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Sakol v. Commissioner of Internal Revenue

decided: April 6, 1978.

MIRIAM SAKOL, APPELLANT,
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLEE



Appeal from a decision of the United States Tax Court upholding the constitutionality of 26 U.S.C. ยง 83(a) under the Fifth and Sixteenth Amendments.

Feinberg and Oakes, Circuit Judges, and Wyatt, District Judge.*fn*

Author: Oakes

OAKES, Circuit Judge:

Is it constitutional under the Fifth and Sixteenth Amendments for Congress, in taxing a corporate employee in connection with his purchase of his employer's stock, not to take into account any diminution in value of the stock that may be present by virtue of temporary restrictions on transfer in the employer's underlying stock purchase plan? Section 83(a) of the Internal Revenue Code governs the taxation of certain stock transfers to employees "in connection with the performance of services."*fn1 It requires a taxpayer to include in gross income the excess of the stock's fair market value over its cost, as soon as the taxpayer's interest is no longer subject to a substantial risk of forfeiture. The actual value of the stock arguably may be less than the value of stock readily transferable on the open market because of restrictions imposed by the stock purchase plan. Nevertheless, these restrictions, other than permanent, nonlapsing restrictions, may not be considered in determining fair market value. Appellant argues that the Tax Court erroneously concluded that the statute was constitutional under the Fifth and Sixteenth Amendments. 67 T.C. 986 (Mar. 23, 1977). We disagree, and accordingly affirm the Tax Court.

I. FACTS AND PROCEEDINGS BELOW

During 1972, taxpayer was employed by Chesebrough-Pond's Inc. (Chesebrough). Chesebrough offered to its officers and administrative employees a stock purchase plan under a standard stock purchase agreement. The agreement, executed by all purchasers, provided that one dollar par value common stock could be purchased for an amount equal to fourteen times Chesebrough's average per share earnings during the preceding five years. It also contained a restriction on transfer referred to below.

On May 7, 1971, taxpayer agreed to purchase 140 shares at $21.20 per share. For a period of one year thereafter, her shares were subject to forfeiture if she ceased to be employed by Chesebrough for any reason other than death.*fn2 In addition, she was bound not to sell, pledge or transfer any interest in the shares for a five-year period ending May 7, 1976.*fn3 The transfer restriction, however, could be waived by Chesebrough.

As of May 7, 1972, taxpayer's 140 shares were no longer subject to forfeiture. Thus, the excess of the stock's fair market value over its cost became includable in taxpayer's gross income in the 1972 tax year.*fn4 On the last business day prior to May 7, the average New York Stock Exchange quotation for Chesebrough stock was $66.50 per share. Taxpayer's required inclusion under the statute, therefore, is measured by the difference between her cost of $21.20 and the market price of $66.50, or $45.30 per share for a total of $6,342. Because taxpayer both included the $6,342 in gross income and then deducted that amount in arriving at her adjusted gross income, the Commissioner determined a deficiency. It was in a redetermination petition that taxpayer challenged the constitutionality of Section 83(a).

II. DISCUSSION

A. The Fifth Amendment Ground

Appellant rests her Fifth Amendment argument on the irrebuttable presumption doctrine.*fn5 She contends that the conclusive legislative generalization embodied in Section 83(a) violates the Due Process clause because the statute imposes a tax on an amount "which . . . . does not, and cannot be made to, exist in actuality . . . ." Heiner v. Donnan, 285 U.S. 312, 329, 76 L. Ed. 772, 52 S. Ct. 358 (1932).*fn6

The doctrinal underpinning for taxpayer's argument flowered in the early 1970's when the dormant irrebuttable presumption doctrine was revived in constitutional analysis. See, e.g., Vlandis v. Kline, 412 U.S. 441, 37 L. Ed. 2d 63, 93 S. Ct. 2230 (1973) (holding unconstitutional a conclusive presumption of nonresidence whenever a person applied to a Connecticut state university from out of state); Cleveland Board of Education v. LaFleur, 414 U.S. 632, 39 L. Ed. 2d 52, 94 S. Ct. 791 (1974) (invalidating local education board rules requiring pregnant teachers to take maternity leave without pay a specified number of months before and after the expected birth of her child).*fn7 Earlier, Heiner with the aid of this analysis, had held unconstitutional a federal statutory presumption that gifts made within two years of a donor's death were made in contemplation of death.*fn8

More recently, however, the Court has narrowed the broad scope of the irrebuttable presumption doctrine*fn9 evinced in Vlandis and progeny. See note 7 supra. For example, Weinberger v. Salfi, 422 U.S. 749, 45 L. Ed. 2d 522, 95 S. Ct. 2457 (1975), upheld a federal statute precluding widows and their children from receiving Social Security survivors' benefits unless the claimant's relationship to the wage-earner existed at least nine months before his death. The Court articulated a rational relationship test for testing the validity of conclusive legislative presumptions in the context of a "noncontractual claim to receive funds from the public treasury," id. at 772:

The question is whether Congress, its concern having been reasonably aroused by the possibility of an abuse which it legitimately desired to avoid, could rationally have concluded both that a particular limitation or qualification would protect against its occurrence, and that the expense and other difficulties of ...


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