No. 19



                     UNITED STATES TAX COURT



              VENTURE FUNDING, LTD., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 4174-95.            Filed March 26, 1998.


         P transferred stock to its employees as
    compensation for services, and it claimed a deduction
    in the year of transfer for the value of the stock.
    None of P's employees included the value of the
    transferred stock in his or her gross income for the
    year of transfer.
         Held: Sec. 83(h), I.R.C., does not allow P to
    deduct the reported amount in the year of transfer.



     Joseph Falcone, Brian H. Rolfe, and Robert J. Zinkel, Jr.,

for petitioner.

     Mark I. Siegel, for respondent.
                                - 2 -

                               OPINION

     LARO, Judge:   This case was submitted to the Court fully

stipulated.   See Rule 122.   Petitioner petitioned the Court to

redetermine respondent's determination of deficiencies of

$347,583 and $27,578 in its 1988 and 1989 Federal income taxes.

We must decide whether section 83(h) prevents petitioner from

currently deducting the value of stock that it transferred to its

employees in 1988 as compensation for services.       We hold it

does.1   Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the subject years.       Rule

references are to the Tax Court Rules of Practice and Procedure.

                              Background

     All facts have been stipulated.       The stipulations of fact

and the exhibits submitted therewith are incorporated herein by

this reference.   Petitioner is an accrual method corporation

whose principal place of business was in Detroit, Michigan, when

it petitioned the Court.   It was owned as follows during the

subject years:




     1
       The deficiency for 1989 results entirely from respondent's
determination that a research and development credit that
petitioner claimed for 1989, as a carryover from 1988, was usable
in full in 1988. We sustain respondent's determination for 1989
as a result of our holding on the deduction issue.
                               - 3 -

  Shareholder                    Ownership Percentage

Eugene Schuster                          49.45
Monis Schuster                            9.99
Adam Schuster                             9.99
Joseph Schuster                           9.99
Sarah Schuster                            9.99
Jayson Pankin                             9.99
Ann Schuster                               .50
London Arts                                .10
   Total                                100.00

All the Schusters are related, and London Arts is a corporation

whose stock is owned by Eugene Schuster.

     On March 27, 1987, Endotronics, Inc. (Endotronics), filed a

petition for reorganization in the U.S. Bankruptcy Court for the

District of Minnesota.   On April 4, 1988, the court confirmed an

amended plan of reorganization under which petitioner gained a

controlling interest in Endotronics.   Later that day, petitioner

transferred Endotronics stock to 12 of its employees as

compensation for services.   The following chart lists the

employees who received Endotronics stock and the fair market

value of the stock that they each received:

   Employee                      Fair Market Value

Eugene Schuster                     $390,625.00
Monis Schuster                       156,250.00
Mary Parkhill                         58,593.75
Bert Williams                         78,125.00
David Dawson                          78,125.00
Ira Snider                            66,953.13
Christopher Dean                      11,718.75
Jayson Pankin                        156,250.00
Werner Wahl                            7,812.50
W. Kent Clarke                         7,812.50
Carolyn Mazurkiewicz                   7,812.50
Mary Lore                             58,593.75
   Total                           1,078,671.88
                               - 4 -

Petitioner did not issue to any of these employees, or to

respondent, a Form W-2, Wage and Tax Statement, or a Form

1099-MISC, Miscellaneous Income, and none of these employees

included any of this compensation in his or her 1988 gross

income.   Petitioner claimed a $1,078,672 deduction for the

transfer on its 1988 Federal income tax return.    Petitioner filed

its 1988 return based on the calendar year.

                            Discussion

     Respondent determined that petitioner could not deduct the

claimed amount because it failed to meet the requirements of

section 83.2   Petitioner must prove this determination wrong.

Rule 142(a); Welch v. Helvering, 

, 115 (1933).

Petitioner also must prove its entitlement to the deduction.

Deductions are a matter of legislative grace.     New Colonial Ice

Co. v. Helvering, 

, 440 (1934).

     Petitioner argues that section 83(h) and the underlying

regulations let it deduct the claimed amount in 1988 because

petitioner's employees were required to recognize the

corresponding income in that year.     The fact that the employees

failed to recognize this income in 1988, petitioner argues, has

no bearing on its right to this deduction.    Petitioner argues

that respondent's regulations are invalid to the extent that they


     2
       Respondent determined alternatively that petitioner
realized a $1,078,672 capital gain on its distribution of the
stock. Because we agree with respondent's primary position, we
do not address the alternative determination.
                                 - 5 -

require an employer to issue an employee a Form W-2 or Form 1099

as a prerequisite to a deduction under section 83(h).    Petitioner

alleges that the income from the transfer of the Endotronics

stock was includable in petitioner's employees' incomes for the

year of transfer, which is the statutory requirement for a

deduction under section 83(h), and respondent's regulatory

requirement that petitioner also issue Forms W-2 to its employees

to deduct the compensation under section 83(h) impermissibly adds

restrictions to a statute which are not there.    Petitioner,

relying mainly on section 1.83-6(a)(3), Income Tax Regs., argues

that it may deduct the claimed amount in 1988 because that amount

is deductible in 1988 under petitioner's accrual method.

     We disagree with petitioner that it may deduct the claimed

amount in 1988.    We start our analysis with the statutory text,

construing the language as written by the legislators with

reference to the legislative history primarily to learn the

purpose of the statute and to resolve any ambiguity in the words

used in the text.     Trans City Life Ins. Co. v. Commissioner,

, 299 (1996).    Section 83, which was added to the

Code as section 321(a) of the Tax Reform Act of 1969, Pub. L.

91-172, 83 Stat. 588, reads in relevant part:

     SEC. 83.     PROPERTY TRANSFERRED IN CONNECTION
                  WITH PERFORMANCE OF SERVICES.

          (a) General Rule.--If, in connection with the
     performance of services, property is transferred to any
     person other than the person for whom such services are
     performed, the excess of--
                                 - 6 -

               (1) the fair market value of such property
          (determined without regard to any restriction
          other than a restriction which by its terms will
          never lapse) at the first time the rights of the
          person having the beneficial interest in such
          property are transferable or are not subject to a
          substantial risk of forfeiture, whichever occurs
          earlier, over

               (2) the amount (if any) paid for such
          property,

     shall be included in the gross income of the person who
     performed such services in the first taxable year in
     which the rights of the person having the beneficial
     interest in such property are transferable or are not
     subject to a substantial risk of forfeiture, whichever
     is applicable. * * *

     *      *       *        *           *        *          *

          (h) Deduction by Employer.--In the case of a
     transfer of property to which this section applies
     * * *, there shall be allowed as a deduction under
     section 162, to the person for whom were performed the
     services in connection with which such property was
     transferred, an amount equal to the amount included
     under subsection (a) * * * in the gross income of the
     person who performed such services. Such deduction
     shall be allowed for the taxable year of such person in
     which or with which ends the taxable year in which such
     amount is included in the gross income of the person
     who performed such services.

The legislative history to section 83 reveals that it was enacted

primarily to set forth rules on the tax treatment of deferred

compensation arrangements known as restricted stock plans; i.e.,

arrangements under which employers transfer stock to their

employees as compensation for services, where the stock is

subject to restrictions which affect its value.   S. Rept. 91-552,

at 253, 256-263 (1969), 1969-3 C.B. 423, 500-503.     Section 83 was

not meant, however, to reach only restricted stock.    The
                               - 7 -

legislators drafted section 83 broadly to reach any transaction

in which "a person * * * receives a beneficial interest in

property, such as stock, by reason of his [or her] performance of

services", id. at 256, 1969-3 C.B. at 501, and, as this Court has

observed previously, "Absent specific provision that a particular

transfer [of property to a person in connection with the

performance of services] is excepted from section 83, this

section is applicable", Alves v. Commissioner, 

, 876

(1982), affd. 

 (9th Cir. 1984).    Once applicable,

section 83 rests an employer's deduction on its employee's

inclusion in income of a corresponding amount.    As stated by the

Senate Finance Committee in its report:   "The allowable deduction

is the amount which the employee is required to recognize as

income.   The deduction is to be allowed in the employer's

accounting period which includes the close of the taxable year in

which the employee recognizes the income".    S. Rept. 91-552,

supra at 262, 1969-3 C.B. at 502.

     From the text of section 83, we understand that it applies

to the case at hand because "in connection with the performance

of services, property [was] transferred to [a] person other than

the person for whom such services [were] performed".    See also

sec. 1.83-1(a)(1), Income Tax Regs. ("Section 83 provides rules

for the taxation of property transferred to an employee * * * in

connection with the performance of services by such employee").

See generally sec. 1.61-2(d)(6), Income Tax Regs. (rules of
                              - 8 -

section 1.61-2(d), Income Tax Regs., relating to compensation

paid other than in cash, apply to transfers of property "to the

extent such rules are not inconsistent with section 83").   We

also understand that petitioner may deduct the value of the

transferred property when the corresponding value is "included in

the gross income of the [persons] who performed such services."

Because none of petitioner's employees included the corresponding

amount in his or her 1988 income, it follows that petitioner may

not deduct any of the claimed amount in that year.   Whereas

petitioner would have us read section 83(h) to allow it a

deduction in 1988 for the amount of income that was includable in

its employees' income for 1988, we decline to do so.    An amount

is deductible under section 83(h) in the year that the

corresponding income is "included" in the recipient employee's

income, which means to us that the amount is taken into account

in determining the tax liability of the employee for that year.

See S. Rept. 91-552, supra at 262, 1969-3 C.B. at 502

("The deduction [under section 83(h)] is to be allowed in the

employer's accounting period which includes the close of the

taxable year in which the employee recognizes the income"); see

also Lenz v. Commissioner, 

, 265 (1993) ("'Allowable

deduction' generally refers to a deduction which qualifies under

a specific Code provision whereas 'allowed deduction', on the

other hand, refers to a deduction granted by the Internal Revenue

Service which is actually taken on a return and will result in a
                                 - 9 -

reduction of the taxpayer's income tax").    See generally Bittker

& McMahon, Federal Income Taxation of Individuals, par. 28.2,

at 28-2 (2d ed. 1995) (the word "recognized" means "taken into

account in computing taxable income").3

     Neither party references the legislative history of section

83(h), and we do not resort to it to alter the plain meaning of

the words used in the statute.    A statute speaks for itself, and

its legislative history is sought to clarify the text only when

the meaning of the words therein is "inescapably ambiguous".

Garcia v. United States, 

, 76 n.3 (1984); see also

Ex parte Collett, 

 (1949).     When read in view of the

     3
       We also note that the drafters of section 83 knew the
difference between the suffixes "-able" and "-ible", on the one
hand, and "-ed" on the other. Section 83 includes both
"transferable" and "transferred" in many places, and it is clear
that those words are not interchangeable. Moreover, sec. 83 was
added to the Code by sec. 321(a) of the Tax Reform Act of 1969
(the Act), Pub. L. 91-172, 83 Stat. 588, and sec. 321(b)(3) of
the Act, 83 Stat. 591, which provides similar but not identical
rules for nonexempt trusts and nonqualified annuities, amended
sec. 404(a)(5) to provide for deductibility "in the taxable year
in which an amount attributable to the contribution is includible
in the gross income". (Emphasis added.) When we find, as we do
here, that different words are used in the same section of the
same act, we do not impute to Congress the intent to express the
same meaning through the different words. See United States v.
Olympic Radio & Television, 

 (1955); Estate of
Cuddihy v. Commissioner, 

, 1176 (1959); Root Glass
Co. v. Commissioner, 

, 477 (1943). "[L]egal documents
are for the most part nonemotive, [and] it is presumed that the
author's language has been used, not for its artistic or
emotional effect, but for its ability to convey ideas.
Accordingly, it is presumed that the author has not varied his
terminology unless he has changed his meaning, and has not
changed his meaning unless he has varied his terminology".
Zuanich v. Commissioner, 

, 443 n.26 (1981) (quoting R.
Dickerson, The Interpretation and Application of Statutes 224
(1975)).
                                - 10 -

legislative intent for section 83, the text of section 83(h) is

unambiguous.   As stated in section 83(h), an employer who

transfers property to an employee as compensation for services

rendered to it may generally deduct "an amount equal to the

amount included * * * in the gross income of the person who

performed such services * * * [and the] deduction shall be

allowed for the taxable year of * * * [the employer] in which or

with which ends the taxable year in which such amount is included

in the * * * [employee's] gross income".   Given the clarity of

this text, our inquiry starts and ends with the statutory text,

and we apply the plain and common meaning of that text.      TVA v.

Hill, 

 (1978); United States v. American Trucking

Associations, Inc., 

, 543-544 (1940); see also

Connecticut Natl. Bank v. Germain, 

, 253-254 (1992).

The statutory prerequisite to petitioner's deduction under

section 83(h) is that the corresponding amount must be "included"

in its employees' income, and, given the fact that petitioner's

employees did not include any of the subject income in their 1988

incomes, we conclude that petitioner is not entitled to a

corresponding deduction for that year.

     We recognize that Congress' insistence that an amount be

included in an employee's income as a precursor to an employer's

deduction under section 83(h) may present difficulties to some

employers attempting to ascertain whether their employees

included an amount in income.    We decline to second-guess the
                              - 11 -

wisdom of the Congress in promulgating such a requirement, or to

rewrite section 83(h) in a way that is more employer friendly by

substituting the word "includable" for the word "included".     As

the Court has noted many times before in similar settings, we

apply section 83 according to its terms, although such an

application could result in an inequity in a particular case.

See Alves v. Commissioner, 79 T.C. at 878, and the cases cited

therein, for prior cases in which the Court has applied section

83 literally, notwithstanding the inequities that could occur

from such an application.   Although the Congress has given the

Commissioner broad authority under section 7805(a) to prescribe

rules and regulations to implement provisions, including

provisions such as the one at hand which could otherwise be

difficult to meet in practice, the duty and province of this and

other courts are to interpret the statute as written.   As the

Supreme Court has repeatedly instructed the lower courts for

almost 200 years, "where * * * the statute's language is plain,

'the sole function of the courts is to enforce it according to

its terms.'"   United States v. Ron Pair Enters., Inc., 

, 241 (1989) (quoting Caminetti v. United States, 

, 485 (1917)); see also United States v. Goldenberg, 

, 102-103 (1897); Oneale v. Thornton, 10 U.S. (6 Cranch) 53, 68

(1810).   "[C]ourts must presume that a legislature says in a

statute what it means and means in a statute what it says there."

Connecticut Natl. Bank v. Germain, supra at 253-254.
                              - 12 -

     In the case at hand, the Commissioner has prescribed an

employer-friendly regulatory rule with respect to section 83(h).

The Commissioner's regulations, however, do not help petitioner

under the facts herein.   The applicable regulations are found in

section 1.83-6, Income Tax Regs.   These regulations, which are

generally effective for transfers of property after June 30,

1969, T.D. 7554, 1978-2 C.B. 71, 82, read:

          §1.83-6.   Deduction by employer.

          (a) Allowance of deduction--(1) General rule. In
     the case of a transfer of property in connection with
     the performance of services * * *, a deduction is
     allowable under section 162 or 212, to the person for
     whom such services were performed. The amount of the
     deduction is equal to the amount includible as
     compensation in the gross income of the service
     provider, under section 83(a) * * *, but only to the
     extent such amount meets the requirements of section
     162 or 212 and the regulations thereunder. Such
     deduction shall be allowed only for the taxable year of
     such person in which or with which ends the taxable
     year of the service provider in which such amount is
     includible as compensation. * * *

          (2) Special Rule.--If the service provider is an
     employee of the person for whom services were
     performed, such deduction is allowed for the taxable
     year of the employer in which or with which ends the
     taxable year of the employee in which such amount is
     includible as compensation, but only if the employer
     deducts and withholds upon such amount in accordance
     with section 3402. A deduction will not be disallowed
     under the preceding sentence if the employer does not
     withhold and deduct upon amounts excluded from gross
     income, such as amounts excluded under section 79,
     section 101(b), or subchapter N. * * *

          (3) Exceptions.--Where property is substantially
     vested upon transfer, the deduction shall be allowed to
     such person in accordance with his method of accounting
     (in conformity with section 446 and 461). * * *
                                - 13 -

     Under these interpretative regulations, the Commissioner has

allowed an employer such as petitioner to deduct compensation

paid to an employee through a transfer of property in the year

that the corresponding income is includable in the employee's

income if the employer deducts and withholds income tax on the

payment under section 3402.   See sec. 1.83-6(a)(2), Income Tax

Regs.; see also sec. 7805(a) (the Commissioner authorized to

"prescribe all needful rules and regulations for the enforcement

of this title").   Petitioner does not benefit from these

regulations because it did not withhold income tax on any of the

payments underlying the claimed deduction.    Although petitioner

attempts to avoid this result by arguing that these regulations

are invalid, we do not agree.    The statutory text allows a

deduction when the corresponding amount is included in income,

and the Commissioner's regulations merely establish a "safe

harbor" for concluding that the corresponding amount was included

in income.   The Commissioner's regulatory implementation of the

congressional mandate set forth in section 83(h) is reasonable,

which, in turn, means that the regulations are valid.    United

States v. Vogel Fertilizer Co., 

, 24 (1982); United

States v. Correll, 

, 307 (1967).    The special rule as

to the deduction and withholding of payroll taxes was meant to

alleviate the "difficult[ies] that a service recipient may have

in demonstrating that an amount has actually been included in the

service provider's gross income", see T.D. 8599, 1995-2 C.B. 12,
                             - 14 -

12, and its effect that an employer's deduction is in fact offset

by a corresponding inclusion in income comports with the

statute's purpose of matching an employer's deduction with income

inclusion by the employee.

     The history of these regulations is noteworthy.   When the

Commissioner originally proposed these regulations in 1971, they

did not contain a safe harbor provision under which an employer

could deduct the value of property transferred to an employee as

compensation for services, absent the employee's including the

corresponding amount in income.   Section 1.83-6, Income Tax

Regs., was originally proposed as follows:

          §1.83-6. Deduction by employer.--(a) In general.
     In the case of a transfer of property in connection
     with the performance of services * * *, there is
     allowed as a deduction under section 162 or 212, to the
     person for whom such services were performed, an amount
     equal to the amount included, under subsection (a) * *
     * of section 83 as compensation, in the gross income of
     the person who performed such services, but only to the
     extent such amount meets the requirements of section
     162 or 212 and the regulations thereunder. Such
     deduction shall be allowed only for the taxable year of
     such person in which or with which ends the taxable
     year for which such amount is included as compensation
     in the gross income of the person who performed such
     services. * * * [Sec. 1.83-6, Proposed Income Tax
     Regs., 36 Fed. Reg. 10793 (June 3, 1971).]

After these proposed regulations were published, the Commissioner

received numerous comments expressing concern as to the

difficulty that an employer may have in demonstrating that an

amount has actually been included in an employee's gross income.

Accordingly, the Commissioner, in finalizing the proposed
                               - 15 -

regulations, opted to allow a deduction at the time that the

corresponding amount was includable in an employee's gross

income, even if the employee did not properly include the

includable amount in his or her income.   As a quid pro quo to

receiving the deduction at that time, however, the Commissioner

required that the employer deduct and withhold payroll taxes from

the underlying payment.

      Most recently, the Commissioner has amended the regulations

under section 83(h) to "more closely [follow] the statutory

language of [that] section".   T.D. 8599, supra, 1995-2 C.B. at

13.   The current regulations, which are effective for deductions

in taxable years beginning on or after January 1, 1995, but which

may be used by employers claiming deductions for any taxable year

not closed by the period of limitations under section 6501, read:

           §1.83-6. Deduction by employer. (a) Allowance of
      deduction--(1) General rule. In the case of a transfer
      of property in connection with the performance of
      services * * *, a deduction is allowable under section
      162 or 212 to the person for whom the services were
      performed. The amount of the deduction is equal to the
      amount included as compensation in the gross income of
      the service provider under section 83(a) * * *, but
      only to the extent the amount meets the requirements of
      section 162 or 212 and the regulations thereunder. The
      deduction is allowed only for the taxable year of that
      person in which or with which ends the taxable year of
      the service provider in which the amount is included as
      compensation. * * *

           (2) Special Rule. For purposes of paragraph
      (a)(1) of this section, the service provider is deemed
      to have included the amount as compensation in gross
      income if the person for whom the services were
      performed satisfies in a timely manner all requirements
      of section 6041 or section 6041A, and the regulations
                             - 16 -

     thereunder, with respect to that amount of
     compensation. * * *

          (3) Exceptions. Where property is substantially
     vested upon transfer, the deduction shall be allowed to
     such person in accordance with his method of accounting
     (in conformity with sections 446 and 461). * * *

As stated by the Commissioner in the preamble to these

regulations:

          Under section 83(h) of the Code, in the case of a
     transfer of property to which section 83(a) applies,
     the person for whom services were provided may deduct
     an amount equal to the amount included in the service
     provider's gross income. In light of the difficulty
     that a service recipient may have in demonstrating
     that an amount has actually been included in the
     service provider's gross income, the general rule in
     former §1.83-6(a)(1) permitted the deduction for the
     amount "includible" in the service provider's gross
     income. Thus, the deduction was allowed to the service
     recipient even if the service provider did not properly
     report the includible amount. Where the service
     provider was an employee of the service recipient,
     however, the special rule in §1.83-6(a)(2) provided
     that a deduction could be claimed only if the service
     recipient (employer) deducted and withheld income tax
     in accordance with section 3402. The special rule was
     designed to ensure that the service recipient's
     deduction was in fact offset by a corresponding
     inclusion in the service provider's gross income.
     The special rule was limited to employer-employee
     situations because in other situations there was no
     underlying withholding requirement upon which the
     deduction could be conditioned.

          Taxpayers expressed concern that it was often
     difficult to satisfy the prerequisite that employers
     must deduct and withhold income tax from payments in
     kind as a condition for claiming a deduction. These
     regulations address this concern by eliminating this
     prerequisite, while still ensuring consistent treatment
     between service recipients and service providers as
     required by the statute. In addition, because the
     deduction no longer is conditioned on withholding,
     there no longer is a need to have different rules for
     those who receive services from employees and those who
     receive services from others.
                        - 17 -

     Under these regulations, the former general rule
and special rule are replaced by a revised general rule
that more closely follows the statutory language of
section 83(h). The service recipient is allowed a
deduction for the amount "included" in the service
provider's gross income. For this purpose, the amount
included means the amount reported on an original or
amended return or included in gross income as a result
of an IRS audit of the service provider.

      Because of the potential difficulty of
demonstrating actual inclusion by the service provider,
a special rule provides that, if the service recipient
timely complies with applicable Form W-2 or 1099
reporting requirements under section 6041 (or 6041A),
as appropriate, with respect to the amount includible
in income by the service provider, the service provider
is deemed to have included the amount in gross income
for this purpose. Thus, the regulations allow the
deduction without requiring the service recipient to
demonstrate actual inclusion by the service provider.
* * *

*       *         *         *           *     *         *

     The deemed inclusion rule may be used only by a
service recipient whose compliance with applicable Form
W-2 or 1099 reporting requirements is timely. Thus,
for example, under the current reporting requirements,
if amounts attributable to one or more section 83
transfers of property are includible in an employee's
income in year 1 (and are not eligible for any
reporting exemption), the employer generally is
required to furnish the employee a Form W-2 reflecting
that amount by January 31 of year 2 and generally is
required to file a copy of the Form W-2 with the
federal government by the last day of February of year
2. If the employer reports to the employee and the
government in a timely manner, the employer can rely on
the deemed inclusion rule to claim a deduction for the
amount in year 1. If the employee's Form W-2 is not
furnished until after January 31 of year 2 or the
government's copy of Form W-2 is not filed until after
the last day of February of year 2, the employer
generally is required to demonstrate that the employee
actually included the amount in income in order to
support its deduction of the amount. * * *

*       *         *        *        *        *      *
                              - 18 -

T.D. 8599, supra, 1995-2 C.B. at 12-13.   Petitioner can find no

refuge in current section 1.83-6, Income Tax Regs., because:

(1) It has not issued a Form W-2 or Form 1099, and (2) none of

its employees has included the value of the Endotronics stock in

his or her gross income.

     Nor can petitioner find refuge in section 1.83-6(a)(3),

Income Tax Regs.   Section 1.83-6(a)(3), Income Tax Regs.,

provides an exception to the general timing rule of section

1.83-6(a)(1), Income Tax Regs., in that the deduction afforded by

section 1.83-6(a)(1) and/or (2), Income Tax Regs., is allowed to

the employer in accordance with its method of accounting where

the underlying property is substantially vested upon transfer.

Section 1.83-6(a)(3), Income Tax Regs., does not, as argued by

petitioner, provide an independent basis for deducting an amount

under section 83(h).   Section 1.83-6(a)(3), Income Tax Regs.,

merely sets forth the time that an amount is deductible, where

the employer's right to the deduction has already been

established by section 1.83-6(a)(1) and/or (2), Income Tax Regs.

The fact that section 1.83-6(a)(3), Income Tax Regs., is only a

timing provision is quickly seen by comparing the rules contained

in that section with the rules contained in section 1.83-6(a)(1),

Income Tax Regs.   Section 1.83-6(a)(1), Income Tax Regs., tracks

the statutory text in that they both contain three separate

rules, the first of which allows a deduction under section 162 or

212, the second of which sets forth the amount of the deduction,
                               - 19 -

and the third of which sets forth the timing of the deduction.

Section 1.83-6(a)(3), Income Tax Regs., by contrast, contains

only one rule, and that rule speaks only to the timing of the

deduction.

     The following example illustrates the applicability of

section 1.83-6(a)(3), Income Tax Regs.    Assume that the

respective taxable years of an employer and an employee end on

July 31 and December 31.    Assume further that the employer

transfers property to the employee on May 1, 1993, in connection

with services rendered, that this property is substantially

vested at the time of transfer, and that the employer deducts and

withholds income tax on this transfer under section 3402.      In

such a case, the employee must include the value of the property

in income for his or her taxable year ended December 31, 1993.

See sec. 83(a).   With respect to the employer, the general rule

of section 1.83-6(a)(1) and (2), Income Tax Regs., forces it to

deduct the value of the transfer in its taxable year ended

July 31, 1994 (i.e., its taxable year in which ends the taxable

year of the employee in which the amount is included in gross

income), although the employer made the payment in its taxable

year ended July 31, 1993.    By virtue of the safe harbor in

section 1.83-6(a)(2), Income Tax Regs., and the exception in

section 1.83-6(a)(3), Income Tax Regs., the employer can take the

deduction in its taxable year ended July 31, 1993; i.e., the year

in which the amount is deductible under the employer's method of
                              - 20 -

accounting.   See Schmidt Baking Co. v. Commissioner, 

(1996); see also Chalmette Gen. Hosp., Inc. v. United States,

71 AFTR 2d 93-3314, 90-2 USTC par. 50,578 (E.D. La. 1990).

See generally Utz, 384-2nd T.M., Restricted Property--Section 83

A-15-16 (1996).

     Petitioner argues that section 1.83-6(a)(3), Income Tax

Regs., the two cases cited immediately above, and Robinson v.

Commissioner, 

 (1984), support its right to a

deduction in 1988, the year in which the amount is deductible

under its accrual method, notwithstanding the fact that its

employees did not include any of the subject amount in income.

We do not agree.   As discussed above, section 1.83-6(a)(3),

Income Tax Regs., does not independently bestow a deduction on

petitioner with respect to its transfer of the Endotronics stock.

Moreover, petitioner's reliance on Schmidt Baking Co., Chalmette

Gen. Hosp., and Robinson is misplaced.    None of the Courts in

those cases addressed or decided the issue that is before us

today.   Nor did the parties in those cases, unlike the parties

here, dispute that the employers were entitled to a deduction,

challenging only the timing of that deduction.

     In summary, petitioner has not met the requirements for

deductibility under section 83(h), and it has not met the

requirements for deductibility under section 1.83-6, Income Tax

Regs., either pre- or post-amendment.    Thus, section 83(h)

prevents petitioner from deducting the value of the transferred
                              - 21 -

stock in 1988.   We have considered all arguments made by

petitioner for a contrary holding and, to the extent not

discussed above, find them to be irrelevant or without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.



     Reviewed by the Court.



     CHABOT, SWIFT, JACOBS, GERBER, PARR, COLVIN, FOLEY, and
VASQUEZ, JJ., agree with this majority opinion.
                               - 22 -

     COLVIN, J., concurring:    I agree with the reasoning and

conclusions stated by the majority.     The majority concludes that

section 83(h) does not allow petitioner to deduct the value of

stock that it transferred to 12 of its employees as compensation

for services in the year of the transfer.    The majority denies

the deduction because none of the 12 employees included the value

of the stock in income, and because petitioner did not qualify

for safe harbors provided in applicable regulations that allow

the employer a deduction if it meets certain withholding or

reporting requirements.    I concur to emphasize some points of

agreement with the majority.

     Judge Ruwe recognizes that his interpretation of section

83(h) raises questions about "the 'equity' of allowing a

corporate deduction for compensation paid to its controlling

shareholders and principal officers, who failed to report the

same items as income."    Judge Ruwe's dissent p. 54.   I agree with

the majority that Congress did not intend and the statute does

not require the inequitable result that follows from the

dissent's reasoning.

                                 I.

                             "Included"

     Section 83(a) requires that a service provider (e.g., an

employee) include the fair market value of property received from

the employer in his or her gross income in the first taxable year

in which the rights of the person having the beneficial interest
                              - 23 -

in such property are transferable or are not subject to a

substantial risk of forfeiture.   Section 83(h) allows an employer

to deduct an amount equal to the amount "included" under section

83(a).

     Judge Ruwe's substitution of the word "includible", Judge

Ruwe's dissent pp. 39-40, for the word "included" is at odds with

our usual understanding of these and analogous terms.   I agree

with the majority that the "ed" ending and the "ible" (or "able")

ending have different meanings.   The "ed" ending refers to

something done in fact, e.g., an expense "deducted", income

"reported", or an item "recognized" in computing gross income.

Majority op. pp. 8-9.   The "ible" (or "able") ending refers to

something legally required, such as "reportable" income, or

permitted, such as a "deductible" expense.   Id.   Consistent with

those usual meanings, the majority properly reads "included" to

require that the amount has in fact been included in income.

Majority op. p. 8.

     Section 83(a) says that the fair market value of certain

property "shall be included" in the gross income of a service

provider in the first year the property is not subject to a

substantial risk of forfeiture.   The majority (majority op. p. 7)

and Judge Ruwe's dissent p. 39 correctly point out that   section

83(a) imposes a legal obligation on the recipient of property.

Congress could also have imposed that obligation by saying that

the fair market value of the property is "includible" in the
                               - 24 -

recipient's income.    See sec. 88 (nuclear decommissioning costs

are "includible" in gross income).

     Judge Ruwe's dissent uses the word "included" in section

83(a) to construe the word "included" in section 83(h).    Although

the choice of "included" or "includible" in section 83(a) would

not affect our reading of that subsection, Judge Ruwe's dissent's

substitution of "includible" for "included" in section 83(h)

would dramatically change the meaning of that subsection.

     From the fact that Congress might have accomplished its

purpose in section 83(a) equally well by saying "includible"

instead of "included", Judge Ruwe reasons that Congress meant

"includible" in section 83(h) where it used "included".    Judge

Ruwe's dissent pp.39-40.    The dissent in essence relies on the

maxim of statutory construction that if Congress uses the same

term in two places in the statute, we should give it the same

meaning.

     Maxims of construction are useful interpretative tools but

are not dispositive.   The dissent overlooks the different purpose

and context of sections 83(a) and (h).    The same word or phrase

appearing in different places in the internal revenue laws may

have different meanings depending on the context and legislative

purpose involved.   See Helvering v. Stockholms Enskilda Bank, 

, 86-88 (1934); Helvering v. Morgan's Inc., 

,

128 (1934).   The context of section 83(a), an income inclusion

provision, is different than section 83(h), a deduction
                               - 25 -

provision.   While the term "includible" is interchangeable with

"included" in section 83(a) without affecting the result, it is

definitely not interchangeable in section 83(h).    The effect of

applying the maxim regarding consistent use of terms here would

be to override the plain meaning of the term "included" in

section 83(h) and to significantly alter the meaning of section

83(h).

                                 II.

                       The 1995 Regulations

     Judge Ruwe's dissent does not take into account the 1995

amendments to the section 83(h) regulations or the accompanying

preamble, both of which shed important light on the issue in

dispute here.

     The 1995 regulations under section 83(h) provide a safe

harbor under which a service provider is deemed to have included

an amount as compensation in gross income if the person for whom

the services were performed timely meets Form W-2 or Form 1099

reporting requirements under sections 6041 or 6041A.    Sec. 1.83-

6(a)(2), Income Tax Regs.    The preamble accompanying the 1995

amendments to those regulations states that, absent qualification

under that special rule, the employer must show that the employee

"actually included" the amount in income in order to support its

deduction of the amount.    T.D. 8599, 1995-2 C.B. 12, 12-13.

     The 1995 amendments to the section 83(h) regulations and the

preamble accompanying them show that the Commissioner's
                               - 26 -

interpretation of section 83(h) is the same as that of the

majority.   This is shown by the preamble to the 1995 regulations

which states in part:

          Because of the potential difficulty of
     demonstrating actual inclusion by the service provider,
     a special rule provides that, if the service recipient
     timely complies with applicable Form W-2 or 1099
     reporting requirements under section 6041 (or 6041A),
     as appropriate, with respect to the amount includible
     in income by the service provider, the service provider
     is deemed to have included the amount in gross income
     for this purpose. * * * [T.D. 8599, 1995-2 C.B. 13.]


     A safe harbor is needed only if the interpretation of the

majority is correct.    This is so because the purpose of the safe

harbor is to ease an employer's potential difficulty of proving

that an employee actually included the fair market value of

property in income.

     If Judge Ruwe's reading of the regulations in effect from

1978 to 1995 (i.e., that an employer may deduct the fair market

value of property given to an employee whether or not the

employee includes that property in income) is correct, then the

1995 regulations are a total reversal in position by the IRS.

The preamble to the 1995 regulations indicates that this

interpretation is incorrect.    The IRS did not reverse its

position on this fundamental issue.     T.D. 8599, 1995-2 C.B. at

12-13.   In describing the regulations in effect from 1978 to

1995, the preamble states:

     In light of the difficulty that a service recipient may
     have in demonstrating that an amount has actually been
     included in the service provider's gross income, the
                             - 27 -

     general rule in former section 1.83-6(a)(1) permitted
     the deduction for the amount "includible" in the
     service provider's gross income. [T.D. 8599, 1995-2
     C.B. at 12.]


     After describing a special rule provided in the regulations

in effect from 1978 to 1995 (reasonably characterized as a safe

harbor by the majority, majority op. p. 14), the preamble

continues as follows:

     The special rule was designed to ensure that the
     service recipient's deduction was in fact offset by a
     corresponding inclusion in the service provider's gross
     income. [T.D. 8599, 1995-2 C.B. at 12.]


     The "difficulty" to which the first of these two quotes

refers is the service recipient's task of proving that a service

provider included the fair market value of property in income.

The regulations in effect from 1978 to 1995 presented that

"difficulty", prompting the IRS to provide a safe harbor.    Thus,

the preamble accompanying issuance of the 1995 regulations shows

that the meaning of "included" in section 83(h) was the same

before and after 1995, and is as the majority holds.

                              III.

       Judge Ruwe's Dissent's Concerns About Practicality

     Judge Ruwe's dissent is concerned that the result reached by

the majority leads to a rule compliance with which is

"impractical, if not impossible" for employers and employees or
                              - 28 -

other service providers.   Judge Ruwe's dissent pp. 44, 47.   Maybe

it is impractical to expect the employer to have this level of

cooperation from its (typically, key) employees to which it has

distributed property.   But if we are to consider those

impracticalities, we should also compare the employer's

difficulties to those faced by the IRS when, as here, employers

and their key employees play "hide the ball" with the result that

the employer can deduct the fair market value of property under

section 83(h) which has not been included or reported in income

by the recipient of the property.

                                IV.

                            Conclusion

     For the foregoing reasons, I agree with the reasoning and

conclusions of the majority that petitioner may not deduct the

value of stock that it transferred to its employees in 1988 under

section 83(h).



     CHABOT, SWIFT, JACOBS, GERBER, PARR, FOLEY, and VASQUEZ,
JJ., agree with this concurring opinion.
                                - 29 -

     BEGHE, J., concurring in result and dissenting in part:

Judge Ruwe’s concern (see his dissenting op. p. 53) over the

unsatisfactory result his correct analysis seems to require and

my own sense that there must be more to this fully stipulated

case than either side chose to present has led me to review the

record made by the parties.   My review of the record raises such

troubling questions that I am impelled to set them forth, with

supporting references to their sources in the record and

petitioner’s brief, in the face of the views of my colleagues and

the courts that judges must refrain from trying to tell

respondent how to do his job.    See, e.g., United States v.

Payner, 

, 737-738 (1980).

     1.   Why didn’t respondent issue statutory notices of

deficiency to petitioner’s employees who received Endotronics

shares as compensation?1


     1
       Petitioner’s brief suggests that the employees may not
have reported the receipt of the shares as income because the
shares were “letter stock” under the Federal securities laws and
could not be sold on the public market without a registration
statement for a 2-year period following receipt. The suggestion
appears misplaced in two respects: (1) It was clear at the time
the shares were received that letter stock is not subject to a
substantial risk of forfeiture under sec. 83(a) and that letter
stock restrictions do not postpone the receipt of income, as
demonstrated by the cases cited in petitioner’s brief, decided
prior to the receipt of the shares, see Pledger v. Commissioner,

 (5th Cir. 1981); Robinson v. Commissioner, T.C.
Memo. 1985-275; Phillippe v. Commissioner, T.C. Memo. 1982-30;
Cassetta v. Commissioner, T.C. Memo. 1979-384, see also Robinson
v. Commissioner, 

, 467 (1984) (sec. 83(c)(3) is not in
issue here); Horwith v. Commissioner, 

 (1979); Grant
                                                   (continued...)
                              - 30 -

     2.   Why didn’t respondent summarily assess employment taxes

that petitioner should have withheld and paid over in respect of

the Endotronics shares petitioner caused to be paid to its

employees as compensation?2

     3.   Why didn’t respondent’s statutory notice, rather than

asserting, as an alternative to disallowing the compensation

deduction claimed by petitioner, that petitioner had “taxable


     1
      (...continued)
v. United States, 

 (1988)); (2) Petitioner’s chief
executive officer, owning 49.95 percent of its stock (the parties
have stipulated that he directed and controlled all aspects of
petitioner’s activities), signed petitioner’s return, which
claimed the corporate deduction as a miscellaneous deduction for
“consulting” and did not report on the officers’ salary schedule
on p. 2 of the return the compensatory shares received by him and
petitioner’s other officers, even as petitioner was not reporting
on the same return its compensation income on receipt of a much
larger number of Endotronics shares and he was not reporting on
his own return his personal income on the shares received by him
as compensation.
     2
       The parties have stipulated that petitioner did not issue
W-2 Forms or Forms 1099 disclosing the payments of the
compensatory shares to its employees. It seems likely that
petitioner omitted the value of the Endotronics shares from the
amounts of compensation paid to its employees from the Forms 941
that it was required to file with respect to employment taxes
under subtitle C, chapter 24 of the Code.

     In addition, petitioner may well have caused Endotronics,
which became controlled by petitioner under the terms of the plan
of reorganization approved by the bankruptcy court, not to file a
Form 1099 for the 7,650,000 shares that Endotronics issued to
petitioner, including the portion of those shares issued, at
petitioner’s direction, to petitioner’s employees, as
compensation to petitioner for its commitments to provide
management services and necessary financing. The plan of
reorganization discloses that more than 3 months before issuance
of the shares petitioner’s treasurer had been named chief
financial officer of Endotronics.
                               - 31 -

capital gain” in the same amount as the claimed deduction on

petitioner’s transfer of the Endotronics stock to petitioner’s

employees (see majority op. p. 4 note 2), instead determine that

petitioner had ordinary income in the same amount as the claimed

deduction upon its own receipt of those same shares as

compensation?    As indicated by facts in the stipulated record

disclosed by the explanation of the next question, that

determination would be without regard to whether the deduction

claimed by petitioner were allowed or disallowed.

     4.   More to the point, why didn’t respondent’s statutory

notice to petitioner include in petitioner’s gross income the

full stipulated value--$5,976,563--of the total number of

7,650,000 Endotronics shares that petitioner received as

compensation?3   Included in the stipulated record is the plan of

reorganization4 under which the bankruptcy court approved the


     3
       The only clue on petitioner’s return to its receipt of the
7,650,000 Endotronics shares is that line 22 of the yearend
consolidated balance sheet Schedule L shows paid-in or capital
surplus of $5,976,563, which did not appear on the corresponding
balance sheet for the beginning of the year. This is the exact
fair market value of the 7,650,000 shares that petitioner
received on Apr. 4, 1988 (at the stipulated value of $.78125 per
share).
     4
       The plan of bankruptcy reorganization to which petitioner
and Endotronics were parties in the transactional sense did not
immunize petitioner’s receipt of the Endotronics shares from the
recognition of taxable income. The transaction in which
petitioner received the Endotronics shares did not satisfy the
definition of a recapitalization reorganization under sec.
368(a)(1)(E) or of an insolvency reorganization defined by sec.
                                                   (continued...)
                             - 32 -

issuance to petitioner of 7,650,000 shares--51 percent of the new

common stock of Endotronics5--as consideration for petitioner’s


     4
      (...continued)
368(a)(1)(G) as:

     a transfer by a corporation of all or part of its
     assets to another corporation in a title 11 or similar
     case; but only if, in pursuance of the plan, stock or
     securities of the corporation to which the assets are
     transferred are distributed in a transaction which
     qualifies under section 354, 355, or 356.

An operative requirement of both (E) and (G) reorganizations is
an exchange of stock or securities. In this case there was no
such exchange. Petitioner received the stock of Endotronics as
compensation for providing services; petitioner did not transfer
any stock or securities in itself or of any other corporation in
exchange for the Endotronics shares.
     5
       The premier treatise on venture capital does not discuss
the factual situation presented by the Venture Funding, Ltd.
acquisition of control of Endotronics. See Levin, Structuring
Venture Capital, Private Equity, and Entrepreneurial Transactions
(1997), especially ch. 8, Structuring a Turn-Around Investment in
an Overleveraged or Troubled Company. The role of the venture
capitalist (VC) in the example described in ch. 8, see Levin,
supra at 264-265, is to contribute $8 million in new money to
“Badco” and to receive in exchange (while preexisting creditors
and shareholders are suffering various “haircuts”):

     $7.9 million face of new senior preferred stock,
     mandatorily redeemable 10 years after issuance, plus

     1,000 new common shares (at a stated price of $100 per
     common share, i.e., an aggregate of $0.1 million).
     [Levin, supra, sec. 802.1.1 at 264.]

Under the facts of the example, the new common shares received by
VC (1,000 out of 3,950) amount to 25 percent of Badco’s post
restructuring common stock. It goes without saying that the
exchange of cash by VC for newly issued preferred and common
stock of Badco is a nontaxable transaction to both of them. No
gain or loss is realized by (much less recognized to), either
party to the transaction, and the only obvious tax question
                                                   (continued...)
                              - 33 -

undertakings to provide Endotronics with management services and

necessary financing.6

     5.   If the 3- and 6-year periods of limitation on assessment

have expired on respondent’s right to take the actions described

in any or all of the foregoing questions, would respondent still

have any arguably valid grounds for taking any such actions

against petitioner and/or petitioner’s controlling person or

persons, as might be shown to be appropriate?   Cf. Burke v.

Commissioner, 

 (1995), with Zackim v. Commissioner,

 (1988), revd. 

 (3d Cir. 1989).

     This is a fully stipulated case that was submitted without a

trial pursuant to Rule 122, and with only one round of

concurrently filed briefs.   Included in the stipulated record,

apparently at petitioner’s request, is the Debtor’s

[Endotronics’s] Amended Disclosure Statement, which contains the

plan of reorganization above referred to.   Petitioner’s Proposed



     5
      (...continued)
presented by the example is how the $8 million of consideration
is to be allocated between the preferred and common stock.
     6
       Petitioner’s undertaking to provide necessary financing,
as well as management services, would appear to cause the shares
allocable to that undertaking to be treated as a commitment fee,
included in the gross income of the recipient as compensation for
services at the time of accrual or receipt. See Rev. Rul. 70-
540, 1970-2 C.B. 101 (issue 3), declared obsolete on another
issue by Rev. Proc. 94-29, 1994-1 C.B. 616, 621; see also
Chesapeake Fin. Corp. v. Commissioner, 

, 879 (1982);
Metropolitan Mortgage Fund, Inc. v. Commissioner, 

,
120 (1974).
                              - 34 -

Findings of Fact, as set forth in petitioner’s brief, are replete

with references to the Disclosure Statement and the plan,

including the admission (Petitioner’s Proposed Finding 75) that

petitioner was entitled under the plan to receive 7,650,000 newly

issued Endotronics shares.

     The majority does not adopt any of petitioner’s proposed

findings regarding the background and terms of the plan, inasmuch

as those findings are irrelevant to the majority’s theory of how

the case should be decided.   In my view, however, petitioner, by

including the Disclosure Statement and plan in the stipulated

record, has caused the issues raised in questions 3 and 4 above

in effect to be tried by consent.   I believe that the case should

not be regarded as fully submitted for decision until the parties

have been asked to respond to questions 3 and 4, which appear to

me to be ineluctably inherent in the facts of the case as

presented by petitioner with respondent’s consent.

     If respondent on a motion for reconsideration and leave to

amend answer should attempt to raise questions 3 and/or 4, and

such motion should be denied by the Court on the grounds of

lateness or surprise, or for whatever reason, then respondent

could try to put question 5 in play, insofar as petitioner is

concerned, if respondent should conclude that there are grounds

for sending petitioner a second notice of deficiency pursuant to

section 6212(c).   See Burke v. Commissioner, supra.
                               - 35 -

     There may be facts not in the record that would belie the

inferences that have led me to concur in the majority’s result

and to raise the foregoing questions.   There may be explanations

that would point out errors in my reading of the record and

provide answers that would confirm that there’s nothing more that

respondent can or should do.   It’s up to respondent’s management,

in the exercise of its discretion, to decide whether the

questions warrant any inquiry and action at this time.
                                - 36 -

     RUWE, J., dissenting:     The issue in this case is whether

petitioner is to be denied a deduction for compensation paid in

the form of property.   The property was not subject to risk of

forfeiture.   The fair market value of the stock was includible1

in the employees' income when the transfer occurred.     The

transfer meets the deductibility requirements of section 162.

The only possible impediment to the deduction is section 83 and

the regulations thereunder.2

     The applicable statutory language is contained in

subsections (a) and (h) of section 83.    Subsection (a) provides

that the value of transferred property:


     shall be included in the gross income of the person who
     performed such services in the first taxable year in
     which the rights of the person having the beneficial
     interest in such property are transferable or are not
     subject to a substantial risk of forfeiture * * *
     [Emphasis added.]


Subsection (h) provides:




     1
      The words "includible" and "includable" are used
interchangeably. I will use "includible" because that spelling
is used consistently by Congress throughout the Code.
     2
      Unless otherwise stated, references to the regulations
under sec. 83 are to those in effect from 1978 through 1995 and
which are applicable to the years in issue. The current
regulations promulgated in 1995 are effective for taxable years
ending after Jan. 1, 1995, although they may be used by employers
who so choose for any taxable year not closed by the statute of
limitations.
                              - 37 -

          (h) Deduction by Employer.--In the case of a
     transfer of property to which this section applies
     * * * there shall be allowed as a deduction under
     section 162, to the person for whom were performed the
     services in connection with which such property was
     transferred, an amount equal to the amount included
     under subsection (a), (b), or (d)(2) in the gross
     income of the person who performed such services. Such
     deduction shall be allowed for the taxable year of such
     person in which or with which ends the taxable year in
     which such amount is included in the gross income of
     the person who performed such services. [Emphasis
     added.]


     The majority interprets the term "included" as used in

section 83 as if it means actually reported on each service

provider's income tax return or otherwise used to compute the

service provider's income tax liability.3   The majority simply

describes this as the clear, plain, and unambiguous meaning of

the statute.   No precedent is cited.

     The word "included" is used three times in subsections (a)

and (h) of section 83.   Section 83(a) provides that the value of

the property received as compensation for services "shall be

included in the gross income" of the recipient.   This means that

such property is required to be included in gross income as a

matter of law.4


     3
      The alternative to reporting as gross income on the
employee's or independent contractor's return would be an
adjustment to gross income in a deficiency determination.
     4
      In Adair v. Commissioner, T.C. Memo. 1985-392, we stated:


                                                    (continued...)
                               - 38 -

     Section 83(h) provides that "there shall be allowed as a

deduction under section 162 * * * the amount included under

subsection (a)"; i.e., the amount included under subsection (a)

as a matter of law.   As explained in the Senate Finance Committee

report:   "The allowable deduction is the amount which the

employee is required to recognize as income".    S. Rept. 91-552,

at 123 (1969), 1969-3 C.B. 423, 502.    (Emphasis added.)    The next

sentence of section 83(h) provides that the employer's deduction

"shall be allowed" for the taxable year of the employer that

coincides with the taxable year of the person who performed

services "in which such amount is included in the gross income"

of such person.   A natural interpretation of this last phrase,

and the one that is consistent with the previous use of the term

"included", is that it refers to included in gross income as a

matter of law.    The majority makes no argument that these three

instances wherein the term "included" was used were intended to

convey different meanings of that single word.    The majority,

however, concludes that when Congress used the word "included" it

meant something other than "includible" as a matter of law.     I

disagree.


     4
      (...continued)
     Section 83(a) provides that property transferred "in
     connection with the performance of services" is
     included in the gross income of the transferee in an
     amount equal to the excess of the fair market value
     over the amount paid for the property transferred.
     * * * [Fn. ref. omitted; emphasis added.]
                              - 39 -

     The Code sections providing that different types of

accessions to wealth constitute gross income use various forms of

the word "include".   Section 61(a) provides that "gross income

means all income from whatever source derived, including (but

not limited to) the following items:" and then lists 15 items

specifically included in gross income.     Section 61(b) provides:

"For items specifically included in gross income, see part II

(sec. 71 and following).   For items specifically excluded from

gross income, see part III (sec. 101 and following)."     Section 79

uses the same articulation as section 83 in providing that the

cost of employees' group-term life insurance "shall be included

in the gross income" of employees.     The same is true for

reimbursed moving expenses under section 82.     Other Code sections

convey the same meaning by different terms such as providing that

"gross income includes" alimony (section 71), annuities (section

72), prizes and awards (section 74), and Social Security benefits

(section 86).   Section 80(a) provides that the restoration of

value of certain securities "shall, except as provided in

subsection (b), be included in gross income".     Subsection (b)

then provides for reducing "The amount otherwise includible in

gross income under subsection (a)" (emphasis added), using the

term "includible" to refer to what was previously "included" in

gross income.   In another variation, section 88 provides that

nuclear decommissioning costs that are built into costs of
                                - 40 -

services for ratemaking purposes "shall be includible in the

gross income of such taxpayer".5    (Emphasis added.)   Obviously,

Congress has used the terms "includes", "included", and

"includible" interchangeably.

     The regulations regarding gross income also use variations

of the word "include" to describe items that constitute gross

income.    Section 1.61-1(a), Income Tax Regs., provides that

"Gross income includes income realized in any form, whether in

money, property, or services."     That regulation goes on to

provide:


          (1) For examples of items specifically included in
     gross income, see part II (section 71 and following),
     subchapter B, chapter 1 of the Code.

          (2) For examples of items specifically excluded
     from gross income, see part III (section 101 and
     following), subchapter B, chapter 1 of the Code.

          (3) For general rules as to the taxable year for
     which an item is to be included in gross income, see
     section 451 and the regulations thereunder. [Sec.
     1.61-1(b), Income Tax Regs.]




     5
      Congress has used the phrase "shall be includible in gross
income" as a legal mandate in the following Code sections:
101(f)(3)(B)(ii); 415(b)(10)(C)(ii); 454(c); 457(a), (g);
468A(c)(1); 529(c)(3)(A); 530(d)(1); 704(e)(2); 7702(f)(1)(C);
7702A(e)(1)(C); and 7702B(b)(2)(C), (d)(1). Further, Congress
has used the phrase "is includible in the gross income" as a
legal mandate in sec. 72(m)(3)(B), and Congress has used the
phrase "are includible in gross income" as a legal mandate in
sec. 803(a)(3).
                              - 41 -

Section 1.61-2T(a), Temporary Income Tax Regs., 50 Fed. Reg.

52281, 52285 (Dec. 23, 1985), provides that "gross income

includes compensation for services".   Section 1.61-6(a), Income

Tax Regs., provides:   "Gain realized on the sale or exchange of

property is included in gross income, unless excluded by law."

Section 1.61-9(a), Income Tax Regs., provides:


     Except as otherwise specifically provided, dividends
     are included in gross income under sections 61 and 301.
     For the principal rules with respect to dividends
     includible in gross income, see section 316 and the
     regulations thereunder. * * * [Emphasis added.]


Section 1.61-9(b), Income Tax Regs., provides:


     Gross income includes dividends in property other than
     cash, as well as cash dividends. For amounts to be
     included in gross income when distributions of property
     are made, see section 301 and the regulations
     thereunder. * * *


     The terms "includes", "included", and "includible" in

reference to gross income are used throughout the Code and

regulations and, as the above examples demonstrate, generally

refer to the legal status of an item that constitutes gross

income.   In a Court-reviewed opinion released on February 19,

1998, this Court also used the terms "included" and "includes" in

the same sense when we stated:

     Absent any exclusionary provision, items of income are
     included in gross income. Sec. 61(a). Section
     61(a)(12) includes COD income in gross income. [Nelson
                                - 42 -

     v. Commissioner, 

___, ___ (1998) (slip op. at
     4).]

     The majority, relying on the report of the Senate Finance

Committee, opines that "included" means "taken into account in

determining the tax liability" and is synonymous with the term

"recognize".   Majority op. pp. 8-9.     In footnote 3 on page 9 of

the Majority opinion, the majority argues that because section

83(h) uses the term "included" and section 404(a)(5), which was

also added by section 321 of the Tax Reform Act of 1969, Pub. L.

91-172, 83 Stat. 487, 588, uses the term "includible", Congress

intended different meanings.6    However, a close analysis of the

Senate Finance Committee report indicates that Congress used the

two terms interchangeably.   The Senate Finance Committee report

refers to the deduction under section 83(h) and states:


     The allowable deduction is the amount which the
     employee is required to recognize as income. The
     deduction is to be allowed in the employer's accounting
     period which includes the close of the taxable year in
     which the employee recognizes the income. * * * [S.
     Rept. 91-552, supra at 123, 1969-3 C.B. at 502;
     emphasis added.]




     6
      Sec. 404(a)(5) provides that contributions to nonexempt
plans are deductible in the taxable year in which an amount
attributable to the contribution is "includible in the gross
income of employees". Sec. 402(b)(1) provides that employer
contributions to a nonexempt trust "shall be included in the
gross income of the employee in accordance with section 83".
                               - 43 -

Section 404(a)(5), which uses the term "includible", is then

explained by the Senate Finance Committee by using essentially

the same terminology:

          The committee provided with respect to nonexempt
     trusts that the employer will be allowed a deduction
     for his contribution at the time that the employee
     recognizes income * * * [S. Rept. 91-552, supra at
     123, 1969-3 C.B. at 502; emphasis added.]

The Senate Finance Committee report uses the phrase "required to

recognize" to describe the amount of any deduction under section

83(h).    Section 83(h) itself describes the amount of the

deduction as the "amount included" in the gross income of the

employee.    The term "recognizes" is used by the Committee to

describe the period in which property "is included" in an

employee's gross income in section 83(h).    The term "recognizes"

is also used by the Committee to describe the period in which

income "is includible" by the employee in section 404(a)(5).

Thus, it is reasonable to conclude that the timing provisions of

both sections were intended to refer to the year in which income

is required to be "included" or is "includible" in the employee's

income.

     When Congress wants to require actual reporting of gross

income, it knows how to say so.    For example, section 1367(b)(1)

provides that:

     An amount which is required to be included in the gross
     income of a shareholder and shown on his return shall
     be taken into account under subparagraph (A) or (B) of
     subsection (a)(1) only to the extent such amount is
                                - 44 -

     included in the shareholder's gross income on his
     return * * *

     Interpreting the word "included" to mean "reported by" or

"actually used in computing the tax liability of" any employee or

independent contractor would establish a statutory requirement

that would be impractical and in many cases impossible for

employers to meet.     Deductions are a matter of legislative grace,

and a taxpayer is required to meet all of the statutory

requirements before taking a deduction.    Employers would not be

able to take a deduction until they first ascertained that their

employees and independent contractors had filed an income tax

return and reported the item as gross income.    How could

employers know that employees and independent contractors had

actually filed returns and reported the property transfers as

income before taking a deduction?    Indeed, in many situations the

employer's return would be due before the due date of the service

providers' returns.7    Even the majority acknowledges that its

interpretation sets up an impractical requirement that the

majority believes justifies "employer friendly" regulations that

are at variance with the majority's own interpretation of the

statutory requirements.


     7
      Most individual employees file returns on a calendar year
basis, in which case their returns are due on April 15.
Employers are often corporations filing returns on the basis of a
fiscal year. Even those corporations filing returns on a
calendar year basis are, absent extensions, required to file
returns on March 15. See sec. 6072.
                              - 45 -

     When the applicable regulations interpreting section 83(h)

were issued in 1978, neither the preamble in the Treasury

decision nor the regulations contained anything indicating that

deductibility under section 83(h) depends on an employee or

independent contractor's actually reporting the compensation.   On

July 11, 1978, final regulations were issued dealing with section

83(h).   T.D. 7554, 1978-2 C.B. 71.    The general rule for

deductions under section 83(h) was stated as follows:


     (1) General rule. In the case of a transfer of
     property in connection with the performance of
     services, or a compensatory cancellation of a nonlapse
     restriction described in section 83(d) and §1.83-5, a
     deduction is allowable under sections 162 or 212, to
     the person for whom such services were performed. The
     amount of the deduction is equal to the amount
     includible as compensation in the gross income of the
     service provider, under section 83(a), (b), or (d)(2),
     but only to the extent such amount meets the
     requirements of section 162 or 212 and the regulations
     thereunder. Such deduction shall be allowed only for
     the taxable year of such person in which or with which
     ends the taxable year of the service provider in which
     such amount is includible as compensation. For
     purposes of this paragraph, any amount excluded from
     gross income under section 79 or section 101(b) or
     subchapter N shall be considered to have been
     includible in gross income. [Sec. 1.83-6(a)(1), Income
     Tax Regs.; emphasis added.]


The explanation of the difference between these final regulations

and those previously proposed in 1971 was as follows:


          Subject to the requirements of sections 162 and
     212, a deduction is allowed to the person for whom
     services were performed, in an amount equal to the
     amount of compensation includible in the gross income
                               - 46 -

     of the person who provided the services, at the time
     the compensation becomes includible in the gross income
     of the person who performed the services. This timing
     rule is a change from the regulations as proposed in
     1971, which allowed a deduction at the time an amount
     was actually included in gross income. This change was
     suggested by public comments to the regulations as
     proposed in 1971. [T.D. 7554, 1978-2 C.B. at 72-73;
     emphasis added.]


     There is nothing in T.D. 7554, supra, to indicate that these

regulatory provisions allowing the deduction "at the time the

compensation becomes includible" were intended to be anything

other than a proper interpretation of the statutory language of

section 83(h).    Nothing in T.D. 7554, supra, describes the use of

the word "includible" as a "safe harbor" or an "employer

friendly" variance from the statutory requirement.   Indeed, T.D.

7554, supra, states that the U.S. Treasury Department rejected

any suggested regulatory language that conflicted with the

express statutory language.


     Many comments suggested changes that either conflicted
     with the express statutory language or would have made
     the regulations unreasonably long and complex. Those
     suggestions were rejected. [Id., 1978-2 C.B. at 73.]


It is clear that use of the word "includible" in the regulations

is used in the sense that the law requires inclusion.   Those

regulations remained in effect for 17 years and apply to the

years in issue.   I believe that section 1.83-6(a)(1), Income Tax

Regs., is a proper interpretation of the requirements of section
                               - 47 -

83(h).    This interpretation is supported by Duncan Indus., Inc.

v. Commissioner, 

, 285 (1979), where we stated:

     Section 83(h) expressly allows the person for whom the
     services were performed to deduct an amount equal to
     the amount includable in the service performer's income
     under section 83(a). * * * [Emphasis added.]

     The majority's interpretation of section 83 conflicts with

the interpretation contained in section 1.83-6(a)(1), Income Tax

Regs.    The majority attempts to reconcile this conflict by

describing the regulations as being an "employer friendly" "safe

harbor".    But such rationalization is only necessary because of

the majority's strained interpretation of the term "included".

If given a choice between two possible interpretations, we should

choose the one that is reasonable and practical rather than

assume that Congress intended to set standards for deductions

that are impractical, if not impossible, to meet.8   See United

States v. American Trucking Associations, Inc., 

, 543

(1940).    The more reasonable and practical interpretation, and

the one contained in the applicable interpretative regulations,

is that a deduction under section 83(h) is allowed for the

employer's taxable year that coincides with the taxable year in

which the compensation is "includible" in the service provider's

income.


     8
      Indeed, were we to interpret "included" as meaning
reported, an employer could arguably take the deduction in any
amount for any year that matches the employee's reporting
position.
                               - 48 -

     Section 1.83-6(a)(2), Income Tax Regs., provides a "Special

rule" for compensatory transfers of property by "employers" to

"employees".    It allows a deduction in the employer's taxable

year that coincides with the year in which the compensation is

"includible" in the employee's income, but "only if the employer

deducts and withholds upon such amount in accordance with section

3402."   Id.   This regulatory requirement that there be

withholding has no basis in the statutory language or the

legislative history of section 83(h).    The majority nevertheless

upholds the validity of this withholding requirement by treating

it as a relaxation of what it believes to be the more explicit

and onerous requirements in the Code.    The only basis for this is

the majority's restrictive and erroneous interpretation of the

word "included".9


     9
      The withholding requirement in sec. 1.83-6(a)(2), Income
Tax Regs., is fatally flawed even if one were to accept
respondent's definition of "included". Under this regulation,
deductibility is totally dependent on whether the employer
withheld tax upon the compensatory transfer of property. An
obvious example in which the withholding requirement is
unworkable involves its application to situations where there are
significant restrictions on the employee's rights to the property
at the time of transfer such as a substantial risk of forfeiture.
In that case, the employee generally receives no includible gross
income under sec. 83(a) until those restrictions are lifted.
Therefore, there would be no withholding requirement at the time
of the initial transfer. Indeed, the amount of any reportable
compensation would not be known at the time of transfer. But any
withholding that might be required when the restrictions are
lifted, possibly years later, may be physically or legally
impossible if the employee earned no other compensation in the
later year or was no longer an employee. Withholding would also
                                                   (continued...)
                              - 49 -

     Finally, even if section 1.83-6(a)(2), Income Tax Regs., is

considered valid, section 1.83-6(a)(3), Income Tax Regs.,

provides an exception to the requirements of section 1.83-

6(a)(2), Income Tax Regs.   Despite the statutory timing

provisions of section 83(h), which are also contained in section

1.83-6(a)(1) and (2), Income Tax Regs., section 1.83-6(a)(3),

Income Tax Regs. (hereinafter subparagraph (3)), provides:

          (3) Exceptions. Where property is substantially
     vested upon transfer, the deduction shall be allowed to
     such person in accordance with his method of accounting
     (in conformity with sections 446 and 461). * * *

Pursuant to this exception, when the compensatory transfer

consists of property that is substantially vested upon transfer

(which is true in the instant case), the explicit timing

provisions of section 83(h) and the regulations are not




     9
      (...continued)
be inappropriate if the employee's Form W-4 indicates no
withholding was required. Sec. 1.83-6(a)(2), Income Tax Regs.,
would also disallow a deduction for a compensatory transfer of
property to an employee where there was no withholding, even
where the employee reported the income and paid the tax.
Respondent has acknowledged that "employers that failed to deduct
and withhold income tax were denied a deduction even where the
employee reported the income and paid the tax." T.D. 8599, 1995-
2 C.B. 12, 12. (Emphasis added.) Thus, this part of the
regulation was in conflict with respondent's current position
that actual reporting is exactly what sec. 83(h) requires.
                               - 50 -

applicable.10   Petitioner's transfers come within the exception

in subparagraph (3).

     The majority suggests that the exception in subparagraph (3)

overrides the explicit statutory timing requirements in section

83(h) but does not override the withholding requirements in

section 1.83-6(a)(2), Income Tax Regs.   This is a non sequitur.

Section 1.83-6(a)(2), Income Tax Regs., imposes a withholding

requirement, but only in connection with the application of its

specific timing provisions.   Thus, in the only sentence that has

any application to this case, the regulation provides:




     10
      Sec. 83(h) requires that any deduction by the service
recipient be allowed "for the taxable year of such person [the
service recipient or employer] in which or with which ends the
taxable year in which such amount is included in the gross income
of the person who performed such services." In light of the
explicit timing provisions of sec. 83(h), how can the exception
in subparagraph (3) be justified? The original version of sec.
83 introduced in the House of Representatives contained no
provision regarding deductions for property transferred in return
for services. What is now sec. 83(h) was first introduced by the
Senate Finance Committee. The Senate report states:


          The committee provided rules for the employer's
     deduction for restricted property given to employees as
     compensation. The allowable deduction is the amount
     which the employee is required to recognize as income.
     * * * [S. Rept. 91-552, at 123 (1969), 1969-3 C.B. 423,
     502; emphasis added.]


It is therefore possible that the U.S. Treasury Department
concluded that sec. 83(h) was not intended to affect deductions
based on the transfers of unrestricted property.
                              - 51 -

     If the service provider is an employee of the person
     for whom services were performed, such deduction is
     allowed for the taxable year of the employer in which
     or with which ends the taxable year of the employee in
     which such amount is includible as compensation, but
     only if the employer deducts and withholds upon such
     amount in accordance with section 3402. * * * [Sec.
     1.83-6(a)(2), Income Tax Regs.]

     The literal terms of the withholding requirement in the

above-quoted regulation apply only where the deduction is allowed

for the employer's taxable year in which or with which ends the

taxable year in which the compensation is includible in the

employees' income; i.e., where the timing rules of section 83(h)

apply.   The withholding requirement does not purport to apply to

other situations, such as where the deduction is allowed in

accordance with the employer's own accounting method pursuant to

subparagraph (3).

     The majority states that the regulations under section 83(h)

implement the following three requirements for deductibility:

(1) The requirements of sections 162 or 212; (2) the requirements

of section 83(h) regarding the amount of the deduction; and (3)

the requirements of section 83(h) regarding the timing of the

deduction.   There is no question in this case that the transfer

of property qualifies for deduction under section 162.

Deductions under section 162 are not conditioned on withholding.

There is also no question in this case regarding the amount of
                               - 52 -

any potential deduction pursuant to the formula in the statute.11

As stated in the Senate Finance Committee report:   "The allowable

deduction is the amount which the employee is required to

recognize as income."   S. Rept. 91-552, supra at 123, 1969-3 C.B.

at 502.   (Emphasis added.)   As we stated in Duncan Indus., Inc.

v. Commissioner, 73 T.C. at 285:

     Section 83(h) expressly allows the person for whom the
     services were performed to deduct an amount equal to
     the amount includable in the service performer's income
     under section 83(a). * * * [Emphasis added.]

The only other requirement concerns timing.12   The majority

argues that subparagraph (3) is only an exception to the

statutory timing provision.   But that is the only statutory

requirement that is conceivably in issue.

     We recently addressed the exception contained in

subparagraph (3).   In Schmidt Baking Co. v. Commissioner, 

 (1996), the taxpayer-employer's taxable year ended on

December 28.   The taxpayer deducted vacation and severance pay

that it had accrued as of December 28, 1991, on its return for


     11
      The majority makes no attempt to link the regulatory
withholding requirement to the statutory provisions regarding the
amount of any deduction and, indeed, there is no linkage.
     12
      As stated in Duncan Indus., Inc. v. Commissioner, 

, 285 (1979):


     Section 83(h) is a modification of section 162 which
     only affects the time and amount of deductions
     otherwise allowable, when property is transferred in
     connection with services. * * * [Emphasis added.]
                              - 53 -

the year ended December 28, 1991.    The taxpayer's employees

received unrestricted property representing the accrued vacation

and severance pay on March 13, 1992, which was during the

employees' calendar year ended December 31, 1992.     If the

explicit timing provisions of section 83(h) and section 1.83-

6(a)(2), Income Tax Regs., applied, the taxpayer would not have

been entitled to take the deduction until its taxable year ended

December 28, 1993; i.e., the taxpayer's taxable year in which or

with which ends the employee's taxable year in which the amount

was includible in the employee's income.     Nevertheless, based on

the exception in subparagraph (3), we allowed the deduction in

the year ended December 28, 1991, in accordance with the

taxpayer's accrual method of accounting.13

     The instant case turns on an interpretation of section 83

and the regulations.   Legal interpretations should not be driven

by the facts of a particular case.     While I disagree with the

majority's interpretation, I recognize that the operative facts

of this particular case raise questions about the "equity" of

allowing a corporate deduction for compensation paid to its

controlling shareholders and principal officers, who failed to

report the same items as income.    However, neither respondent nor



     13
      In Schmidt Baking Co. v. Commissioner, 

(1996), the parties had stipulated that the taxpayer-employer had
not withheld taxes when it transferred the property on Mar. 13,
1992.
                             - 54 -

the majority relies on equitable arguments.   In any event, such

considerations should play no part in how we interpret statutory

and regulatory language.

     COHEN, WELLS, BEGHE, CHIECHI, AND GALE, JJ., agree with this

dissent.
                                - 55 -

     HALPERN, J., dissenting:    The majority concludes:    “An

amount is deductible under section 83(h) in the year that the

corresponding income is ‘included’ in the recipient employee’s

income, which means to us that the amount is taken into account

in determining the tax liability of the employee for that year.”

The majority explains: (1) “When read in view of the legislative

intent for section 83, the text of section 83(h) is unambiguous”

and (2) “Given the clarity of this text, our inquiry starts and

ends with the statutory text, and we apply the plain and common

meaning of that text.”   The majority is correct that the word

“include” has the plain, common, and unambiguous meaning ascribed

to it by the majority:   i.e., “To consider with or place into a

group, class, or total”.   The American Heritage Dictionary of the

English Language 913 (3d ed. 1992).      The question, however, is

not whether Congress is skilled in rhetoric, or used the word

"included" unambiguously in section 83(h), but what the word

"included" means in the context of section 83(h).      The Supreme

Court has said:   “Ambiguity is a creature not of definitional

possibilities but of statutory context”.      Brown v. Gardner, 

, 117 (1994) (citing King v. St. Vincent's Hosp., 

, 221 (1991) (“[T]he meaning of statutory language, plain

or not, depends on context.”)    All of the majority, Judge Ruwe,

and Judge Colvin have failed to give sufficient weight to the

contextual relationship between the word “included” and the
                                - 56 -

phrase “in the gross income”.    Gross income is a legal concept

and not a reporting position.    The term “gross income” has the

general definition set forth in section 61(a), and, unless the

word "included" is used in an unusual sense, it is a question of

law whether or not any particular receipt is included or excluded

from gross income.   If context is to govern meaning, then,

relying on the “plain and common meaning of that text [sec.

83(h)]”, I conclude that the meaning of the phrase “included in

the gross income of the [service provider]” means included as a

matter of law.   Nothing in the majority’s description of

Congressional purpose for section 83 (“primarily to set forth

rules on the tax treatment of deferred compensation arrangements

known as restricted stock plans)” leads me to believe that

Congress intended the word "included" in section 83(h) to have an

unusual meaning.   The majority cites S. Rept. 91-552, 1969-3 C.B.

423 (S. Rept. 91-552 (1969)), wherein it is stated:

     The allowable deduction is the amount which the
     employee is required to recognize as income. The
     deduction is to be allowed in the employer’s accounting
     period which includes the close of the taxable year in
     which the employee recognizes the income. * * * [1969-
     C.B. at 502; emphasis added.]

On its face, the language of S. Rept. 91-552 is ambiguous.    In

the income tax law, the word “recognize” is a term of art,

connoting a noncognitive act--gain or loss being recognized “to”

a person, not “by” a person.    See, e.g., secs. 361(a), 731(a) and
                               - 57 -

(b), 1245(b)(3).   Nevertheless, the majority has persuaded me

that we should proceed as if section 83(h) were ambiguous.1

     We are not without guidance, however, because we have

interpretive regulations, section 1.83-6(a), Income Tax Regs.

(section 1.83-6(a)).2   Those regulations contain both a general

rule, in subparagraph (1) (the general rule), and a special rule,

in subparagraph (2) (the special rule).   The general rule is as

follows:   “[The section 83(h) deduction] shall be allowed only

for the taxable year of such person [the service consumer] in

which or with which ends the taxable year of the service provider

in which such amount is includible as compensation.”   (Emphasis

added.)    The general rule applies to all service consumers,

whether an employment relationship exists with the service

provider or not.   The special rule applies only to service

consumers that are employers, and it differs from the general

rule only in that it conditions the deduction on withholding.

     In Chevron, U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 

, 842-843 (1984), the Supreme Court

stated that, when a Court reviews an agency’s construction of a

statute that it administers, it is confronted with two questions:


     1
          “Ambiguity exists if reasonable persons can find
different meanings in a statute”. Black’s Law Dictionary 79 (6th
ed. 1990)
     2
          References to sec. 1.83-6(a), Income Tax Regs., are to
that section prior to amendment by T.D. 8599, 1995-2 C.B. 12
(effective July 19, 1995).
                                - 58 -

     First, always, is the question whether Congress has
     directly spoken to the precise question at issue. If
     the intent of Congress is clear, that is the end of the
     matter; for the court, as well as the agency, must give
     effect to the unambiguously expressed intent of
     Congress.9
     9
       The judiciary is the final authority on issues of
     statutory construction and must reject administrative
     constructions which are contrary to clear congressional
     intent. If a court, employing traditional tools of
     statutory construction, ascertains that Congress had an
     intention on the precise question at issue, that
     intention is the law and must be given effect.

Id. at 842-843 (citations omitted; emphasis added).    Second, if

section 83(h) is ambiguous, then we must address:    “[W]hether the

agency’s answer is based on a permissible [reasonable]

construction of the statute.”    Id. at 837-838.   If section 83(h)

is not ambiguous, and carries the must-be-reported meaning

ascribed to it by the majority, then the general rule is

necessarily invalid because it conditions a deduction only on

includability (as a matter of law), and not on reporting.    The

majority has not considered that consequence in reaching its

conclusion about the (lack of) ambiguity in section 83(h).

Indeed, the majority has failed to consider whether the general

rule even suggests any ambiguity in section 83(h).    Perhaps that

is because, for the majority, there is no middle ground.    If the

majority were to conclude that section 83(h) is ambiguous,

Chevron U.S.A., Inc. would require the Court to determine if the

regulations contain a permissible (reasonable) construction of

the statute.   Because the general rule is such a construction,
                              - 59 -

the majority would be obligated to construe “included” in section

83(h) to mean “includable”, as the general rule does, and as I

would do.   That is precisely why the majority is compelled to

conclude that the statute is unambiguous despite the fact that it

is apparent that reasonable people can find, and, indeed, have

found, different meaning within it.

     If section 83(h) is ambiguous, as I am prepared to concede,

then the general rule is valid as a permissible (reasonable)

interpretation of section 83(h) because it implements the

expression “included in the gross income [of the service

provider]” consistently with a contextual analysis of section

83(h) (taking into account either the language of section 83(h)

alone or both that language and the language of S. Rept. 91-552).

If section 83(h) is not ambiguous, and is to be construed to mean

“included as a matter of law”, as I conclude from context, then

the general rule is still valid because it is not in conflict

with the statute.   Whether “included in the gross income” in

section 83(h) means “included as a matter of law” either because

it is (1) unambiguous or (2) ambiguous and permissibly

interpreted by the general rule, the special rule would be

invalid because it conditions an employer’s deduction on

withholding.

     WHALEN, J. agrees with this dissent.