Raymond B. Mitchell and Beverly Mitchell v. Commissioner of Internal Revenue

590 F.2d 312 79-1 USTC P 9235 Raymond B. MITCHELL and Beverly Mitchell, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. No. 76-2277. United States Court of Appeals, Ninth Circuit. Jan. 26, 1979. Malcolm G. Smith (argued), Los Angeles, Cal., for petitioners-appellants. Leonard J. Henzke, Jr. (argued), of Dept. of Justice, Washington, D. C., for respondent-appellee. Appeal from the United States Tax Court. Before HUFSTEDLER and TANG, Circuit Judges, and HALL, * District judge. HUFSTEDLER, Circuit Judge: 1 Appellants Raymond and Beverly Mitchell appeal from a decision of the Tax Court pursuant to Section 7482 of the Internal Revenue Code of 1954. The Tax Court held that the gain realized by appellants from the transfer of certain stock options constituted ordinary income; appellants contend that it was a capital gain. We affirm the Tax Court. 2 On September 21, 1961, Raymond Mitchell received a five-year option to purchase 2,353 shares of the common stock of his employer, the Western Rubber Corporation, at $22 per share. Western subsequently was consolidated into Amerco, Inc. Mitchell retained his position in the corporation and his Western option…

Appellants Raymond and Beverly Mitchell appeal from a decision of the Tax Court pursuant to Section 7482 of the Internal Revenue Code of 1954. The Tax Court held that the gain realized by appellants from the transfer of certain stock options constituted ordinary income; appellants contend that it was a capital gain. We affirm the Tax Court.

On September 21, 1961, Raymond Mitchell received a five-year option to purchase 2,353 shares of the common stock of his employer, the Western Rubber Corporation, at $22 per share. Western subsequently was consolidated into Amerco, Inc. Mitchell retained his position in the corporation and his Western option was converted into an option to purchase 22,137 shares of Amerco stock at $2.34 per share.

On May 3, 1966, Amerco stockholders agreed to sell their stock to Royal Industries, Inc., for $4.00 per share. Mitchell surrendered his Amerco option to Royal, and he retained his corporate position at a salary $6,000 less than he had received previously. In return for the salary reduction and surrender of the Amerco option, Royal granted Mitchell a five-year option to purchase 10,000 shares of R.oyal stock at $12 per share. Mitchell agreed, as a…

concurring:

Somehow or other it does not seem quite right that the Appellant is denied the advantage which he anticipated when he took a reduction of $6,000 a year in salary in consideration of securing in return therefor an advantage of capital gains tax over ordinary income tax.

But, the option was clearly subject to the restriction and condition that Mitchell remain in Royal Industries, Inc.’s employ for at least a year, and the Tax Court has concluded that that condition had “a significant effect upon the fair market value of the option.” The uncertainties of life alone which go with such an executory contract restrict the present market value of the optioned stock. That finding is not clearly erroneous and should not be disturbed.

I concur in the results.