The Tax Lawyer
Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.


United States v. Fletcher : Through the Lens of Section 83 Applied to Restricted Stock Accounts

Joseph McClain

Equity-based compensation for corporate executives and other key employees has become an increasingly important form of compensation in both pub­lic and closely held corporations. Companies attract and retain employees, as well as incentivize employees through market participation, through the use stock options and restricted stock plans. Restricted stock accounts, in particular, have become popular largely due to changes in accounting guide­lines that have made stock options less attractive for corporations. In fact, General Electric and Microsoft no longer use stock options, but rather grant restricted stock accounts to their employees. Recent data compiled by Deloitte Consulting indicates that many corporations may follow the lead of General Electric and Microsoft. The most common restriction on such stock is that the employee must return it to the corporation if he or she does not maintain employment for a given period of time. Restricted stock accounts are designed so that the employee does not have to recognize income until the vesting date specified by the employer.

In United States v. Fletcher, Judge Easterbrook affirmed a summary judg­ment holding that a partnership-for-restricted-stock swap was an asset transfer subject to immediate recognition under section 451. The court determined that the partners constructively received the stock at time of transfer, even though the stock was placed in escrow subject to various forfeiture provisions over a five-year period. The court reasoned that the partners fully partici­pated in any market gain or loss, voluntarily agreed to postpone access to the stock, and consented to the contingencies that could result in forfeiture.

This Note will argue that the transaction should have been analyzed under section 83 of the Code and that summary judgment was inappropriate. Part I describes the relevant statutory provisions. Part II discusses the Fletcher case. Part III argues that under section 83 Fletcher was incorrectly decided. Part IV examines why policy considerations do not justify the court’s conclusion.

Published by
Section of Taxation,
American Bar Association
in Collaboration with the
Georgetown University Law Center

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