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petitioner's shares within 90 days of any termination of
employment other than a voluntary termination by
petitioner. The repurchase price for vested shares was
equal to the adjusted book value per share. The price for
the unvested shares was set at the lesser of the adjusted
book value per share or the original purchase price.
On or before August 12, 1989, petitioners filed with
the Internal Revenue Service a timely election under
section 83(b) regarding the SWI stock petitioner purchased
pursuant to the agreement. In this election, petitioners
reported the fair market value of the SWI stock to be
$60.98 per share, the amount petitioner paid for the stock.
Thus, petitioners claimed that they realized no gross
income in 1989 from the purchase of the SWI shares.
Although petitioner received the subject stock on
July 13, 1989, the parties agree that June 30, 1989,
is the appropriate valuation date with regard to the
section 83(b) election.
SWI experienced moderate expansion during the first
half of 1989. Although it began the year with only two
superstores, it opened a third in Houston, Texas, in April,
and was preparing to open a fourth in Los Angeles by the
end of June. In addition, its most successful store,
located in Dallas, had to be moved several times into
larger facilities. Although the company was beginning to
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