US SUPREME COURT DECISIONS

In recognition of his "contribution and efforts in making the operation of the Company successful," a corporation gave an employee options to purchase stock in the corporation. The options were nontransferable, and were contingent upon continued employment. After some time had elapsed and the value of the shares had increased, the employee exercised the options and purchased the stock at less than the then current market price. For some of the shares, he gave the employer a promissory note for the option price; but the shares were not delivered until the notes were paid in cash, when the value of the shares had increased.

Held: under the Internal Revenue Code of 1939, as amended, the resulting gain to the employee was taxable as income received at the time he exercised the option and purchased the stock, and his taxable gain should be measured as of the time when the options were exercised, and not as of the time when they were granted. Pp. 351 U. S. 244-250.

(a) In defining "gross income" as broadly as it did in § 22(a) of the Internal Revenue Code of 1939, as amended, Congress intended to tax all gains except those specifically exempted . P. 351 U. S. 246.

(b) The only exemption that could possibly apply to these transactions is the gift exemption of § 22(b)(3), and these transactions were not "gifts" in the statutory sense. Pp. 351 U. S. 246-247.

(c) There is no statutory basis for excluding such transactions from "gross income" on the ground that one purpose of the employer was to confer on the employee a "proprietary interest" in the business. P. 351 U. S. 247.

(d) The employee received a substantial economic and financial benefit from his employer, prompted by the employer's desire to get better work from the employee, and this is "compensation for personal service" within the meaning of § 22(a). P. 351 U. S. 247.

(e) In these circumstances, the employee "realized" a taxable gain when he purchased the stock. P. 351 U. S. 248.

(f) The employee's taxable gain should be measured by the difference between the option price and the market value of the chanrobles.com-red

Page 351 U. S. 244

shares as of the time when the options were exercised, and not as of the time when the options were granted. Pp. 351 U. S. 248-249.

(g) On remand, the Tax Court may consider the question, not previously passed on, whether delivery of a promissory note for the purchase price marked the completion of the stock purchase, and whether the gain should be measured as of that date or as of the date the note was paid. P. 351 U. S. 250.

223 F.2d 367 reversed and remanded.