Dorothy E. Brown and Donald Lee Brown and United States National Bank of Oregon, Etc. v. United States

The residuary legatees of Clay Brown, deceased, appeal from a judgment of the district court denying their claim to a partial refund of income taxes for 1956. At issue is the tax treatment of two blocks of stock that the decedent acquired pursuant to a stock option plan under the then applicable section 421 of the Internal Revenue Code ( 26 U.S.C. § 421 ).

On October 28, 1954, Mr. Brown was elected president of M and M Woodworking Company (“M & M”), and shortly thereafter became a director. As a part of the resolution naming him president, Mr. Brown was granted a stock option for 10,000 shares of M & M stock of which 2,000 shares would be available for purchase on November 1, 1954, and the remainder in four blocks of 2,000 shares each on October 31, 1956 through 1959. The option price was $9.90 per share. Mr. Brown bought the first block of stock for that price on December 23, 1954.

On May 26, 1955, the board of directors revised the option plan, making the second block of 2,000 shares available for purchase on November 1, 1955, rather than on October 31, 1956. Mr. Brown exercised his option for the second block of shares on November 15, 1955, at $9.90 per share. On May 24,…