaser, or if David Vickter, the present owner of all of our issued and outstanding stock, shall sell all of our issued and outstanding stock, and if you shall have...
To continue reading
Request your trial
-
McDonald v. C.I.R.
...the spread between the exercise price and the then fair market value of the stock as burdened by the restrictions. See Hirsch v. Commissioner, 51 T.C. 121, 136-37 (1968). See also Commissioner v. Lo Bue, 76 S.Ct. at 804. Thereafter, and prior to the enactment of section 83, with respect to ......
-
Wurster v. Comm'r of Internal Revenue (In re Estate of Gilford )
...value accurately. Estate of Piper v. Commissioner, supra at 1072; see also Bolles v. Commissioner, 69 T.C. 342 (1977); Hirsch v. Commissioner, 51 T.C. 121 (1968); Husted v. Commissioner, 47 T.C. 664 (1967). Petitioner, through Joyce's testimony and valuation report, introduced credible evid......
-
Piper v. Comm'r of Internal Revenue (In re Estate of Piper)
...being sold freely in the public market, a measure the stock's value accurately. Bolles v. Commissioner, 69 T.C. 342 (1977); Hirsch v. Commissioner, 51 T.C. 121 (1968); Husted v. Commissioner, 47 T.C. 664 (1967).7 The issues we must decide are (1) whether the PAC stock owned by Piper Investm......
-
Nazarian v. Commissioner
...of Metrocare for a period of time, not exceeding two years, following the initial offering of Metrocare stock. In Hirsch v. Commissioner Dec. 29,201, 51 T.C. 121 (1968), the taxpayer received an option to purchase certain shares of his corporate employer's common stock. The option agreement......