25 T.C. 1112">*1113 The Commissioner determined deficiencies in the income tax liability of Joseph Kane for the years 1945, 1946, and 1947 in the amounts set forth below; and he determined a deficiency in the income tax liability of Rose Kane for 1947, in the amount set forth below:

The chief question is whether gain realized upon the exercise of options to purchase stock in 1945, 1946, and 1947 is taxable to the petitioner Joseph Kane under the provisions of section 22 (a) of the 1939 Code, as the Commissioner has determined. In the event these determinations of the Commissioner are not sustained, it is necessary to decide whether gain realized in 1947, upon the exercise of an option to purchase stock, is taxable to the petitioner Rose Kane.

FINDINGS OF FACT.

The stipulated facts are found as facts according to the stipulation. 1956 U.S. Tax Ct. LEXIS 258">*260 The stipulation and the attached exhibits are incorporated herein by this reference.

The petitioners, husband and wife, are residents of New York City, New York. They filed individual returns with the collector of internal revenue for the third district of New York.

The petitioners were married before 1935. They have two children. Joseph Kane is referred to hereinafter as Joseph, and Rose Kane is referred to hereinafter as Rose.

Prior to 1935, the petitioners lived in New York City. Joseph Kane had lived there for about 30 years before 1935. In 1935, petitioners moved to Cincinnati, Ohio, where Joseph Kane accepted employment by Gruen Watch Company. The petitioners lived in a suburb of Cincinnati in a 6-room house which they rented.

At all times since her marriage, Rose Kane had been a homemaker and she has not been employed in any other way.

Lou Kane, hereinafter called Lou, is a brother of Joseph. In 1944, he maintained his residence in Saybrook, Connecticut, and he was a salesman for Bulova Watch Company in charge of its New England sales territory. He had been employed by Bulova Company for a period of 10 years up to 1944.

25 T.C. 1112">*1114 Joseph was a vice president of Gruen1956 U.S. Tax Ct. LEXIS 258">*261 Watch Company, in charge of production, in 1943 and 1944. He received a salary and a "voluntary bonus" in the years 1940-1943, inclusive, in the amounts set forth below:

Bulova Watch Company, hereinafter referred to as Bulova Company, has its principal office in New York City. In 1944, and thereafter, Arde Bulova was chairman of the board of directors; John Ballard was president; and Harry Henshel was vice president; and all three constituted the board of directors.

Joseph, Rose, and Lou Kane were well acquainted with John Ballard and Arde Bulova. Joseph had known Ballard since 1930, and he had known Bulova for several years prior to 1944. Rose became acquainted with Bulova in connection with philanthropic work.

In March of 1944, Joseph Kane issued a public notice that he intended terminating his employment with Gruen Watch Company. A few days after the issuance of the public notice, Lou, from New York, telephoned to Joseph in Cincinnati, and told Joseph that Ballard, president of Bulova Company, would like to talk to Joseph, 1956 U.S. Tax Ct. LEXIS 258">*262 and that Ballard wished that Joseph would not make any definite commitment about his future employment until Ballard had the opportunity of talking to Joseph.

In April of 1944, Joseph went to New York City to see Ballard. There were discussions with both Ballard and Arde Bulova about the possibility of Joseph's becoming associated with Bulova Company. Joseph, Ballard, and Arde Bulova arrived at some understanding about the possibility of Joseph's entering into the employment of Bulova Company. Joseph understood that he would have to move from Cincinnati to New York City. It was understood, also, that an interval of time would be required during which the Kanes could find a place to live in New York City. Also, Joseph wanted to have a vacation before he undertook new employment. Joseph returned to Cincinnati and discussed the entire matter with his wife, Rose.

Shortly after Joseph returned to Cincinnati, Rose went to New York City. Arde Bulova talked to her about the possibility of her husband's becoming employed by Bulova Company. Arde Bulova told Rose that Bulova Company had been seeking to employ her husband and he proposed that in order to get her husband to work for Bulova1956 U.S. Tax Ct. LEXIS 258">*263 Company he would give Rose an option to buy some of his, 25 T.C. 1112">*1115 Arde Bulova's, shares of stock at $ 37 per share under the following conditions: If her husband, Joseph, was employed by Bulova Company for 1 year, she could buy 300 shares during the first year of his employment. If he was employed by Bulova Company a second year, she could buy 300 shares during the second year. If he was employed by Bulova Company a third year, she could buy 400 shares during the third year of his employment. Rose told Arde Bulova that she would accept the option under the terms which he had specified.

Rose was able to purchase Bulova stock because she had assets of her own consisting of securities in various corporations which had been acquired during several years before 1944. A good part of Rose's assets represented gifts from her husband. The extent of her holdings in securities is reflected in her income tax returns for 1945, 1946, and 1947. In those 3 years she sold securities for, roughly, the total sum of $ 91,000.

After Rose's discussion with Arde Bulova, the Kanes proceeded with arrangements to leave Cincinnati. In May of 1944, they gave up their rented house in Cincinnati; they1956 U.S. Tax Ct. LEXIS 258">*264 stored some of their household equipment including china and silverware; and they sold at auction various articles of household furnishings, for about $ 2,555, because they preferred to refurnish a new home or apartment in New York City. The Kanes then went to visit Lou Kane in Saybrook, Connecticut, where they stayed until they rented an apartment in New York City in the early part of August of 1944.

On August 17, 1944, Joseph and Rose executed separate agreements. Joseph executed an agreement with Bulova Watch Company under which he was employed as assistant to the president commencing August 21, 1944. Rose signed an agreement with Arde Bulova under which he gave her an option to buy up to 1,000 shares out of his own Bulova stock during the first, second, and third years of Joseph's employment by Bulova Company. The agreements are as follows:

Bulova Watch Company

Executive Offices

630 Fifth Avenue, New York 20, N. Y.

Mr. Joseph Kane,

240 Central Park South,

New York City, N. Y.

Dear Sir:

In accordance with conversation which you had with Mr. Arde Bulova and the undersigned, we make the following arrangement with you:

You are hereby hired by our company1956 U.S. Tax Ct. LEXIS 258">*265 and you agree to work for us as Assistant to the President, commencing August 21, 1944 and up to August 31, 1945 at a salary of $ 400 per week. If you are still in our employ beginning with 25 T.C. 1112">*1116 September 1, 1945, your salary shall be $ 500 per week and if you are in our employ after September 1, 1946, your salary will be $ 600 per week. On and after September 1, 1945, the arrangement provided for herein may be cancelled by either party upon four months' written notice to the other party by registered mail to the addresses given herein.

In addition to the above, if you are in our employ on August 31st of each of the years mentioned in this paragraph, you are to receive an amount equal to 1/2% of the net profit after taxes realized by our company as shown by our annual statement for the period ending March 31st, 1945, 1946 and 1947 and for no other years, payable on or before September 1, 1945, September 1, 1946 and September 1, 1947 respectively. If your employment ends during any year, then you are to receive one-twelfth of the yearly share of the profits above provided for each month of your employment during the year in which you have not been paid the said share of net1956 U.S. Tax Ct. LEXIS 258">*266 profits.

You are to devote all of your time, effort and energy to the performance of your duties as Assistant to the President or to such duties as you may be assigned by the President or other officer of our company, subject to our direction, and shall in all respects serve us diligently and to the best of your ability and shall not represent or in any way be connected, either directly or indirectly, with any other business during your employment with us.

Bulova Watch Company, Inc.

I agree to and accept the above: By [S] John H. Ballard

[S] Joseph Kane

Joseph Kane

Arde Bulova

630 Fifth Ave.

Mrs. Rose Kane,

240 Central Park South,

New York, New York

Dear Mrs. Kane:

As you know, we have been seeking to employ your husband Joseph Kane, but he is hesitating in accepting employment in our Company because you do not desire to move your home to New York from Cincinnati, where you now reside.

In consideration of the sum of One ($ 1.00) Dollar, receipt of which is hereby acknowledged, and in consideration of your agreeing to give up your Cincinnati residence and making New York your home so that your husband will work for us, I, 1956 U.S. Tax Ct. LEXIS 258">*267 by this letter, give you the option to buy from me 1000 shares of Bulova Watch Company, Inc. stock at the price of $ 37.00 per share. You are to exercise this option as follows: 300 shares within the first year of his employment, 300 shares within the second year of his employment and 400 shares within the third year of his employment.

Upon your exercising this option, I agree to deliver certificates for the shares you elect to take under this option in proper form for transfer upon the payment to me of the price provided to be paid in this option.

Very truly yours,

[S] A. Bulova

A. Bulova.

I agree to the above:

[S] Mrs. Rose Kane

25 T.C. 1112">*1117 Under the agreement with Bulova Watch Company, Joseph was employed as assistant to the president for 1 year from August 21, 1944, up to September 1, 1945, at which time the arrangements provided for by the agreement could be canceled by either party upon 4 months' written notice to the other party. If neither party canceled the agreement on or after September 1, 1945, Joseph's employment would be continued. The period of employment under the agreement with Bulova Watch Company was indefinite on and after September 1, 1945.

In 1944, at the 1956 U.S. Tax Ct. LEXIS 258">*268 time of Ballard's discussions with Joseph, and up to March 31, 1945, the authorized capital stock and the outstanding stock of Bulova Company amounted to 500,000 shares and 324,881 shares, respectively. Arde Bulova owned between 16 and 19 per cent of the outstanding stock. The number of shares which Bulova owned in 1944 did not exceed 61,727 shares. After Arde Bulova, the shareholder who owned the next largest block of Bulova stock, owned 3.16 per cent of the outstanding stock.

The parties have stipulated that $ 37 per share, the option price, was in excess of the market price of stock of Bulova Company on August 17, 1944.

Prior to March 31, 1947 (and also prior to August 17, 1944), no stock options had been given to any employee of Bulova Company by either Bulova Company or Arde Bulova.

On July 24, 1945, before the exercise of any part of the option under the agreement of August 17, 1944, there was a split of the stock of Bulova Company on the basis of 2 new shares for 1 old share. Thereafter, the authorized and the outstanding stock of Bulova Company was twice the amount before July 24, 1945, namely, 1,000,000 and 649,762 shares, respectively. After the stock split, the number1956 U.S. Tax Ct. LEXIS 258">*269 of shares of Bulova stock owned by Arde Bulova did not exceed 123,454 shares.

As a result of the stock split, the option agreement of August 17, 1944, gave Rose the right to purchase a maximum amount of 2,000 shares at $ 18.50 per share, 600 shares during the first and second years of Joseph's employment, and 800 shares during the third year.

The options to purchase Bulova stock from Arde Bulova were exercised on December 27, 1945, August 6, 1946, and July 21, 1947. On, or as of, each of the above dates, certificates of stock were issued to Rose Kane for 600 shares, 600 shares, and 800 shares, respectively. Rose used the proceeds from sales of stock in 1945, 1946, and 1947, for the purchase of Bulova stock in each of those years.

Joseph Kane was in the employ of Bulova Company during the years in which the stock options were exercised.

25 T.C. 1112">*1118 The market prices per share of stock of Bulova Company on December 27, 1945, August 6, 1946, and July 21, 1947, were $ 37.16, ¹ $ 51.25, and $ 33.75, respectively. The total cost, the total market prices, and the excess of the market prices above costs of the blocks of Bulova stock acquired under the stock option were as follows:

In each instance of the purchase of stock under the option agreement, Rose drew a check on her own checking account in the total amount of the purchase price of each purchase.

During the years of their marriage, Rose received gifts from Joseph.

In each of the years 1945, 1946, and 1947, securities were sold and Rose reported the sales in her individual income tax returns. The proceeds from the sales of securities which Rose reported in her individual income tax returns for 1945, 1946, and 1947 exceeded the cost of Bulova stock purchased 1956 U.S. Tax Ct. LEXIS 258">*271 under the option in 1945, 1946, and 1947. For example, in her returns for 1945, 1946, and 1947, Rose reported sales of securities, in each year, for the total amounts of $ 24,980.11, $ 44,381.52, and $ 22,498.13, respectively.

During all times material, Rose has had her own safety-deposit box. She has kept all of the Bulova stock in question in her own safety-deposit box.

Rose still possesses all of the Bulova stock involved in these proceedings. All of the dividends thereon have been paid to her, and she reported the dividends in her individual income tax returns.

Joseph has not used any of the Bulova stock in question as collateral for loans or in any other way.

Arde Bulova reported the stock which he sold under the stock option agreement as capital transactions. He did not claim any deduction for the excess of market price over sales price.

Joseph Kane received salary and bonus payments from Bulova Company in 1945, 1946, and 1947, in the total amounts of $ 34,740.35, $ 44,940.35, and $ 55,742.51, respectively.

25 T.C. 1112">*1119 In determining the deficiencies in the income tax liability of Joseph Kane (Docket Nos. 50587 and 52755) for 1945, 1946, and 1947, the Commissioner determined1956 U.S. Tax Ct. LEXIS 258">*272 that Joseph Kane realized income from the exercise of a stock option in each of the taxable years in the amounts of $ 11,100, ² $ 19,650, and $ 12,200, respectively. The explanation given by the Commissioner in the statements attached to the notices of deficiencies, in each instance, is as follows.

It is held that the exercise of a stock option by Rose Kane, your wife, resulted in income taxable to you under the provisions of section 22 (a) of the Internal Revenue Code [1939], to the extent of the difference between the option price and the market price, * * * on the date the option was exercised * * *

1956 U.S. Tax Ct. LEXIS 258">*273 In her income tax return for 1945, Rose Kane reported gain from the exercise of a stock option in the amount of $ 11,100, as ordinary income. She did not report any gain from the exercise of a stock option in her income tax return for 1946, or 1947.

In determining the deficiency in the income tax liability of Rose Kane for the year 1947 (Docket No. 52756), the Commissioner determined that Rose had realized income in the amount of $ 12,200 upon the exercise of an option to buy 800 shares of stock of Bulova Co. in 1947. The explanation given in the statement attached to the deficiency notice is as follows:

On July 23, 1947, Mrs. Kane executed an option to buy 800 shares of stock in the Bulova Watch Company. The excess of fair market value over cost is held to be taxable income to you.

The Commissioner agrees that if this Court holds that taxable gain was realized in 1947 upon the exercise of an option to purchase Bulova stock, and that such gain is taxable to Joseph Kane, then the above determination relating to Rose Kane is incorrect and should be set aside.

The Bulova Watch 1956 U.S. Tax Ct. LEXIS 258">*274 Company was controlled by the father of Arde Bulova up to the time of his death. Originally, the Bulova Company was a closely held corporation. Upon the death of Arde Bulova's father, Arde Bulova made John Ballard the president of the Bulova Company. In 1944, Arde Bulova exercised a dominant 25 T.C. 1112">*1120 influence in the management of the Bulova Company and he was the largest stockholder.

Arde Bulova offered Rose Kane the option to purchase some of his Bulova stock as an inducement to Joseph Kane to accept the position of assistant to the president of the Bulova Company in 1944 and to continue in the employ of the company; the option was intended to provide additional compensation to Joseph Kane in each year in which the option was exercised. The option was not intended to provide Rose Kane with a proprietary interest in the Bulova Company. In each of the years 1945, 1946, and 1947, Joseph Kane realized additional compensation for his services in the amount of the excess of the market value of the Bulova stock over the option price paid for the acquisition of stock in each year.

Rose would have moved to New York City even if Bulova had not given her the option to buy Bulova stock.

1956 U.S. Tax Ct. LEXIS 258">*275 OPINION.

The chief question is whether the option granted by Arde Bulova, the chairman of the board of directors of Bulova Watch Company, was given for the purpose of enabling Rose Kane to acquire a proprietary interest in that company, or was given as additional compensation to Joseph Kane for his services to Bulova Company, to be received in each year in which the option was exercised. The petitioners contend that the option was granted for the purpose of giving Rose a proprietary interest in the Bulova Company, and that, therefore, no taxable income, under section 22 (a) of the 1939 Code, was realized in the years in which Rose exercised the option by either Rose or Joseph Kane.

In the event the Court should sustain the contention of Joseph Kane that he did not receive taxable income under section 22 (a) in the years when Rose exercised the option, the respondent contends that Rose received taxable income, under section 22 (a) of the Code, in 1947, which is the only year before this Court involving Rose, because the option was intended as compensation to her for the trouble and inconvenience of moving from Cincinnati to New York and so that Bulova Company would have the services1956 U.S. Tax Ct. LEXIS 258">*276 of Joseph Kane in New York.

All of the questions arise under section 22 (a) of the 1939 Code. ³25 T.C. 1112">*1121 The questions to be decided are questions of fact. Abraham Rosenberg, 20 T.C. 5, 8, and 9.

The petitioners rely upon Abraham Rosenberg, supra,1956 U.S. Tax Ct. LEXIS 258">*277 and Commissioner v. Straus, 208 F.2d 325.

It is pointed out that the respondent does not contend that his amendment to Regulations 111, section 29.22(a)-1, contained in T. D. 5507, dated April 12, 1946, 1946-1 C. B. 18, and elaborated upon in I. T. 3795, 1946-1 C. B. 15, apply to the stock option which is involved in these proceedings. The respondent recognizes that the stock option granted by Arde Bulova was given on August 17, 1944, and, accordingly, it is a stock option granted before February 26, 1945, to which the provisions of his regulations as they stood before his amendment apply. See Abraham Rosenberg, supra, pp. 9 and 10. The respondent relies upon the old regulations, the pertinent part of which is quoted in the margin. ⁴

1956 U.S. Tax Ct. LEXIS 258">*278 We shall consider first the question presented in the proceedings of Joseph Kane. The respondent argues that the evidence supports a finding that the option was compensatory in nature. He argues that the evidence establishes that Arde Bulova granted the option, orally, at the time when employment of Joseph by Bulova Company first was being discussed; that the stock option was granted, orally, prior to the execution of the final employment agreement; that when the agreements were reduced to writing, the stock option agreement was tied to the agreement setting forth the terms of Joseph's employment; that the option was to be exercised during the period of Joseph's employment; and that the dominant motive underlying Arde Bulova's granting the stock option was to provide the "clincher" in obtaining Joseph's services for Bulova Company.

The respondent relies upon the rule that an employee is taxable upon the economic benefits realized upon the exercise of a stock option which was granted as compensation for services rendered, or to be rendered, by the employee. Commissioner v. Smith, 324 U.S. 177">324 U.S. 177; Dean Babbitt, 23 T.C. 850.1956 U.S. Tax Ct. LEXIS 258">*279 The respondent cites the foregoing cases and, also, Charles E. Sorensen, 22 T.C. 321. The respondent also contends that the petitioner, Joseph Kane, cannot avoid the tax consequences under section 22 (a), if the economic benefits of the stock option constitute additional compensation for his services to Bulova Company, merely because the option was given by Arde Bulova rather than by Joseph's employer, Bulova Company. On this point, he relies on Wanda V. Van Dusen, 8 T.C. 388, affd. 166 F.2d 647.

25 T.C. 1112">*1122 The issue to be decided places upon the Court the difficult task, in view of the record before us, of determining whether it was the intention of the parties that the option to purchase stock from Arde Bulova was to provide additional compensation to Joseph for his services, or was to give a proprietary interest in the Bulova Company to a member of Joseph's family, namely, his wife. The determination of such intent, which is a question of fact, is dependent upon the evidence in the case to be decided. "Each case must be decided upon its own peculiar facts, and facts which have been deemed1956 U.S. Tax Ct. LEXIS 258">*280 significant under some circumstances may serve as guides, but are not necessarily controlling." Abraham Rosenberg, supra, p. 10.

In their testimony, both Arde Bulova and Joseph Kane have denied emphatically that it was intended that any economic benefit which might be derived from exercise of the option was intended to be compensation for Joseph's services to Bulova Company. Joseph denies that he had any discussion with Arde Bulova about the terms of his employment by the company, and Arde Bulova denies having had any discussions with Joseph about his employment by the company, or about the stock option. Joseph, Rose, and Arde testified that the discussions about the stock option were between Rose and Arde exclusively and solely. Rose and Arde testified that the stock option was suggested by Arde and that neither Joseph nor Rose asked for the stock option. Arde testified that he had given friends and relatives opportunities to buy Bulova stock, and that he wanted Rose to have an opportunity to make an investment in the Bulova Company because it was his belief that such investments served to establish good "family" relations with the company. Also, 1956 U.S. Tax Ct. LEXIS 258">*281 there is testimony that Rose was not happy about moving from Cincinnati back to New York City, that she expressed dissatisfaction, and that Arde Bulova voluntarily offered her the option to make her satisfied.

All of the testimony of all of the witnesses has been carefully considered. There are inconsistencies in Arde Bulova's testimony. We are not impressed by Rose's professed dissatisfaction and alleged unhappiness about leaving Cincinnati, at least as a serious factor in the granting of the stock option. Rose finally testified that she would have gone to New York with her husband even if Arde Bulova had not granted her the stock option. There are statements appearing in the written agreements of August 17, 1944, which are in conflict with testimony of Joseph Kane and Arde Bulova. It is stated in the employment agreement of Bulova Company that Joseph Kane had had conversation with both Arde Bulova and John Ballard about his employment. It is stated in the option agreement that one of the purposes of that agreement was to get Joseph Kane to work for Bulova Company, and that he had been hesitating to accept employment in 25 T.C. 1112">*1123 the company. All of these facets of the record1956 U.S. Tax Ct. LEXIS 258">*282 have been taken into account.

The limited question to be decided is whether the option was given with the intention that any economic benefits which might be derived were to constitute additional compensation to Joseph for services rendered or to be rendered.

The petitioner Joseph Kane has testified that the only agreement relating to and fixing his compensation is the agreement which he made with the Bulova Company by which his compensation is stated to be a weekly salary, starting at $ 400 in the first year, increasing to $ 500 in the second year, and increasing to $ 600 in the third year, plus, in each year, one-half of one per cent of net profits after taxes, that he was entirely satisfied with the compensation so stated in the agreement, and that the agreement gave him better compensation than he had received from Gruen. The evidence shows that although Joseph had been receiving a "voluntary bonus" from his former employer, Gruen, the share of profits which he actually received from Bulova Company in 1945, 1946, and 1947 exceeded the amounts of the annual bonus which he had received from Gruen. For example, the amounts of Joseph's share of the net profits of Bulova Company 1956 U.S. Tax Ct. LEXIS 258">*283 in 1945, 1946, and 1947 amounted to $ 13,940, $ 18,940, and $ 24,542, respectively, which amounts exceeded the voluntary bonus received from Gruen in any of the years 1940 through 1943. Also, the basic salary paid by Bulova Company to Joseph in 1946 and 1947, namely, $ 26,000 and $ 31,200, exceeded his highest basic salary from Gruen in 1943. Thus, the evidence lends support to Joseph's testimony that the employment agreement with Bulova Company was a better one than the contract with Gruen.

After giving careful consideration to the testimony presented by the petitioners, there remain, nevertheless, obvious considerations which cannot be ignored. There is some background which is part of the entire situation which impresses us as having as much importance as the explanations given by the petitioners and Arde Bulova. The business of the Bulova Watch Company was directed by the father of Arde Bulova, if not developed by Arde Bulova's father. Arde Bulova testified that originally the stock of Bulova Watch Company was closely held, and from his testimony we understand that he meant, by the members of the family of Arde Bulova's father. It is established here that in 1944 Arde Bulova1956 U.S. Tax Ct. LEXIS 258">*284 was the largest single stockholder of the company. It also is clear from Arde Bulova's testimony that he was the leading director of the company. He testified that after his father died he made Ballard the president of the company. It must be concluded that in 1944 Arde Bulova exercised the dominant position in the management of Bulova Company.

25 T.C. 1112">*1124 In less than a year after Arde Bulova gave Rose Kane the option to purchase some of his shares of stock, there was a 2-for-1 split in Bulova stock. We cannot, in view of Arde Bulova's position in the company, regard the happening of the stock split as an event which was wholly unthought of by Arde Bulova when he gave the option to Rose. In fact, he testified that he told Rose that if she took the option it would make her "rich." After the stock split, the option enabled Rose to purchase up to 2,000 shares of stock of Bulova Company at $ 18.50 per share in a rising market. A matter involving a stock split is one which is peculiarly within the knowledge of the highest officials of a corporation.

All of the contentions of the petitioners invite the taking of a very naive view about all of the circumstances to which we are unable1956 U.S. Tax Ct. LEXIS 258">*285 to subscribe. One aspect of these proceedings comes within the oft-repeated pattern of action by the wife of a taxpayer who is directly concerned in a business transaction in which the wife would have no interest other than the benefits to her husband and to her family. Where a wife has assets in her own name, it is an easy matter for her, for her husband's convenience, to use her assets in the same way that her husband could use his own assets, and where some tax consequence to the husband may be involved, the husband's convenience is served if the wife enters into a transaction. Many instances have come before the courts where the Commissioner has applied the broad provisions of section 22 (a) to protect the fisc, and where substance rather than form has been held to be determinative. In these proceedings the petitioners have the burden of proof which is, specifically, to prove that there was no vital causal connection between the employment of Joseph Kane and his rendition of services and the purchase of the stock at favorable prices, taking into account all of the circumstances. See Wanda V. Van Dusen, supra.

We are left with a conviction that1956 U.S. Tax Ct. LEXIS 258">*286 the explanations of the petitioners and of Arde Bulova do not serve to discharge the petitioners of their duty under their burden of proof. There are patent weaknesses in the explanations which have been given.

In the first place, we must reject wholly the emphasis upon Rose's alleged unhappiness about moving from Cincinnati to New York City. Her professed objections to a change in the location of her home may have existed, but in deciding the issue presented, they are entirely immaterial and irrelevant.

Also, the alleged desire of Arde Bulova, a generous one, simply to give Rose an opportunity to purchase Bulova Company stock is also irrelevant and immaterial even though he may be a person of magnanimous impulses. Since the market price of Bulova Company stock on August 17, 1944, was less than $ 37 per share, which was the 25 T.C. 1112">*1125 option price, and since Rose had a portfolio of securities which had a value of around $ 90,000, Arde Bulova's willingness to sell her some of his stock could have been satisfied by simply offering to sell stock to Rose without giving Rose a favorable option price at which she could purchase stock over a period of 3 years, provided Joseph, her husband, 1956 U.S. Tax Ct. LEXIS 258">*287 was employed by Bulova Company. The crux of the matter is that Arde Bulova gave Joseph's wife a favorable option price which was conditioned upon Joseph's employment. He has not testified that he ever gave any other friend, or relative, an option price when he offered them the opportunity to purchase any of his Bulova stock. This is the factor which raises the big doubt about the entire theory of the petitioners. To be perfectly clear about the point, it must be remembered that not only did Arde Bulova give Rose an option price but also he offered the option at exactly the same time that the employment of Joseph Kane was under consideration and before Joseph Kane entered into an employment contract with Bulova Company; and that there was a stock split in less than 1 year after the agreements were executed; and that the exercise of the option was put on a year to year basis and was made dependent upon whether Joseph Kane was employed by Bulova Company; and that the stock split occurred before the end of the first year within which the stock option could be exercised.

After careful consideration of the respective arguments of both parties, it must be concluded that the situation1956 U.S. Tax Ct. LEXIS 258">*288 in this case is not essentially different from the situation in the case of Wanda V. Van Dusen, supra. It is concluded that there existed a vital causal connection between Joseph's employment by and his rendition of services to Bulova Company, and the purchases of the Bulova stock at a favorable option price, and the compensation to be "realized" by Joseph for his services to the company, and the granting by Arde Bulova of the highly advantageous option to Rose before or at precisely the same time that Joseph Kane agreed to become the assistant to the president of Bulova Company. We agree with the respondent that, in truth, the stock option was the "clincher" of the employment agreement. We think there is no doubt that Arde Bulova intended that his option would be the final inducement which would bring about Joseph Kane's acceptance and continuation of employment by Bulova Company, and that there was present the intention that the economic benefit to be derived from the exercises of the option would constitute additional compensation for Joseph's services to Bulova Company. The Van Dusen case is strong authority in support of the respondent's 1956 U.S. Tax Ct. LEXIS 258">*289 determination.

A taxpayer cannot avoid tax upon his "realization" of income, such as compensation for his personal services, by anticipatory arrangements. 25 T.C. 1112">*1126 Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Burnet v. Leininger, 285 U.S. 136">285 U.S. 136; and Helvering v. Horst, 311 U.S. 112">311 U.S. 112. Even though Rose exercised the option and acquired the stock, the difference between market value and the option price at the time blocks of shares of Bulova stock were purchased constituted additional compensation to Joseph for services which he had rendered during the year in which each stock option was exercised, and he cannot escape the reach of section 22 (a) merely because his wife exercised the option and made the purchase of the stock. He rendered the personal services. The Commissioner's determination under section 22 (a) is fully supported by the doctrine of Corliss v. Bowers, 281 U.S. 376">281 U.S. 376; 281 U.S. 111">Lucas v. Earl, supra, and many other decisions which had followed the principle of those leading authorities.

The rule established by 324 U.S. 177">Commissioner v. Smith, supra,1956 U.S. Tax Ct. LEXIS 258">*290 cannot be avoided by the convenient arrangement of having the taxpayer's wife exercise a stock option which is part and parcel of an arrangement for the employment and compensation of the taxpayer. In the proceedings of Joseph Kane, the respondent's determinations are sustained.

The conclusion in the main issue requires that the respondent's determination for the year 1947 in the proceeding of Rose Kane be reversed and set aside. It is so held.

In Docket Nos. 50587 and 52755 decisions will be entered for the respondent.

In Docket No. 52756 decision will be entered for the petitioner.