Alves v. Commissioner

734 F.2d 478 (9th Cir. 1984)

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Nature of the Case

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Facts

General Digital Corporation resolved to issue 90,000 shares of its common stock to its company president, and 66,000 shares to the company underwriter. The board also voted to sell an additional 264,000 shares of common stock to seven named individuals, including P. All seven became company employees. The company agreed to sell P 40,000 shares of common stock at ten cents per share 'in order to raise capital for the Company's initial operations while at the same time providing the Employee with an additional interest in the Company. The agreement divided the shares into three categories: one-third were subject to repurchase by the company at ten cents per share if P left within four years; one-third were subject to repurchase if he left the company within five years; and one-third were unrestricted. The company retained an option to repurchase up to one-half of the shares for their fair market value at any time between July 1, 1973 and July 1, 1975. P sold some of his shares to friends and relatives. In 1973 he sold 4,667 four-year shares to Technology Ventures, Inc. (TVI), the assignee of General Digital's repurchase option, for $18 per share, and in 1974 he sold TVI 2,240 five-year shares for $4 per share. On July 1, 1974, when the restrictions on the four-year shares lapsed, Alves still owned 4,667 four-year shares that had a fair market value at that time of $6 per share. On March 24, 1975, the restrictions on the 7,093 remaining five-year shares lapsed with the fair market value at $3.43 per share. P reported the $8,736 of gain on the sale of the 2,240 five-year shares to TVI as ordinary income on his 1974 tax return, he did not report the difference between the fair market value of the four and five-year shares when the restrictions ended, and the purchase price paid for the shares. D treated the difference as ordinary income in 1974 and 1975, pursuant to section 83(a). P petitioned the tax court. The parties stipulated that: (1) General Digital's common stock had a fair market value of 10 cents per share on the date P entered into the employment and stock purchase agreement; (2) the stock restrictions were imposed to 'provide some assurance that key personnel would remain with the company for a number of years;' (3) P did not make an election under section 83(b) when the restricted stock was received; (4) the free shares were not includable in gross income under section 83; and (5) the four and five-year restricted shares were subject to a substantial risk of forfeiture until July 1, 1974, and March 24, 1975, respectively. The court found that the stock was transferred to P in connection with the performance of services for the company, and, as a matter of law, that section 83(a) applies even where the transferee paid full fair market value for the stock. P appealed.