## Facts

- Lawrence J. Alves served as vice president for finance and administration of General Digital Corporation (later Western Digital).
- Under a May 22, 1970 employment and stock purchase agreement, the corporation sold Alves 40,000 shares of common stock at $0.10 per share.
- Two-thirds of the shares were subject to restrictions: if Alves left employment before specified periods, the corporation could repurchase the restricted shares for $0.10 per share.
- The parties stipulated that $0.10 per share equaled the stock’s full fair market value at the time of purchase, determined without regard to any restrictions.
- In 1974 and 1975, restrictions lapsed on portions of the stock, and Alves also sold some restricted shares in arm’s-length transactions.
- Alves did not report income attributable to appreciation between purchase and vesting and did not make a § 83(b) election at purchase.
- The IRS determined deficiencies for 1974 and 1975, asserting § 83(a) required ordinary income recognition when restrictions lapsed (and on sales), measured by value at vesting over the amount paid.

## Issues

1. Whether the stock was transferred to Alves “in connection with the performance of services” within the meaning of I.R.C. § 83(a).
2. Whether § 83 applies to restricted stock purchased by an employee at full fair market value at the time of transfer (ignoring restrictions), or only to bargain purchases.
3. Whether the availability of a § 83(b) election implies that § 83(a) should be limited to below-market transfers.

## Decision

- The Ninth Circuit affirmed the Tax Court’s decision sustaining the deficiencies.
- The court held that § 83 applies to all restricted stock transferred in connection with the performance of services, regardless of the amount paid.
- Because the stock was connected to Alves’s employment and subject to forfeiture/repurchase restrictions, § 83(a) governed timing and character of income.
- Absent a § 83(b) election, Alves had ordinary income when his rights in the stock became transferable or no longer subject to a substantial risk of forfeiture, measured by the excess of fair market value at vesting (determined under § 83) over the amount paid.

## Legal Principles

- I.R.C. § 83(a) applies when property is transferred in connection with the performance of services and is subject to vesting restrictions; income is recognized when the property becomes transferable or the substantial risk of forfeiture lapses.
- The statute’s scope does not depend on whether the employee paid less than, equal to, or more than fair market value at transfer; the relevant comparison is value at vesting (as defined by § 83) minus the amount paid.
- Service-connection can be shown by contemporaneous employment arrangements and restrictions that function as a retention mechanism (e.g., employer repurchase rights upon early departure).
- A § 83(b) election is an optional timing rule that accelerates inclusion; it does not limit § 83(a)’s applicability.

## Conclusion

The court held that restricted stock acquired under an employment-related arrangement is governed by § 83 even when purchased at fair market value, requiring ordinary income recognition for post-transfer appreciation when restrictions lapse unless a timely § 83(b) election is made.


Alves v. Comm’r, 734 F.2d 478 (9th Cir. 1984)