Becker v. Comm'r of Internal Revenue

• Decision Date: 12 August 1966
• Docket Number: Docket No. 5135-64.
• Citation: 46 T.C. 613
• Parties: GEORGE J. BECKER AND ISABELLE BECKER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

46 T.C. 613

GEORGE J. BECKER AND ISABELLE BECKER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5135-64.

Tax Court of the United States.

Filed August 12, 1966.

George J. Becker, pro se.

Alan M. Stark, for the respondent.

Petitioner had an option to purchase shares of stock of his employer under a restricted stock option plan which required written notice to the company's treasurer at St. Paul, Minn., of his intention to exercise his option, together with full payment. On June 14, 1960, he placed his signed notice and check in the company mail at its Ridgefield, N.J., office, where he was employed. This mail, in normal course by air mail, would reach the St. Paul office on June 15. The stock certificate was issued June 20. Petitioner sold the stock on the New York Stock Exchange on December 15, 1960. Held, petitioner did not hold the stock for more than 6 months and is not entitled to treat the gain as long-term capital gain.

BRUCE, Judge:

Respondent determined a deficiency in income tax in the amount of $1,141 for the calendar year 1960. The sole issue for decision is whether shares of stock sold by George J. Becker were held by him for more than 6 months.

FINDINGS OF FACT

The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

The petitioners are husband and wife. They reside in Ridgewood, N.J. They filed a joint income tax return for the calendar year 1960 with the district director of internal revenue at Newark, N.J. George J. Becker will be referred to as the petitioner.

The petitioner is a district sales manager for Minnesota Mining & Manufacturing Co., hereinafter referred to as the company, in Ridgefield and has held such position since prior to May 13, 1958. The company was incorporated in Delaware and has its home office in St. Paul, Minn. At all times involved herein, the outstanding common stock of the company has been listed on the New York Stock Exchange.

On May 13, 1958, the stockholders of the company duly adopted the ‘1958 Executive Restricted Stock Option Plan of the Minnesota Mining and Manufacturing Company,‘ hereinafter referred to as the plan. The pertinent provisions of the plan are as follows:

The Executive Restricted Stock Option Plan, adopted by the Company in 1954, afforded executives of the Company an opportunity to acquire a limited number of shares of its common stock. The Company's increased growth and diversification since the adoption of the 1954 plan have resulted in the assumption of additional responsibility by the executives who participated in that plan as well as by others who have assumed positions of key responsibility.

SECTION 3.

Shares Subject to the Plan

The Committee from time to time may provide for Options aggregating not to exceed 200,000 shares of the common stock of Minnesota. Shares shall be made available in the discretion of the Board of Directors from authorized unissued or reacquired common stock, which latter stock is hereinafter referred to as Treasury Stock. In the event an Option granted to a Participant lapses, is cancelled or otherwise terminated, as to any or all of the shares covered by such Option, the Committee may make such shares so covered available to other Participants in accordance with the Plan.

SECTION 5.

Option, Price and Payment

(a) Shares of common stock shall be optioned from time to time at one hundred per cent (100 percent) of the fair market value of such common stock on the New York Stock Exchange on the date the Option is granted. The fair market value shall be determined by the method prescribed in Section 81.10(c) of Regulation 105 issued by the United States Treasury Department.

(b) Twenty-five per cent (25 percent) of the total number of shares under option to a Participant may be purchased after his First Anniversary Date; an additional twenty-five per cent (25 percent) after his Second Anniversary Date; an additional twenty-five per cent (25 percent) after his Third Anniversary Date; and an additional twenty-five per cent (25 percent) after his Fourth Anniversary Date. This right is to be cumulative.

(c) Options not exercised during the four year period provided in the preceding paragraph may be exercised in whole or in part from time to time during the remainder of the Option Period, except that a Participant who reaches his 65th birthday during his Option Period must exercise his Option within three months after reaching his 65th birthday.

(d) In order to exercise his Option, a Participant shall give written notice to Minnesota's Treasurer at Saint Paul, Minnesota, of his intention to exercise his Option and accompany his notice with full payment for the number of shares purchased, together with a written statement that the shares are purchased by him for investment and not for resale.

(e) No shares shall be issued until full payment therefor has been made and a Participant shall obtain no rights as a stockholder until shares are issued to him.

SECTION 7.

Delivery of Certificates

Minnesota shall not be required to issue or deliver any certificate for its common shares purchased upon the exercise of this Option prior to the admission of such shares to listing on any stock exchange on which shares may at that time be listed. In the event of the exercise of this Option with respect to any shares subject hereto, Minnesota shall make prompt application for such listing. If at any time during the Option Period Minnesota shall be advised by its counsel that the shares deliverable upon an exercise of the Option must be accompanied or preceded by a prospectus meeting the requirements of the Federal Securities Act of 1933, Minnesota will use its best efforts to provide such prospectus not later than a reasonable time following each exercise of an option, and delivery of shares by Minnesota may be deferred until such prospectus is available. The Participant shall have no interest in shares covered by this Option until certificates for said shares are issued.

On May 13, 1958, pursuant to the plan, the company and petitioner entered into an agreement. The pertinent provisions of the agreement are as follows:

OPTION PURCHASE AGREEMENT, Effective this 13th day of May, 1958, by and between Minnesota Mining and Manufacturing Company, a Delaware corporation (hereinafter referred to as the ‘COMPANY’) and G. J. BECKER, an executive employee of the COMPANY or of a Subsidiary of the COMPANY (hereinafter referred to as the ‘EMPLOYEE):

WITNESSETH:

The COMPANY desiring to afford EMPLOYEE an opportunity to purchase shares of its Common Stock Without Par Value (hereinafter referred to as Common Stock), through the Executive Restricted Stock Option Plan, approved by the stockholders on May 13, 1958, thereby providing the EMPLOYEE with an added incentive to continue his services with the COMPANY and to intensify his interest in the success of the COMPANY.

Now, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for good and valuable considerations, the parties hereto have agreed, and do hereby agree, as follows:

10. EXERCISE OF OPTION.

Subject to the terms and conditions of this Agreement, the OPTION may be exercised by written notice to the COMPANY, 900 Bush Avenue, St. Paul 6, Minnesota, attention of the Treasurer, which notice shall state the election to exercise the OPTION and the number of shares in respect of which it is being exercised, shall fix a date (not less than five (5) business days from the date such notice is received by the COMPANY) for the delivery of the certificate or certificates for said shares, shall be accompanied by a certified or bank cashiers check for payment in full of the purchase price for said shares, shall be signed by the person or persons so exercising the OPTION * * *

11. PROVISION FOR LISTING AND REGISTRATION OF SHARES.

The COMPANY shall not be required to issue or delivery any certificate for its Common Shares purchased upon the exercise of this OPTION prior to registration of these shares under the Federal Securities Act of 1933 or prior to the admission of such shares to listing on any stock exchange on which shares may at that time be listed. The participant shall have no interest in shares covered by this OPTION until certificates for said shares are issued.

15. SAVINGS CLAUSE.

If any provision contained in this Option Purchase Agreement conflicts with any provision of the Executive Restricted Stock Option Plan, the provisions of the latter shall control. * * *

The agreement was entered into for reasons connected with the employment of petitioner by the company.

By reason of the agreement petitioner became entitled to purchase all or any part of an aggregate of 200 shares of common stock of the company at $75.625 per share.

On May 13, 1958, $75.625 was equal to 100 percent of the fair market value per share of the stock so optioned.

The option granted petitioner under the agreement is an option without a readily ascertainable fair market value within the meaning of regulations section 1.421-6(d), issued pursuant to section 421, I.R.C. 1954.

On May 20, 1960, the common stock of the company was split three shares for one. By reason of that split, the number of shares optioned to petitioner became 600 shares and the option price became $25.2084 per share.

On June 2, 1960, the petitioner mailed an interoffice memorandum to the company at St. Paul, Minn., attention of the treasurer, in which he requested information on the cost and manner of payment for exercising his stock option privilege, and the existing credit in his stock option account.

The petitioner received an interoffice memorandum from the company dated June 6, 1960, and was notified that his stock option account had a credit balance of $608.37 which he was entitled to apply to the purchase of 150 shares of option stock at $25.2084 per share for a total cost of $3,781.26. Petitioner was also notified that if he wished to exercise his stock...