Commissioner of Internal Revenue v. Oscar E. Baan and Evelyn K. Baan

The Commissioner of Internal Revenue (Commissioner) determined a deficiency in the 1961 income tax of Oscar E. and Evelyn K. Baan, in the amount of $284.-44. Taxpayers petitioned the Tax Court for a redetermination of the Commissioner’s finding. The Tax Court decided there was no deficiency, its opinion being reported at 45 T.C. 71 . The Commissioner petitioned this court to review that decision.

During 1961, taxpayers owned six hundred shares of Pacific Telephone and Telegraph Company (Pacific) common stock. In that year they received six hundred stock rights, represented by transferable stock purchase warrants issued by Pacific, entitling them to purchase one share of Pacific Northwest Bell Telephone Company (Northwest) common stock for sixteen dollars and six stock rights.

On October 11, 1961, taxpayers exercised their stock rights and, in consideration for $1,600 ($16 per share) and the surrender of the six hundred stock rights, received one hundred shares of Northwest stock. The fair market value of Northwest common stock on October 11, 1961, was $26.94 per share.

In their joint federal income tax return for that year, taxpayers did not include as income any amount with…