- 16 -
The taxpayer has the burden of proving the existence of an
employment relationship. Rule 142(a); Ellison v. Commissioner,
55 T.C. 142, 152 (1970).
Similar to section 422(a)(2), section 1.421-7(h)(1) and (2),
Income Tax Regs., provides that for purposes of determining
whether section 421 applies to a statutory option,16 the taxpayer
must be an employee of the corporation granting the option at all
times from the date the option is granted until 3 months before
the date of exercise. To determine whether the taxpayer is an
employee, the rules contained in section 3401(c) and the
regulations thereunder are applicable. Sec. 1.421-7(h)(1),
Income Tax Regs.
Section 3401(c) and the regulations thereunder define
“employee” for purposes of withholding from wages. In relevant
part, section 31.3401(c)-1(b), Employment Tax Regs., provides:
(b) Generally the relationship of employer and employee
exists when the person for whom services are performed
has the right to control and direct the individual who
performs the services, not only as to the result to be
accomplished by the work but also as to the details and
means by which that result is accomplished. That is, an
employee is subject to the will and control of the
employer not only as to what shall be done but how it
shall be done. In this connection, it is not necessary
that the employer actually direct or control the manner
in which the services are performed; it is sufficient
if he has the right to do so. The right to discharge is
16 The term “statutory option” means “a qualified stock
option, as defined by section 422(b)”. Sec. 1.421-7(b)(1),
Income Tax Regs. Sec. 422(b) defines an “incentive stock
option”.
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