Alan J. Bayley and Barbara F. Bayley v. The Commissioner of Internal Revenue

Taxpayers appeal a Tax Court judgment sustaining the Commissioner’s notice of deficiency for the tax year 1968. See 69 T.C. 234 (1977). We affirm.

The case turns upon the application of Treas.Reg. §§ 1.61-2(d)(5) and 1.421-6(d)(2) requiring the holder of restricted stock to report the stock as income in the year in which restrictions substantially affecting value are removed.

The shares in question were received in 1966 as compensation for promoting and organizing a corporation. California law required such shares to be restricted for sale, dividend, liquidation and certain other purposes until the release of restrictions by the corporation commissioner. The taxpayers contended in the Tax Court and here that because the restrictions are imposed by law, as distinguished from restrictions imposed by private agreement, the treasury regulation should not apply to these shares. We fail to see why the distinction should make a substantive difference in this case. If, as taxpayers contend, Frank v. Commissioner, 447 F.2d 552 (7th Cir. 1971), teaches otherwise, we are not persuaded that it applies to this case.

The regulation is intended in part to prevent the conversion of ordinary…