Commissioner of Internal Revenue v. LoBue

PETITIONER: Commissioner of Internal Revenue

DECIDED BY: Warren Court (1955-1956)
LOWER COURT: United States Court of Appeals for the Third Circuit

ARGUED: Mar 06, 1956
DECIDED: May 28, 1956

Facts of the case


Media for Commissioner of Internal Revenue v. LoBue

Audio Transcription for Oral Argument - March 06, 1956 in Commissioner of Internal Revenue v. LoBue

Earl Warren:

Number 373, Commissioner of Internal Revenue, versus Philip J. LoBue.

Mr. Elman.

Philip Elman:

May it please the Court.

This case is here on certiorari of the United States Court of Appeals for the Third Circuit.

It's a federal income tax case and presents the question, whether an employee of a corporation who receives the right which he exercises to buy stock in the corporation at a price, which is considerably lower than the fair market price of the stock when he buys it.

It's taxable on the gain thus realized.

In other words, on the spread between what the corporation sells the stock to him for and what the corporation would receive for that stock, had it been sold on the open market, the Tax Court and the Court of Appeals --

Stanley Reed:

What -- on his sale of that stock?

Philip Elman:

On his purchase of the stock.

The question is whether the employee is taxable on the difference between what he pays for the stock to the corporation, what the corporation sells it to him.

Stanley Reed:

Before he sells it?

Philip Elman:

That's right, sir, on the -- on his exercise of the option right given to him by the corporation on the purchase of the stock.

Now, the Tax Court and the Court of Appeals have held that the employee, the taxpayer in this case is not taxable on that gain, and there is no dispute as to the facts which are in the main stipulated.

This agreement here as in the lower courts centers solely, entirely on the legal validity of the criteria or standards used by the Tax Court and the Court of Appeals in reaching the conclusion that no tax was due even though there was an undoubted economic gain or benefit received by the employee when he purchased this stock at the favorable price.

The -- before going into the detailed facts of the case, I should like if I may, in order to put the legal issue in the proper frame of reference, to refer briefly to the statutory provision which all agree is controlling here, that Section 22(a) of the 1939 Revenue Code which is set out in our brief at page 2.

Section 22 (a) is the basic definition of income.

It provides that gross income includes gains, profits and income derived from salaries, wages or compensation for personal service and the material that's omitted there indicated by the italics is just a parenthetical clause providing that -- including personal service for -- personal services rendered by officers of states, or compensation for personal service of whatever kind and in whatever form paid.

And it goes on to specify various categories of income, and there is a concluding catchall clause which the Court is familiar with.

That was before the Court in last term in the so-called windfall cases, the Glenshaw and General American Investors cases involving punitive damages under the antitrust laws and the Security Exchange Act.

The catchall clause, or gains or profits and -- and income derived from any source whatever.

And as the Court has noted on several occasions in recent terms that the statutory definition of income is so broad as to include all gains and only those gains are excluded from tax which Congress specifically excludes.

And we have set out here the provisions of Section 22 (b) (3), which provides that the value of property acquired by gift, bequest, devise or inheritance shall not be included in the gross income and shall be exempt from taxation under this chapter.

The comprehensiveness of the -- of the statute has been noted not only in the cases last term, but also in -- in cases such as the Rankin case involving illegally extorted payments and the Robertson case involving a prize received for a musical composition.

But perhaps, the most important case in this context is the case of Commissioner against Smith in 324 U.S. 177 in which -- which is the leading case dealing with taxability of gains received under employee stock options and Mr. Chief Justice Stone's statement in that opinion has been frequently quoted that Section 22 (a) is broad enough to include any gains or benefits concertedly conferred on employees as compensation, whatever the form or mode that that compensation is given.

Now, under the broad statutory provision as construed by the Court, it's therefore immaterial that the compensation does not take the form of cash.

It takes the form of property and merchandize and stocks, or bonds or whatnot.

It's also immaterial that the compensation is not given pursuant to a legal obligation or contract obligation.

It's given voluntarily such as tips or Christmas bonus or something of that sort.

It's taxable as compensation nonetheless, and it's also immaterial that the compensation takes the form of a byproduct of what might be called a noncompensatory, non-compensation motive on part of the employer.

For example, in the Robertson case where the taxpayer was held to realize taxable income, what he received was a prize in the context for a symphonic composition.