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68 Cornell L. Rev. 488 (1982-83)
Alchemy of Incentive Stock Options-Turning Employee Income Into Gold

handle is hein.journals/clqv68 and id is 506 raw text is: THE ALCHEMY OF INCENTIVE STOCK
Afzihaei W. Meltont
The proper federal income tax treatment of employee stock options
has been a source of controversy and confusion in the law for over fifty
years.' Three issues-when employees must recognize income from              op-
tion transactions, the amount they must include in income, and the
character of the amount--elude satisfactory solutions.
Congress, in labors resembling those of Sisyphus, has pushed for-
ward several alternative approaches. Before 1950, Congress did not pro-
vide special treatment for employee stock options in the Internal
Revenue Code. Such options were treated in the same manner as other
employee bargain purchases.2 From 1950 until 1976, Congress provided
t   Associate Professor of Law, Boston University School of Law; A.B. 1968, Princeton
University; J.D. 1973, University of Southern California. Member of California Bar. The
author wishes to thank Daniel I. Halperin and James A. Henderson, Jr., for their helpful
comments on an early draft of this article.
1  Absent specific statutory provisions to the contrary, the Treasury Department since
1923 has treated the spread in an employee bargain purchase from the employer as compen-
sation. See, e.g., T.D. 3435, 2-1 C.B. 50, 50 (1923) (Where property is sold by . . . an em-
ployer to an employee, for an amount substantially less than its fair market value, such...
employee shall include in gross income the difference between the amount paid for the prop-
erty and the amount of its fair market value.); Rubenfeld & Blessing, Taking Stock: Executive
Stock Options Aer the Economic Recovery Tax Act of 1981, 36 TAx LAw. 347, 354 nn.55, 56 and
accompanying text (1983) (discussing 1945 and 1946 amendments to 1923 position). Before
1956, some courts held that gross income did not include the difference in value at the time of
purchase if a bargain purchase of employer stock was proprietary rather than compensa-
tory. See Geeseman v. Commissioner, 38 B.T.A. 258, 264-65 (1938), acq., 1939-1 C.B. 13;
[NONSTATUTORY STOCK OIPTIONs] TAX MGmT. (BNA) 87-3d, at A-4 n.42 (Jan. 15, 1979).
Moreover, commentators supported this view. See Alexander, Employee Stock Options and the
1950 Revenue Act, 6 TAx L. REV. 165, 202-03 (1951); Sax, Stock Options, 23 TAxES 505, 510
(1945); Note, Taxing Employees on Stock Purchases, 41 COLUM. L. REV. 239 (1941); Note, The
Valuation of Option Stock Subject to Repurchase Options and Restraints on Sale: A New Tax Bonanza in
Executive Compensation, 62 YALE L.J. 832, 838 (1953) [hereinafter cited as Note, Valuation of
Option Stock]. The Supreme Court finally resolved the issue in favor of the Treasury Depart-
ment's treatment. Commissioner v. LoBue, 351 U.S. 243, 249 (1956). The tax treatment of
compensatory bargain sales, however, continues to be troublesome. See Gresham v. Commis-
sioner, 79 T.C. 322, 335 (1982) (Simpson, J., dissenting). Seegeerall Burke, How should an
economic interest acquiredfor services be treated after Rev. Rul 83-416, 58 J. TAx'N 352 (1983) (dis-
cussing ruling that applied I.R.C. § 83 to acquisition of royalty interest in oil and gas
2 See Commissioner v. LoBue, 351 U.S. 243, 248-49 (1956); Alexander, supra note 1, at

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