George E. Johnson and Sylvia v. Johnson v. Commissioner of Internal Revenue

George and Sylvia Johnson appeal a United States Tax Court determination of a $168,060 deficiency in their federal income tax for 1971. This additional tax liability, asserted by the Commissioner of Internal Revenue under the minimum tax provisions of Internal Revenue Code § 56, arose when taxpayers exercised certain employee stock options. Taxpayers dispute the Commissioner’s position that the mean New York Stock Exchange trading price of the stock appropriately measured the stock’s fair market value for purposes of determining the minimum tax, even though undisclosed violations of securities laws inflated the exchange price when the options were exercised. The Tax Court ruled in favor of the Commissioner. 74 T.C. 89 (1980). We affirm.

I

In 1971, Mr. Johnson exercised qualified employee stock options granted by Mattel, Inc. Mattel’s employee stock option plan met the requirements of §§ 421 and 422 of the 1954 Internal Revenue Code. The dates of exercise, the number of shares acquired, the option price, and the mean price of the stock on the New York Stock Exchange on the date of exercise of the options were as follows:

Date Shares Option Price Mean Price Per

Exercised…