Sakol v. C. I. R.

• Decision Date: 06 April 1978
• Docket Number: D,No. 355,355
• Citation: 574 F.2d 694
• Parties: 78-1 USTC P 9372 Miriam SAKOL, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ocket 77-4143.
• Court: U.S. Court of Appeals — Second Circuit

Page 694

574 F.2d 694

78-1 USTC P 9372

Miriam SAKOL, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 355, Docket 77-4143.

United States Court of Appeals,

Second Circuit.

Argued Jan. 13, 1978.

Decided April 6, 1978.

Burton G. Lipsky, New York City (Delson & Gordon, New York City, of counsel), for appellant.

William A. Friedlander, Washington, D. C. (M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Jonathan S. Cohen, Tax Div., Dept. of Justice, Washington, D. C., of counsel), for appellee.

Before FEINBERG and OAKES, Circuit Judges, and WYATT, District Judge. ^*

OAKES, Circuit Judge:

Is it constitutional under the Fifth and Sixteenth Amendments for Congress, in taxing a corporate employee in connection with his purchase of his employer's stock, not to take into account any diminution in value of the stock that may be present by virtue of temporary restrictions on transfer in the employer's underlying stock purchase plan? Section 83(a) of the Internal Revenue Code governs the taxation of certain stock transfers to employees "in connection with the performance of services." ¹ It requires a taxpayer to include in gross income the excess of the stock's fair market value over its cost, as soon as the taxpayer's interest is no longer subject to a substantial risk of forfeiture. The actual value of the stock arguably may be less than the value of stock readily transferable on the open market because of restrictions imposed by the stock purchase plan. Nevertheless, these restrictions, other than permanent, nonlapsing restrictions, may not be considered in determining fair market value. Appellant argues that the Tax Court erroneously concluded that the statute was constitutional under the Fifth and Sixteenth Amendments. 67 T.C. 986 (Mar. 23, 1977). We disagree, and accordingly affirm the Tax Court.

I. FACTS AND PROCEEDINGS BELOW

During 1972, taxpayer was employed by Chesebrough-Pond's Inc. (Chesebrough). Chesebrough offered to its officers and administrative employees a stock purchase plan under a standard stock purchase agreement. The agreement, executed by all purchasers, provided that one dollar par value common stock could be purchased for an amount equal to fourteen times Chesebrough's average per share earnings during the preceding five years. It also contained a restriction on transfer referred to below.

On May 7, 1971, taxpayer agreed to purchase 140 shares at $21.20 per share. For a period of one year thereafter, her shares were subject to forfeiture if she ceased to be employed by Chesebrough for any reason other than death. ² In addition, she was bound not to sell, pledge or transfer any interest in the shares for a five-year period ending May 7, 1976. ³ The transfer restriction, however, could be waived by Chesebrough.

As of May 7, 1972, taxpayer's 140 shares were no longer subject to forfeiture. Thus, the excess of the stock's fair market value over its cost became includable in taxpayer's gross income in the 1972 tax year. ⁴ On the last business day prior to May 7, the average New York Stock Exchange quotation for Chesebrough stock was $66.50 per share. Taxpayer's required inclusion under the statute, therefore, is measured by the difference between her cost of $21.20 and the market price of $66.50, or $45.30 per share for a total of $6,342. Because taxpayer both included the $6,342 in gross income and then deducted that amount in arriving at her adjusted gross income, the Commissioner determined a deficiency. It was in a redetermination petition that taxpayer challenged the constitutionality of Section 83(a).

II. DISCUSSION

A. The Fifth Amendment Ground

Appellant rests her Fifth Amendment argument on the irrebuttable presumption doctrine. ⁵ She contends that the conclusive legislative generalization embodied in Section 83(a) violates the Due Process clause because the statute imposes a tax on an amount, "which . . . does not, and cannot be made to, exist in actuality . . . ." Heiner v. Donnan, 285 U.S. 312, 329, 52 S.Ct. 358, 362, 76 L.Ed. 772 (1932). ⁶

The doctrinal underpinning for taxpayer's argument flowered in the early 1970's when the dormant irrebuttable presumption doctrine was revived in constitutional analysis. See, e. g., Vlandis v. Kline, 412 U.S. 441, 93 S.Ct. 2230, 37 L.Ed.2d 63 (1973) (holding unconstitutional a conclusive presumption of nonresidence whenever a person applied to a Connecticut state university from out of state); Cleveland Board of Education v. LaFleur, 414 U.S. 632, 94 S.Ct. 791, 39 L.Ed.2d 52 (1974) (invalidating local education board rules requiring pregnant teachers to take maternity leave without pay a specified number of months before and after the expected birth of her child). ⁷ Earlier, Heiner with the aid of this analysis, had held unconstitutional a federal statutory presumption that gifts made within two years of a donor's death were made in contemplation of death. ⁸

More recently, however, the Court has narrowed the broad scope of the irrebuttable presumption doctrine ⁹ evinced in Vlandis and progeny. See note 7 supra. For example, Weinberger v. Salfi, 422 U.S. 749, 95 S.Ct. 2457, 45 L.Ed.2d 522 (1975), upheld a federal statute precluding widows and their children from receiving Social Security survivors' benefits unless the claimant's relationship to the wage-earner existed at least nine months before his death. The Court articulated a rational relationship test for testing the validity of conclusive legislative presumptions in the context of a "noncontractual claim to receive funds from the public treasury," id. at 772, 95 S.Ct. at 2470:

The question is whether Congress, its concern having been reasonably aroused by the possibility of an abuse which it legitimately desired to avoid, could rationally have concluded both that a particular limitation or qualification would protect against its occurrence, and that the expense and other difficulties of individual determinations justified the inherent imprecision of a prophylactic rule.

Id. at 777, 95 S.Ct. at 2473. The extent of the Weinberger v. Salfi limitation on the scope of the irrebuttable presumption doctrine was apparently clarified in Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976). Turner Elkhorn validated a federal law utilizing two irrebuttable presumptions: a miner "afflicted with complicated pneumoconiosis is (conclusively deemed) to be totally disabled due to pneumoconiosis; if he has died, it is (also) irrebuttably presumed that he was totally disabled by pneumoconiosis at the time of his death, and that his death was due to pneumoconiosis." Id. at 11, 96 S.Ct. at 2890. The Court sustained this potentially overinclusive legislative determination on the basis that Congress is ordinarily accorded great leeway in "regulating purely economic matters." Id. at 23-24, 96 S.Ct. 2882. And it emphasized that conclusive presumptions in economic matters cannot be "equat(ed)" with presumptions "in the mold of Stanley and Vlandis." Id. at 22, 96 S.Ct. at 2895.

While it is difficult to reconcile all of the Supreme Court's pronouncements on the irrebuttable presumption doctrine ¹⁰ it seems that in the wake of Turner Elkhorn and Salfi "purely economic matters" will not be subject to the demanding test of Vlandis v. Kline, see note 5 supra, but rather will be governed by Turner Elkhorn's more deferential standard of review. ¹¹ That is to say congressional judgments in the form of "irrebuttable presumptions" in the economic area will be upheld where there is a rational relationship between the criteria set forth in the statutory mandate and a legitimate congressional purpose. See Goldberg v. Weinberger, 546 F.2d 477, 480 (2d Cir. 1976), cert. denied, 431 U.S. 937, 97 S.Ct. 2648, 53 L.Ed.2d 255 (1977) (rational relationship test appropriate for due process and equal protection challenge to Social Security law denying certain benefits to widows who remarry before reaching age 60); cf. Image Carrier Corp. v. Beame, 567 F.2d 1197, 1202-03 (2d Cir. 1977) (rational relationship test appropriate for equal protection challenge to economic regulation).

Applying, then, the rational relationship test to Section 83(a), we note and the taxpayer concedes, Brief for Appellant at 19, that Congress could legitimately have judged that the law prior to the enactment of Section 83 permitted undue income tax avoidance through the use of restricted stock options. The value received by the employee was not taken into income until the restrictions lapsed, ¹² yet such arrangements generally permitted taxpayers to enjoy the voting and dividend benefits of stock ownership, despite restrictions on transfer. Section 83(a), which entered the Internal Revenue Code as part of the Tax Reform Act of 1969, ¹³ was a congressional attempt to eliminate such tax avoidance, clearly a legitimate governmental purpose. While taxpayer takes exception to the possibly overbroad means utilized to effectuate the congressional purpose, the statutory scheme ¹⁴ satisfies constitutional standards of rationality for three reasons.

First, whatever depreciating effect transfer restrictions may have on stock value adversely affects only the taxpayer-employee who wishes to sell his stock during the restriction period and is denied the right to do so by the corporation. Prior to enactment of Section 83 most of these restrictions were cooperatively imposed by the corporation with the aim of providing a tax benefit to the employee rather than advancing purely corporate objectives. Section 83(a) is a reasonably well tailored means of defeating a device the only business purpose of which could be to pay employees with dollars that, because they may be tax-free or tax-favored, may be fewer. Second, the corporation always retains, expressly or by implication of law, the power to waive any restriction. The waiver power thus renders the amount of value depreciation both speculative and dependent upon the...