87 T.C. 533">*534 OPINION

Respondent determined deficiencies of $ 297 and $ 28,276.23 in petitioners' joint Federal income tax for 1977 and 1978, respectively. After concessions, two issues remain: (1) Whether petitioners, husband and wife, may disavow the form of the stock option provision within their employment contract so as to allocate the stock option proceeds between themselves for purposes of computing their section 911 foreign earned income exclusions; ¹ and (2) whether petitioners may attribute any income from the 1978 disposition of the employee stock option to 1977 by virtue of the attribution rule of section 911(c)(2) (now section 911(b)(2)(B)).

1986 U.S. Tax Ct. LEXIS 57">*61 This case has been submitted fully stipulated. The evidence consists of a stipulation of facts with attached exhibits which is incorporated herein by this reference.

Robert S. Groetzinger and Beverly Groetzinger (hereinafter referred to as petitioners, collectively, or Robert and Beverly, individually) were married and residents of Fribourg, Switzerland, at the time the petition was filed in this case, and were bona fide residents of a foreign country at all times during the taxable years in issue, 1977 and 87 T.C. 533">*535 1978. Petitioners were employees of American Telecommunications Corp. (ATC), a California corporation, during the tax years in question pursuant to a written, joint employment contract between petitioners and ATC. The parties executed the agreement on November 1, 1976. The terms of the agreement are set forth in an 8-paragraph instrument.

Paragraph 1 of the instrument ² essentially provides for the employment of Robert and Beverly with American Telecommunications S.A. (ATSA), a subsidiary of ATC in Fribourg, Switzerland. Paragraph 1 also specifies the employment title and salary of Robert and Beverly. Robert was to be employed as President of ATSA at a annual salary1986 U.S. Tax Ct. LEXIS 57">*62 of $ 16,000 and Beverly as an administrative secretary at an annual salary of $ 8,000.

Paragraph 2 sets forth the terms of the employee stock option. ³ This paragraph refers to "R.S. GROETZINGER" as the optionee. The paragraph describes the contingencies, the 87 T.C. 533">*536 quantities of shares, and the dates upon which Robert could exercise the option. Paragraph 2 makes no explicit or implicit reference to Beverly.

1986 U.S. Tax Ct. LEXIS 57">*63 Paragraphs 3 through 8 set forth further incidents of employment. ⁴ In each instance, these remaining paragraphs refer to petitioners collectively. Paragraph 8 provides in conclusion that the agreement as written would be construed and performance determined under California law and could not be amended except by an instrument executed by all of the parties.

1986 U.S. Tax Ct. LEXIS 57">*64 On January 19, 1977, the board of directors of ATC formally granted to Robert a stock option on ATC stock pursuant to paragraph 2 of the employment contract.

Petitioners filed a joint individual income tax return for the calendar year 1977. On this return they reported gross income of $ 39,486.83. For purposes of the foreign earned income exclusion, Robert reported $ 20,009.60 and Beverly reported $ 10,004.80 of foreign earned income.

During 1978 Robert exercised his option on 10,000 shares of ATC stock. ⁵ On December 1, 1978, ATC transferred the 10,000 shares to Robert, who paid $ 40,000 for the lot. Robert sold the 10,000 ATC shares within the month for the sum of $ 235,000. This sum was deposited in petitioners' 87 T.C. 533">*537 joint bank account on December 11, 1978. The gain amounted to $ 195,000.

Petitioners filed a1986 U.S. Tax Ct. LEXIS 57">*65 joint individual income tax return for the calendar year 1978. On this return they reported gross income of $ 146,850. Robert reported $ 125,594 in foreign earned income, which consisted of $ 97,500, or half of the gain, from the disposition of the employee stock option and $ 28,094 in salary. Beverly reported $ 10,747 in foreign earned income, which consisted of her ATSA salary alone. Under section 911, Robert and Beverly excluded $ 15,000 and $ 10,747, respectively, of their foreign earned income. On Form 3921 of petitioners' 1978 return, they described the option exercised as a restricted stock option within the meaning of section 424(b) and Robert as the person to whom the optionor ATC transferred the stock. Petitioners consistently described in their returns Robert's occupation as businessman and Beverly's as corporate secretary.

In 1979 and 1980, petitioners filed two amendments to their 1977 tax return and one amendment to their 1978 return. Essentially, petitioners' amendments to their 1977 and 1978 tax returns reallocated the gain from the 1978 disposition of ATC stock first, between petitioners' taxable years 1977 and 1978 and second, between Robert and Beverly for1986 U.S. Tax Ct. LEXIS 57">*66 1978 for purposes of computing their foreign earned income exclusions.

The first issue for decision is whether the proceeds from the stock option, which ATC explicitly granted to Robert, are divisible between Robert and Beverly for purposes of the foreign earned income exclusion provided in section 911. The resolution of this issue turns on whether petitioners may disavow the form of the employment contract pursuant to which the stock option was granted on the theory that the instrument did not represent the substance of the agreement.

Section 911, ⁶ for the tax years in issue, permits an individual citizen of the United States who establishes 87 T.C. 533">*538 either bona fide residency in a foreign country or physical presence in such country for 17 months during a consecutive 18-month period to exclude certain earned income from foreign sources during the qualifying period. For 1978, 87 T.C. 533">*539 qualified taxpayers could elect to exclude a maximum of $ 15,000 for a complete tax year of foreign residence. When qualifying taxpayers are husband and wife, and both reside abroad and earn income abroad, separate ceilings apply to their earnings attributable to the services of each, 1986 U.S. Tax Ct. LEXIS 57">*67 even though the income is community income. Sec. 911(c)(3).

1986 U.S. Tax Ct. LEXIS 57">*68 On brief, petitioners argue that for 1978, Beverly is entitled to the maximum exclusion under section 911(c)(1). The argument is predicated on their assertion that although in form the gain from the ATC stock disposition is allocable to Robert, alone, in substance the gain is allocable to both Beverly and Robert. Thus, under such allocation, Beverly's foreign earned income is sufficiently high to allow for the maximum exclusion.

In arguing substance over form, petitioners address the economic reality of the employment agreement and the intention of the parties to the agreement. Petitioners contend that in economic reality the sales-related contingencies regarding the rights to exercise the stock option were achieved only by the services of both Beverly and Robert. According to petitioners on brief, "[Robert] would never have received his share of the proceeds without her participation." (Emphasis of petitioners.) They assert that the deposit of the proceeds in their joint bank account is objective evidence that in economic reality both received the income. Petitioners also contend that the parties to the agreement intended the stock option to apply to both Robert and 1986 U.S. Tax Ct. LEXIS 57">*69 Beverly. Petitioners explain that "the stock option was issued only in the name of [Robert] solely for reasons of administrative facility and simplicity."

On brief, respondent makes two arguments against any allocation of gains to Beverly. ⁷ First, he contends that "it would defy reason" to believe the parties intended anything other than the form in which the agreement was cast because its terms are "so clearly and unmistakably described." Second, respondent argues that the stock option involved herein constitutes a section 424 restricted stock option, and to permit the transfer of ATC shares to anyone 87 T.C. 533">*540 other than Robert would contradict the restrictive nature and purpose of section 424.

We agree with respondent's determination, although with regard to his first contention we would be reluctant to bind petitioners to the form of their agreement solely on the1986 U.S. Tax Ct. LEXIS 57">*70 ground that the form is clearly described. See Helvering v. F. & R. Lazarus & Co., 308 U.S. 252">308 U.S. 252 (1939); Landa v. Commissioner, 206 F.2d 431">206 F.2d 431, 206 F.2d 431">432 (D.C. Cir. 1953), revg. a Memorandum Opinion of this Court; Ciaio v. Commissioner, 47 T.C. 447">47 T.C. 447, 47 T.C. 447">457 (1967). Before proceeding with our reasons for deciding this issue for respondent, we pause to observe that respondent's second contention is clearly erroneous because the stock option involved herein cannot constitute a section 424 stock option by definition. According to sections 424(b) and 424(c)(3), a statutory "restricted stock option" must be granted before 1964, or later if pursuant to a binding contract made before 1964 or a written plan adopted and approved before 1964. By contrast, ATC granted Robert the stock option involved herein on January 19, 1977, pursuant to a November 1976, employment contract.

The Commissioner's determinations, however, are presumptively correct, and petitioners bear the burden of disproving his adjustments. Rule 142(a). In cases such as the one sub judice, where the taxpayer seeks to avoid the form of his own1986 U.S. Tax Ct. LEXIS 57">*71 agreement, a higher level of proof, known as the "strong proof standard," often is required in order for him to carry his burden. See Coleman v. Commissioner, 87 T.C. 178">87 T.C. 178 (1986); Major v. Commissioner, 76 T.C. 239">76 T.C. 239, 76 T.C. 239">247 (1981); Lucas v. Commissioner, 58 T.C. 1022">58 T.C. 1022, 58 T.C. 1022">1032 (1972). ⁸ We find it unnecessary to determine whether this higher standard of proof is applicable to this case, for after a careful survey of the facts before us we are convinced that the petitioner has failed to disprove by a preponderance of evidence the Commissioner's determinations.

1986 U.S. Tax Ct. LEXIS 57">*72 87 T.C. 533">*541 Under the doctrine of substance over form, the objective economic realities, rather than the particular form in which the agreement was cast, govern the tax consequences of the agreement. Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 435 U.S. 561">573 (1978); Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935). Under certain circumstances, a taxpayer may be entitled to argue substance over form in a transaction ( 308 U.S. 252">Helvering v. F. & R. Lazarus & Co., supra;47 T.C. 447">Ciaio v. Commissioner, supra at 457), although petitioner must provide objective evidence that the substance of the transaction was in accord with the position argued by petitioner rather than the form set forth by all the relevant documents. Gulf Oil Co v. Commissioner, 86 T.C. 937">86 T.C. 937 (1986); Yamamoto v. Commissioner, 73 T.C. 946">73 T.C. 946, 73 T.C. 946">954 (1980), affd. without published opinion 672 F.2d 924">672 F.2d 924 (9th Cir. 1982). Moreover, it is axiomatic that:

while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must1986 U.S. Tax Ct. LEXIS 57">*73 accept the tax consequences of his choice, whether contemplated or not, * * * and may not enjoy the benefit of some other route he might have chosen to follow but did not. * * * [Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134">417 U.S. 134, 417 U.S. 134">149 (1974). ⁹

We are convinced that the rule of National Alfalfa accurately addresses the situation presented herein. ATC and petitioners were free to structure the employment agreement, including the stock option provision, to their tax advantage. The record clearly establishes, and the petitioners do not dispute, that the employment agreement in form provided that ATC would grant the incentive stock option to Robert, alone. Under paragraph 2 of the agreement, the parties explicitly provided that Robert, rather than both Robert and Beverly, would be entitled to the stock option. The omission of Beverly's name in paragraph 2 is particularly obvious1986 U.S. Tax Ct. LEXIS 57">*74 in the context of each of the remaining paragraphs, which refer to petitioners, collectively. In addition, the parties stressed in paragraph 8 of their instrument that the instrument represented the final embodiment of the agreement. In ascertaining the deliberateness of this form we look to the acts of the parties and the documentation surrounding the agreement unless we are given evidence to the contrary. 73 T.C. 946">Yamamoto v. Commissioner, supra at 954. The 87 T.C. 533">*542 objective acts and documentation indicate the parties subsequently abided by the agreement as they made it. Both petitioners and respondent agree that ATC formally granted the option to Robert alone pursuant to the agreement and that Robert himself exercised this option. In addition, petitioners document in their 1978 return that ATC transferred the shares to Robert in his name, alone.

The petitioners understandingly elected to structure the stock option in the form of compensation for Robert, alone, and abided by the agreement as they made it. Following the principle of National Alfalfa, we find that petitioners must accept the tax consequences of their structural choice.

We reject petitioners' 1986 U.S. Tax Ct. LEXIS 57">*75 argument that the substance of the agreement, including the economic realities and underlying intent, differs from its form. In applying the substance-over-form doctrine we are concerned with the intentions at the time of the agreement and economic realities as then perceived by the participants. We are not called upon to restructure the transaction with the benefit of hindsight, for the nature of the stock option depends upon the agreement when entered into, and not upon subsequent action or inaction by the parties. See 73 T.C. 946">Yamamoto v. Commissioner, supra at 954; Barrett v. Commissioner, 58 T.C. 284">58 T.C. 284, 58 T.C. 284">289 (1972). ¹⁰ As such, we are not concerned with petitioners' hindsight perspective of the agreement's potential tax benefits as well as their contention that Beverly's services helped ATSA achieve various sales quotas upon which Robert's exercise powers were contingent, or with such subsequent actions as the deposit of the proceeds from petitioners' sale of ATC stock into their joint account.

1986 U.S. Tax Ct. LEXIS 57">*76 By focusing on the substance of the agreement at the time the parties made it, we are convinced that the form of the stock option was imbued with economic reality. In making this factual determination, we look to the nature of this compensatory provision vis-a-vis the nature of services which each petitioner as employee performed. ATC structured the stock option essentially as a sales incentive. That is, Robert's exercise of the option was contingent upon ATSA's achievement of various sales goals as well as Robert's continuity of employment. In light of Robert's 87 T.C. 533">*543 status as president of ATSA and self-description as "Businessman," we reasonably assume that Robert had a direct impact on ATSA's volume of sales. Petitioners provide no objective evidence that Beverly, in her capacity as administrative secretary, had more than an indirect effect on ATSA's sales volume or that her position was by nature sales-oriented. We are concerned not with Beverly's title as "Administrative Secretary," but rather with her role as perceived by the parties to the agreement when executed. The surrounding facts, including petitioners' documentation on various returns, suggest her role was1986 U.S. Tax Ct. LEXIS 57">*77 purely that of secretary and assistant. In consideration of the sales-oriented nature of the incentive stock option, we find it plausible that the form of the incentive stock option, applicable to Robert, alone, was imbued with economic reality.

In petitioners' remaining contention as to the substance of the agreement, they argue that the parties to the agreement actually intended to allocate the stock option between Robert and Beverly. We find this argument unconvincing for two reasons. First, their argument is self-defeating. Petitioners explained that the stock option was structured as it was because the parties to the agreement intended to employ an administratively convenient form. Faced with competing intentions and the choice of tax benefits versus administrative simplicity, petitioners opted for simplicity, and they must accept the tax consequences. It is this type of deliberate choice of one form over another to which the Court in National Alfalfa speaks.

Second, petitioners present no objective evidence that the parties to the contract specifically intended when the instrument was executed to allocate the stock option between Robert and Beverly. When an agreement1986 U.S. Tax Ct. LEXIS 57">*78 in form is objectively void of any apportionment of the consideration which taxpayer is to receive, taxpayer's unilateral self-serving apportionment of the consideration is not binding upon the Commissioner. Accord Winn-Dixie Montgomery, Inc. v. United States, 444 F.2d 677">444 F.2d 677, 444 F.2d 677">682 (5th Cir. 1971) (involving purchaser's unilateral allocation of goodwill to amortizable assets); Blackstone Realty Co. v. Commissioner, 398 F.2d 991">398 F.2d 991, 398 F.2d 991">997 (5th Cir. 1968), affg. a Memorandum 87 T.C. 533">*544 Opinion of this Court (involving seller's unilateral valuation of certain component parts of sale). Petitioners present no objective evidence that the parties to the agreement intended to allocate quantitatively part of the option to Beverly, rather than merely to benefit her in a community property sense by compensating her spouse. Therefore, we reject petitioners' argument that their unilateral, self-serving allocation in their amended 1978 return of the stock option proceeds between Robert and Beverly is binding upon the Commissioner.

We hold that the substance of the stock option provision within the employment contract coincided with its form. 1986 U.S. Tax Ct. LEXIS 57">*79 Consequently, we agree with respondent that Robert, alone, is entitled to report the gain from the disposition of the stock option as earned income for purposes of computing the section 911 exclusion.

The second issue for decision is whether petitioners may attribute any gain from the 1978 disposition of the employee stock option to 1977 under the attribution rule of section 911(c)(2) (now section 911(b)(2)(B)).

On brief, petitioners argue that the proceeds from the sale of the ATC shares "must be equally divided over the years 1977 and 1978 for income tax purposes." According to petitioners, section 911(c)(2) permits their attribution of the proceeds from the stock option to the years in which Robert earned the right to exercise the option. Petitioners assert they earned those rights by their performance of services over the 2-year period of 1977-78, and are entitled to report the proceeds as such.

Respondent argues that petitioners must report the gain entirely in 1978. He relies on the application of the disqualifying disposition provisions of section 421(b)¹¹ and 87 T.C. 533">*545 section 1.421-8(b)(1), Income Tax Regs., which require recognition of gain in the year of1986 U.S. Tax Ct. LEXIS 57">*80 disposition. Respondent contends that Robert's exercise of the stock option and disposition of the ATC shares prior to the end of the 2-year holding period constituted a disqualifying disposition of a restricted stock option. As such, he contends petitioners must report the entire gain in the year of the disposition, i.e., 1978. Respondent concludes that this "mandate" as to the time for reporting the gain precludes petitioners from any attribution of gain to the year in which it was earned within the authority of section 911(c)(2).

1986 U.S. Tax Ct. LEXIS 57">*81 Respondent attempts to buttress his argument by tracing the legislative history of the attribution rule. ¹² According to respondent, Congress intended the attribution rule of section 911(c)(2) to apply to such income items as salaries and profit-related bonuses paid after the closing of the taxable year. By contrast, respondent asserts most forms of deferred compensation are ineligible for the foreign earned income exclusion by virtue of section 911(c)(4) (now section 911(b)(1)(B)(iv)).

We reject respondent's arguments; however, we find that petitioners have satisfied their burden of proof only in part. Respondent's argument that petitioners must report income from a disqualifying disposition of a section 424 restricted stock option in the year of disposition serves no purpose in this case, 1986 U.S. Tax Ct. LEXIS 57">*82 for section 424 is inapplicable here by virtue of the dates on which ATC proposed and granted the option. ¹³ See secs. 424(b), 424(c)(3). Moreover, respondent's references to the legislative history of sections 911(c)(2) and 911(c)(4) carry little weight with regard to whether petitioners may attribute part of the gain to the taxable year 1977. Respondent shows no trace of congressional intent to preclude the application of section 911(c)(2) to such foreign earned income as exists here. Although section 911(c)(4) may preclude "most deferred compensation" from the 87 T.C. 533">*546 exclusion, that provision is inapplicable to the earned income in this case. Section 911(c)(4) explicitly precludes "[amounts] received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed." Robert received the stock option proceeds involved herein, by contrast, within the taxable year after the services were performed.

1986 U.S. Tax Ct. LEXIS 57">*83 Nevertheless, section 911(c)(2) does not necessarily permit taxpayers to exclude all of their foreign earned income attributable to the year in which the underlying services were performed. This is a consequence of the limitations on the amount of exclusion provided in section 911(c)(1). The attribution rule in effect puts a cash basis taxpayer on the accrual method of accounting exclusively for the purpose of calculating the section 911 exclusion, and does not affect the time of reporting foreign earned income that is includable in gross income. Section 911(c)(2) provides, "For purposes of [computing the amount excludable under section 911], amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed." (Emphasis supplied.) Section 1.911-2(d)(1), Income Tax Regs., T.D. 6665, 1963-2 C.B. 27, applicable to the tax years in issue, dispels any possible vagueness as to the limited applicability of section 911(c)(2). Section 1.911-2(d)(1), Income Tax Regs., in relevant part provides:

(1) Attribution to year in which services are performed. (i) For purposes1986 U.S. Tax Ct. LEXIS 57">*84 of applying paragraphs (a)(4) and (b)(2) of this section, amounts received * * * by an individual shall be considered received in his taxable year in which the services to which the amounts are attributable are performed by such individual.

(ii) The rule of subdivision (i) of this subparagraph applies only to determine the total amounts attributable to any one year for the purpose of determining the amount of the exclusion under paragraph (a)(4) or (b)(2) of this section and does not affect the time of reporting of any amounts which are includible in the individual's gross income. [Emphasis supplied.]

See Cook v. United States, 220 Ct. Cl. 76">220 Ct. Cl. 76, 599 F.2d 400">599 F.2d 400, 599 F.2d 400">408 (1979). Needless to say, under section 911 petitioners may not attribute to 1977 any of the gain from the sale of ATC stock for purposes other than applying it against Robert's 87 T.C. 533">*547 $ 25,000 exclusion for 1977, regardless of when Robert performed the underlying services.

Having determined in issue 1 that the gain from the 1978 sale of ATC stock constitutes foreign earned income of Robert, alone, we find the real issue is whether petitioners may attribute any of the1986 U.S. Tax Ct. LEXIS 57">*85 gain to 1977 for purposes of recomputing Robert's 1977 foreign earned income exclusion. Resolution of this issue turns on whether any amount of the gain is attributable to Robert's services performed in 1977 and, if so, whether any of such gain is excludable from 1977 gross income within the applicable section 911 dollar limitations.

We accept petitioners' contention that half of the $ 195,000 gain from the sale of ATC stock is attributable to services performed in 1977. Petitioners claim that the rights to exercise the stock option on the 10,000 shares of ATC stock were earned from services performed during 1977 and 1978. According to petitioners, half of the gain resulting from the sale of ATC shares is therefore attributable to services performed in 1977. Respondent did not dispute this assertion, and we conclude that respondent concedes this point.

From this part of the gain attributable to Robert's performance of services in 1977, we determine that $ 4,990.40 is excludable within the section 911 ceiling applicable to Robert for 1977. We compute this figure as follows. For tax years beginning in 1977, individuals who were bona fide residents of a foreign country for an uninterrupted1986 U.S. Tax Ct. LEXIS 57">*86 period of 3 consecutive years were entitled to a maximum annual exclusion of $ 25,000. Sec. 911(c)(1)(B). In petitioners' amended 1977 return, they indicate, and respondent does not dispute, that Robert was such a bona fide resident. According to petitioners' 1977 tax return, Robert's foreign earned income, excluding the stock option proceeds attributable to 1977 services, amounted to $ 20,009.60. Petitioners are therefore entitled to attribute $ 4,990.40 of the gain from the 1978 sale of ATC stock to the taxable year 1977 for purposes of computing Robert's section 911 exclusion. To the extent such holding results in an overpayment for 1977, petitioners will be deemed to have amended their petition to request such overpayment. Petitioners may 87 T.C. 533">*548 not attribute any of the balance of the gain to 1977 for purposes of the section 911 exclusion.

As a final matter, we must deal with petitioners' motions for dismissal, filed July 15, 1985, and for the award of fees and costs, filed July 15, 1985. Petitioners based their motion for dismissal on events occurring entirely at the administrative level. In rejecting this motion, we remind petitioners, as we informed them during the1986 U.S. Tax Ct. LEXIS 57">*87 hearing, that trials in the Tax Court are de novo. We must determine petitioners' tax liability based on the merits of the case and not on any previous record developed at the administrative level. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 62 T.C. 324">327-328 (1974).

We also reject petitioners' motion for award of fees and costs pursuant to section 7430, which provides that reasonable litigation costs may be awarded to the prevailing party. Petitioners' motion, filed on the date of the hearing rather than after the service of the written opinion, does not comply with the provisions of Rule 231(a)(2) and is therefore denied.

To reflect the foregoing, as well as concessions,

An appropriate order will be issued and decision will be entered under Rule 155.