Tax Legal Services · Primary-source case analysis

LoBue: Employee Stock-Option Value Was Compensation at Exercise

By Aneeta Mishra and Timothy Chan

Published September 13, 2026

Commissioner v. LoBue considered nontransferable stock options that remained contingent on employment and allowed an employee to purchase company shares for substantially less than their market value.

The stock benefit was not a gift

The company adopted the plan to improve performance and let employees participate in the company’s success. The transfers lacked the detached and disinterested generosity required for a tax gift.

A proprietary-interest purpose did not erase compensation

The Court rejected the view that an employer may avoid compensation treatment merely because it also wants employees to become owners. Property transferred to secure better services can be compensation even when paid in stock rather than cash.

The bargain element was taxable when exercised

Because the options were nontransferable and conditioned on continued employment, the Court measured compensation by the spread between option price and market value when the options were exercised, not when they were granted.

The case was remanded on the payment mechanics

The Court left the lower courts to decide whether delivery of binding promissory notes completed part of the stock purchase on an earlier date. The main compensation holding was settled, but the precise measurement date required further proceedings.

Key takeaways

• Identify the service-related purpose of any employer stock transfer.
• Test transferability and employment contingencies before selecting the tax date.
• Measure the bargain element under the law governing the particular option plan.
• Apply current statutory rules for incentive and nonqualified stock options rather than relying on the historical Code alone.