Robinson v. Comm'r of Internal Revenue
| Decision Date | 13 March 1984 |
| Docket Number | Docket Nos. 18038–80,2951–82. |
| Citation | 82 T.C. No. 32,82 T.C. 444 |
| Parties | PRENTICE I. ROBINSON AND ROSALIE ROBINSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: Date of grant of nonqualified employee stock option determined to be subsequent to April 22, 1969, the effective date of sec. 83, I.R.C. 1954. Held further: The compensation element in the option was taxable in year of exercise. Jerome S. Hertz, Elizabeth B. Burnett, David S. Crane, Steven S. Harwood and Maxwell D. Solet, for the petitioners in docket No. 18038–80.
Dennis I. Meyer and Bertrand M. Harding, Jr., for the petitioners in docket No. 2951–82.
Willard J. Frank and Richard E. Trogolo, for the respondent.WHITAKER, Judge:
Respondent determined a deficiency of $1,446,365.51 in the income tax of the petitioners Prentice I. and Rosalie Robinson (the Robinsons) in docket No. 18038–80 for the taxable year 1974, based upon their failure to report income in that year from the exercise of a stock option (the Option) granted Prentice I. Robinson (Robinson) by Centronics Data Computer Corp. and Subsidiaries (Centronics), the petitioner in docket No. 2951–82. Among other items, respondent determined a deficiency in Centronics' income tax in its 1975 taxable year caused by the disallowance of a $2,958,000 deduction Centronics claimed that year in connection with the Option granted Robinson. 1 The issue of Centronics' entitlement to this deduction was severed from the remaining issues in its petition and consolidated for purposes of trial, briefing and opinion with Robinson's petition. The issues of the year in which Robinson is liable for tax on income from exercise of the Option, the year in which Centronics is entitled to a deduction, were severed for purposes of trial, briefing and opinion from the issues of the value of the stock in question and hence, respectively, the amounts of income and deduction of petitioners Robinson and Centronics. This timing question, which depends initially upon the interpretation of section 83(i)(2)2 of the Internal Revenue Code, is presently before the Court.
The parties filed a stipulation and supplemental stipulation of facts. Centronics and respondent filed an additional stipulation, reproduced below. 3 The facts as stipulated are so found.
The Robinsons resided in New Hampshire at the time their petition in this case was filed. The Robinsons were calendar year taxpayers and filed a timely joint income tax return for the year 1974.
Centronics was incorporated in Delaware in 1968 and maintained its principal place of business in New Hampshire when it filed its petition in this case. Centronics filed timely consolidated income tax returns for its taxable years ending June 30, 1974, June 30, 1975, and June 30, 1976. Robert Howard (Howard) was president, and Samuel Lang (Lang) was vice president of Centronics at the time of its incorporation and for all relevant years thereafter. At the time of incorporation, Howard and Lang each owned a 50 percent interest in Centronics. Centronics was formed to implement and operate a computer gaming system for use in casinos owned and patented by a Nevada corporation in which Howard and Lang were shareholders. Development of these rights was assisted by Wang Laboratories, Inc. (Wang). The patent rights later were transferred to Centronics.
Robinson became an employee of Wang in 1962 and remained on Wang's payroll in the status of a full-time employee through the end of April 1969, although in fact he was working at that time also for Centronics, as more fully developed below. Prior to January 1969, Robinson discussed with Howard and Lang his leaving Wang for employment with Centronics, a client of Wang. In January 1969, as an employee of Wang, Robinson spent approximately three weeks in Puerto Rico installing for Centronics a computer gaming system in a casino. While there, Robinson continued to discuss with Howard and Lang his future employment with Centronics. At this time, Howard owned 155,000 shares and Lang owned 147,000 shares of Centronics' 371,300 shares of outstanding stock, constituting approximately 41 percent and 39 percent, respectively, of the shares outstanding.
During Robinson's stay in Puerto Rico, the parties informally agreed4 that Robinson would leave Wang for Centronics if certain matters could be resolved. The informal agreement contemplated that Robinson would receive an annual salary of $25,000 and that Howard and Lang would each transfer, at a nominal price, 5,000 shares (10,000 shares total) of their Centronics stock to Robinson when he joined the corporation. The parties further informally agreed that Centronics would attempt, in some as then-undetermined manner, to allow Robinson to acquire a stock interest in the company in addition to the stock to be sold to him by Howard and Lang individually. Robinson understood that Howard did not then intend to make a binding offer of employment to Robinson. Robinson refused to commit himself to accept an offer of employment by Centronics until he had satisfied himself after conversations with the president of Wang, Dr. An Wang (Dr. Wang), that Robinson's entitlement to exercise a stock option previously granted him by Wang would not be jeopardized. The terms of the Wang stock option required that Robinson remain employed by Wang through April 18, 1969. During and at the conclusion of the January 1969 conversations, Robinson understood that he would be required to execute written agreements with Centronics covering terms of employment and compensation as ultimately agreed upon.
As of February 4, 1969, counsel for Centronics drafted a letter to be sent to the shareholders informing them that Robinson and the management of Centronics had reached an informal and nonbinding understanding, whereby Robinson would join Centronics on approximately April 1, 1969, contingent upon Centronics' agreeing to grant Robinson an option to purchase 17,000 shares of the corporation's common stock at $6 per share.5 Ultimately, the parties agreed to an option to purchase 25,500 shares at $4 per share. The letter drafted by counsel also indicated that the parties had agreed that Howard and Lang would transfer a total of 10,000 of their personally held shares to Robinson. Ultimately, the parties agreed to a transfer of 15,000 shares. These facts further confirm the tentative nature of the understanding reached in January.
Although an exact date is uncertain, sometime in early February 1969 Dr. Wang and Howard agreed that Robinson would remain on Wang's payroll through the end of April 1969 at his then-current yearly salary of $18,000, thus protecting Robinson's Wang stock option. The parties agreed that during this period Robinson would be available to Wang as required to complete his projects and as otherwise necessary to effect a smooth transition, and that he would be available commencing in February 1969 to Centronics on an at-will, part-time basis. Centronics agreed to pay Robinson the difference between his $18,000 Wang salary and the sum of $25,000 per year, the starting salary agreed upon with Centronics. Robinson received one check from Centronics for February and weekly checks thereafter. Commencing May 1, 1969, Centronics began paying Robinson full installments of his $25,000 annual salary. During the period February 1969 through April 1969, Robinson established a place of business for Centronics in New Hampshire and hired other employees for it.6
On April 10, 1969, the Board of Directors of Centronics voted upon and unanimously passed a resolution (the Resolution) authorizing the granting to Robinson of an option to purchase 25,500 shares of Centronics stock at $4 per share, effective upon his entering into written employment and option agreements, including, of course, his acceptance of specified terms and conditions of the two agreements. The Resolution authorized Howard, as president, to prepare, execute, and deliver to Robinson an option agreement consistent with the terms of the Resolution. The option agreement, as executed, required Robinson to offer to sell shares purchased pursuant to the Option to Centronics, if he were either to terminate or to have terminated for cause during its five-year term his employment agreement with Centronics, 7 or if he intended to dispose of any such shares so purchased within one year of their purchase.8 The parties had not previously discussed these repurchase conditions, and Robinson did not become aware of them until presented with the option agreement for his execution. These conditions were part of the material consideration to Centronics for the granting of the Option.
Pursuant to the Resolution, counsel for Centronics drafted an employment agreement (the Employment Agreement) and an option agreement (the Option Agreement). The Employment Agreement preamble stated: “THIS AGREEMENT made as of the 1st day of May, 1969 * * *.” Its final paragraph read: “SIGNED and SEALED THIS —— day of ————, 1969.” The blanks are not completed on the executed copy. The Employment Agreement provided for a five-year term, to terminate on April 30, 1974. The Option Agreement was not dated where executed on its final page by Howard and Robinson but was dated on its front page, “May 1, 1969.” The “1” was handwritten in a space left blank by the document's typist. The Option Agreement provided, in pertinent part:
In the interest of its future business, the Company desires that you, as its Chief Engineer, shall have a financial interest therein, as a stimulus to vigorous attention by you to the Company's affairs, and, as an inducement to you to acquire such interest, the Company hereby grants you an option to purchase an aggregate of 25,500 shares of its common stock, par value 1¢ per share, at $4 per share, subject to all of the terms and conditions hereinafter stated:
(1) The term of this option shall be from the date...
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