Commissioner of Internal Revenue v. Lo Bue, No. 373

CourtUnited States Supreme Court
Writing for the CourtBLACK
Citation100 L.Ed. 1142,76 S.Ct. 800,351 U.S. 243
PartiesCOMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Philip J. LO BUE
Docket NumberNo. 373
Decision Date28 May 1956

351 U.S. 243
76 S.Ct. 800
100 L.Ed. 1142
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

v.

Philip J. LO BUE.

No. 373.
Argued March 6, 1956.
Decided May 28, 1956.

Page 244

Mr.Philip Elman, Washington, D.C., for petitioner.

Mr. Richard F. Barrett, New York City, for respondent.

Mr. Justice BLACK delivered the opinion of the Court.

This case involves the federal income tax liability of respondent LoBue for the years 1946 and 1947. From 1941 to 1947 LoBue was manager of the New York Sales Division of the Michigan Chemical Corporation, a producer and distributor of chemical supplies. In 1944 the company adopted a stock option plan making 10,000 shares of its common stock available for distribution to key employees at $5 per share over a 3-year period. LoBue and a number of other employees were notified that they had been tentatively chosen to be recipients of nontransferable stock options contingent upon their continued employment. LoBue's notice told him: 'You may be assigned a greater or less amount of stock based entirely upon your individual results and that of the entire organization.' About 6 months later he was notified that he had been definitely awarded an option to buy 150 shares of stock in recognition of his 'contribution and efforts in making the operation of the Company successful.' As to future allotments he was told 'It is up to you to justify your participation in the plan during the next two years.'

Page 245

LoBue's work was so satisfactory that the company in the course of 3 years delivered to him 3 stock options covering 340 shares. He exercised all these $5 per share options in 1946 and in 1947,1 paying the company only $1,700 for stock having a market value when delivered of $9,930. Thus, at the end of these transactions, LoBue's employer was worth $8,230 less to its stockholders and LoBue was worth $8,230 more than before.2 The company deducted this sum as an expense in its 1946 and 1947 tax returns but LoBue did not report any part of it as income. Viewing the gain to LoBue as compensation for personal services the Commissioner levied a deficiency assessment against him, relying on § 22(a) of the Internal Revenue Code of 1939, 53 Stat. 9, as amended, 53 Stat. 574, 26 U.S.C.A. § 22(a), which defines gross income as including 'gains, profits, and income derived from * * * compensation for personal service * * * of whatever kind and in whatever form paid * * *.'

LoBue petitioned the Tax Court to redetermine the deficiency, urging that 'The said options were not intended by the Corporation or the petitioner to constitute additional compensation but were granted to permit the petitioner to acquire a proprietary interest in the Corporation and to provide him with the interest in the successful operation of the Corporation deriving from an ownership interest.' The Tax Court held that LoBue had a taxable gain if the options were intended as compensation but not if the options were designed to provide him with 'a proprietary interest in the business.' Finding after hearings

Page 246

that the options were granted to give LoBue 'a proprietary interest in the corporation, and not as compensation for services' the Tax Court held for LoBue. 22 T.C. 440, 443. Relying on this finding the Court of Appeals affirmed, saying: 'This was a factual issue which it was the peculiar responsibility of the Tax Court to resolve. From our examination of the evidence we cannot say that its finding was clearly erroneous.' 3 Cir., 223 F.2d 367, 371. Disputes over the taxability of stock option transactions such as this are longstanding.3 We granted certiorari to consider whether the Tax Court and the Court of Appeals had given § 22(a) too narrow an interpretation. 350 U.S. 893, 76 S.Ct. 151.

We have repeatedly held that in defining 'gross income' as broadly as it did in § 22(a) Congress intended to 'tax all gains except those specifically exempted.' See, e.g., Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 429—430, 75 S.Ct. 473, 476, 99 L.Ed. 483. The only exemption Congress provided from this very comprehensive definition of taxable income that could possibly have application here is the gift exemption of § 22(b)(3). But there was not the slightest indication of the kind of detached and disinterested generosity which might evidence a 'gift' in the statutory sense. These transfers of stock bore none of the earmarks of a gift. They were made by a company engaged in operating a business for profit, and the Tax Court found that the stock option plan was designed to achieve more profitable operations by providing the employees 'with in incentive to promote the growth of the company by permitting them to participate in its success.' 22 T.C. at page 445.

Page 247

Under these circumstances the Tax Court and the Court of Appeals properly refrained from treating this transfer as a gift. The company was not giving something away for nothing.4

Since the employer's transfer of stock to its employee LoBue for much less than the stock's value was not a gift, it seems impossible to say that it was not compensation. The Tax Court held there was no taxable income, however, on the ground that one purpose of the employer was to confer a 'proprietary interest.'5 But there is not a word in § 22(a) which indicates that its broad coverage should be narrowed because of an employer's intention to enlist more efficient service from his employees by making them part proprietors of his business. In our view there is not statutory basis for the test established by the courts below. When assets are transferred by an employer to an employee to secure better services they are plainly compensation. It makes no difference that the compensation is paid in stock rather than in money. Section 22(a) taxes income derived from compensation 'in whatever form paid.' And in another stock option case we said that § 22(a) 'is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected.' Commissioner of Internal Revenue v. Smith, 324 U.S. 177, 181, 65 S.Ct. 591, 593, 89 L.Ed. 830. LoBue received a very substantial economic and financial benefit from his employer prompted by the employer's desire to get better work from him. This is 'compensation for personal service' within the meaning of § 22(a).

Page 248

LoBue nonetheless argues that we should treat this transaction as a mere purchase of a proprietary interest on which no taxable gain was 'realized' in the year of purchase. It is true that our taxing system has ordinarily treated an arm's length purchase of property even at a bargain price as giving rise to no taxable gain in the year of purchase. See Palmer v. Commissioner of Internal Revenue, 302 U.S. 63, 69, 58 S.Ct. 67, 69, 82 L.Ed. 50. But that is not to say that when a transfer which is in reality...

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296 practice notes
  • Allen v. Comm'r of Revenue Servs., SC 19567
    • United States
    • Supreme Court of Connecticut
    • December 28, 2016
    ...options without a readily ascertainable fair market value. 26 U.S.C. § 83 (e) (3) ; see Commissioner of Internal Revenue v. Lo Bue , 351 U.S. 243, 249, 76 S.Ct. 800, 100 L.Ed. 1142 (1956). This, however, is by no means a tax shelter. Taxation is merely deferred until the taxpayer exercises ......
  • In re Marriage of Cheriton, No. H019424.
    • United States
    • California Court of Appeals
    • September 14, 2001
    ...but neither vesting nor exercise of incentive stock options otherwise constitutes a taxable event. (Cf., Commissioner v. LoBue (1956) 351 U.S. 243, 249, 76 S.Ct. 800, 100 L.Ed. 1142 [receipt of stock options can trigger immediate taxable 9. Allowable deductions clearly include taxes. We que......
  • Putoma Corp. v. C. I. R., No. 77-1591
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • August 27, 1979
    ...statutory sense, on the other hand, proceeds from a 'detached and disinterested generosity.' Commissioner (of Internal Revenue) v. Lo Bue, 351 U.S. 243, 246 (, 76 S.Ct. 800, 803, 100 L.Ed. 1142, 1147); 'out of affection, respect, admiration, charity or like impulses.' Robertson v. United St......
  • Hardee v. U.S., No. 84-79
    • United States
    • United States Courts of Appeals. United States Court of Appeals for the Federal Circuit
    • May 11, 1983
    ...well-established precedents where it was believed that the precedents, though of long duration, were in error. In Commissioner v. LoBue, 351 U.S. 243, 76 S.Ct. 800, 100 L.Ed. 1142 (1956) the Court overruled 18 years of settled tax law concerning the income tax consequences of the receipt of......
  • Request a trial to view additional results
293 cases
  • Allen v. Comm'r of Revenue Servs., SC 19567
    • United States
    • Supreme Court of Connecticut
    • December 28, 2016
    ...options without a readily ascertainable fair market value. 26 U.S.C. § 83 (e) (3) ; see Commissioner of Internal Revenue v. Lo Bue , 351 U.S. 243, 249, 76 S.Ct. 800, 100 L.Ed. 1142 (1956). This, however, is by no means a tax shelter. Taxation is merely deferred until the taxpayer exercises ......
  • In re Marriage of Cheriton, No. H019424.
    • United States
    • California Court of Appeals
    • September 14, 2001
    ...but neither vesting nor exercise of incentive stock options otherwise constitutes a taxable event. (Cf., Commissioner v. LoBue (1956) 351 U.S. 243, 249, 76 S.Ct. 800, 100 L.Ed. 1142 [receipt of stock options can trigger immediate taxable 9. Allowable deductions clearly include taxes. We que......
  • Putoma Corp. v. C. I. R., No. 77-1591
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • August 27, 1979
    ...statutory sense, on the other hand, proceeds from a 'detached and disinterested generosity.' Commissioner (of Internal Revenue) v. Lo Bue, 351 U.S. 243, 246 (, 76 S.Ct. 800, 803, 100 L.Ed. 1142, 1147); 'out of affection, respect, admiration, charity or like impulses.' Robertson v. United St......
  • Hardee v. U.S., No. 84-79
    • United States
    • United States Courts of Appeals. United States Court of Appeals for the Federal Circuit
    • May 11, 1983
    ...well-established precedents where it was believed that the precedents, though of long duration, were in error. In Commissioner v. LoBue, 351 U.S. 243, 76 S.Ct. 800, 100 L.Ed. 1142 (1956) the Court overruled 18 years of settled tax law concerning the income tax consequences of the receipt of......
  • Request a trial to view additional results
3 firm's commentaries
  • Is A Mandated Gift Deductible As A Charitable Contribution? A Review Of The Meaning Of "Gift" In IRC 170
    • United States
    • Mondaq United States
    • September 12, 2022
    ...detached and disinterested generosity, motivated by affection, respect, admiration, charity, or like impulses. See Commissioner v. LoBue, 351 U.S. 243, 246 (1956); Robertson v. United States, 343 U.S. 711, 714 (1952); DeJong v. Commissioner, 36 T.C. 896, 899 (1961), affd. 309 F.2d 373 (9th ......
  • Foreign Gifts | When Do You Have To Report Them?
    • United States
    • Mondaq United States
    • March 22, 2022
    ...3. 26 U.S.C. ' 7701(a)(30)(A)-(E). 4. Id. ' 7701(a)(31)(A). 5. Comm'r v. Duberstein, 363 U.S. 278, 285 (1960) (quoting Comm'r v. LoBue, 351 U.S. 243, 246 (1956), and Robertson v. U.S., 343 U.S. 711, 714 6. 26 U.S.C. ' 6039F(b). 7. See id. ' 2503(e)(2), 6039F(b). 8. See id. ' 6039F(b), 6048(......
  • Historic Tax Case | Commissioner v. Duberstein
    • United States
    • Mondaq United States
    • September 23, 2022
    ...(1952). A gift within the meaning of IRC ' 22(b)(3) (1939) proceeds from a 'detached and disinterested generosity,' Commissioner v. LoBue, 351 U.S. 243, 246 (1956), 'out of affection, respect, admiration, or like impulses.' Robertson v. United States, 343 U.S. 711, 714 (1952). And in this r......

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