Commissioner v. Smith
United States Supreme Court
324 U.S. 177 (1945)
Western Cooperage Company (Western) gave employee John Smith (plaintiff) stock options as part of Smith’s compensation. The options had no value at the time they were given to Smith, but the options gave Smith the right to purchase from Western certain shares of another corporation’s stock at a price not less than the stock’s value at the time Smith received the options (i.e., the option price). In subsequent years, Smith exercised his options and made two large purchases of the other corporation’s stock at times when the stock’s market value was higher than the option price. The Commissioner of Internal Revenue (the commissioner) (defendant) determined that the difference between the stock’s market value and the option price was compensation for Smith’s personal services to Western, which was taxable as income in the years Smith received the stock. The commissioner thus determined a deficiency in Smith’s income taxes for those years. Smith challenged the deficiency notice in tax court. The court upheld the commissioner’s determination, but a federal appeals court reversed, holding that Smith’s exercise of the options was a purchase of a capital investment that could result in taxable income to Smith only when he eventually sold the stock. The United States Supreme Court granted certiorari.
Rule of Law
Holding and Reasoning (Stone, C.J.)
Dissent (Roberts, J.)
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