Before CLARK,*fn* SMITH and HAYS, Circuit Judges.
Edward C. Victorson, Anne Victorson, and Graham, Ross & Company, Inc., seek review of decisions of the Tax Court of the United States upholding the Commissioner's determination that the taxpayers realized income when they exercised the right to purchase stock in Glamur Products, Inc., a right which they secured as partial compensation for their services in underwriting a public issue of Glamur Products stock. To safeguard the revenue the Commissioner filed protective petitions. As we reject the contentions presented by the taxpayers, we need not consider the Commissioner's petitions.
The taxable years in issue are, for the Victorsons, 1954, 1955 and 1956 and for Graham, Ross & Company, Inc., the fiscal years ended April 30, 1955, 1956 and 1957. During these years Graham, Ross was an over-the-counter house engaged in the stock brokerage and underwriting business, and Edward C. Victorson was its sole stockholder and principal executive officer. Anne Victorson is a party only because she filed joint returns with her husband.
On September 21, 1954, Graham, Ross entered into an underwriting agreement with Hosid Products Corporation (subsequently known as Glamur Products, Inc.) and with Hosid Products' president and principal shareholder, Jack Hosid, for the public issue of 600,000 shares of common stock at the public offering price of 50 cents per share. Under the agreement Graham, Ross was to receive (1) 12 1/2 cents per share until a total of $20,000 had been paid to cover the costs and expenses to Graham, Ross incident to the public offer, (2) a commission of 12 1/2 cents per share on all shares sold, and m(3) the right, for every six shares sold to the public, to purchase one share at the price of one mill ($.001) per share. If the entire issue of 600,000 shares was sold, Victorson was to have the right to purchase 50,000 additional shares at one mill per share.
Graham, Ross first sold Glamur Products stock to the public on November 18, 1954, and the offering was successfully completed on February 1, 1955. On May 23, 1955, Graham, Ross and Victorson exercised their right to purchase 100,000 and 50,000 shares respectively of Glamur Products stock at the price of one mill ($.001) per share. 46,498 of the 100,000 shares acquired by Graham, Ross were transferred to its salesmen and other employees as a bonus for participation in the successful underwriting.
The compensatory nature of the right to purchase the shares is not disputed. The determinations of the Tax Court in respect to which petitioners claim error are:
(1) Holding that the date upon which income was realized was May 23, 1955, the date that the taxpayer's right to purchase the stock was exercised, rather than February 1, 1955, the date the underwriting was completed and the taxpayers became finally entitled to purchase 150,000 shares of stock.
(2) Holding that the Glamur Products stock purchased by the taxpayers had an ascertainable fair market value on May 23, 1955, of 50 cents per share.
1. Date when income was realized. The Tax Court characterized the agreement for the sale of stock to petitioners as an "option" and held that income was realized on the date when the option was exercised. The taxpayers argue that the agreement price of one mill a share was so minuscule ($150 for 150,000 shares selling publicly at 50 cents or more a share) that no one ever doubted that the right to purchase would be exercised. Therefore, the argument continues, the significant date is February 1, 1955, when the right to purchase vested. See Fleischer & Meyer, Tax Treatment of Securities Compensation: Problems of Underwriters, 16 Tax L. Rev. 119, 128-29 & n. 43 (1960).
The taxpayers do not argue that May 23, 1955 is an inappropriate date to determine the realization of income if the agreement for the sale of stock is viewed as an option. See Commissioner v. LoBue, 351 U.S. 243, 249, 76 S. Ct. 800, 100 L. Ed. 1142 (1956); Commissioner v. Smith, 324 U.S. 177, 179-182, 65 S. Ct. 591, 89 L. Ed. 830 (1945); Note, Taxation of Compensatory Stock Options: Capital Gain or Ordinary Income, 64 Yale L.J. 269 (1954). Since the parties chose to make the taxpayers' right to the stock dependent on the payment of a sum of money, the Tax Court could quite properly consider the taxpayers' right an option, thus giving effect to the transaction in the form in which the taxpayers molded it. Television Indus. Inc. v. Commissioner, 284 F.2d 322, 325 (2d Cir. 1960). To distinguish, as the taxpayers would have us do, between transactions having the same form, in this case, the option form, on the basis of the amount of payment required would introduce unnecessary uncertainty into future cases.
We therefore conclude that the Tax Court did not err in holding that the income in question was realized on May 23, 1955, the date the option was exercised.
2. Ascertainable market value. The taxpayers assert that because of the speculative character of the option stock and certain restrictions on its transfer, the stock had no ascertainable market value on May 23, 1955, the date for which the Tax Court determined value.
The option stock purchased by Graham, Ross and Victorson was not registered or exempted from registration. The taxpayers agreed that they would hold the stock for twelve months from the effective date of the Regulation "A" Notification covering the public issue. Glamur Products agreed that thereafter it would, on request, take the necessary steps to qualify the option stock for public sale.*fn1 When the options were exercised on May 23, 1955, the restriction on the sale of the stock still had some six months to run, ...