Former Employee had Unreported Income from Post-Termination Stock Transfer

(Parker Tax Publishing September 2025)

The Tax Court held that a taxpayer had unreported income from stock that a former employer transferred to her brokerage account as a result of the purported exercise of the nonstatutory stock options. The court concluded that while the former employee disputed ownership of the stock, she realized income upon receiving the stock because she had full ownership and control over the shares and there were no impediments to her transacting in, or selling, the disputed shares. Feige v. Comm'r, T.C. Memo. 2025-88.

Background

Corri Feige worked for Linc Energy Operations Inc. (Linc), a subsidiary of an Australian corporation in Anchorage, Alaska, from February 2010 through November 5, 2014. As part of her compensation, Corri participated in the Linc Energy Performance Rights Plan (Performance Rights Plan) and received stock in Linc Energy for her services. In 2011, under the Performance Rights Plan, Corri acquired 60,000 unvested rights in Linc Energy stock. She subsequently established an account with Charles Schwab to hold her Linc Energy shares.

On November 24, 2014, Linc Energy and Corri entered into a separation agreement which terminated Corri's employment as of November 5, 2014. On December 3, 2014, Linc transferred 100,000 shares of Linc Energy stock (disputed shares) into Corri's Charles Schwab account. Corri learned of the stock transfer in early January 2015 when she received her December 31, 2014, Schwab brokerage statement. She called a Linc administrative employee and Linc Energy's company secretary to obtain guidance regarding the transfer of the disputed shares. While she ultimately did not receive guidance or direction about the disputed shares, Corri also did not email or give written notice to anyone at Linc or Linc Energy regarding her belief that the share transfer was in error. Nor did she provide written notice to Linc Energy's company secretary regarding any issues under the terms and conditions of the Performance Rights Plan (i.e., that she received the share transfer in error), as required under the Performance Rights Plan.

At the end of January 2015, Corri received Form W - 2, Wage and Tax Statement, from Linc reporting $75,660 as compensation from the exercise of the nonstatutory stock options. She disputed this and contacted Linc's third-party payroll administrator to correct the Form W - 2, but the administrator was not authorized to issue Corri a new Form W - 2. Corri never transacted or sold any of the disputed shares.

While Corri and her husband had previously filed their tax returns on time, they did not file a tax return for 2014. In 2019, they sought legal advice after receiving an IRS notice relating to the nonfiling of their 2014 return. The IRS prepared a 2014 substitute for return (SFR) in which it determined a deficiency based on the SFR and related additions to tax under Code Sec. 6651 for failing to timely file a 2014 tax return. In 2021, the Feiges submitted a 2014 joint return to IRS Appeals, which included all compensation except for the $75,660.

The IRS contended that, under Code Sec. 83, the Feiges were required to include the value of the disputed shares in income because (1) Corri received the shares as compensation in connection with her performance of services for Linc, (2) the shares were not subject to a substantial risk of forfeiture, and (3) Corri had complete control over the shares as they were transferable once she received them. The IRS also determined that the couple was liable for an addition to tax of $8,121 under Code Sec. 6651(a)(1) for failing to timely file their 2014 return, an addition to tax of $9,023 under Code Sec. 6651(a)(2) for failing to timely pay the tax due, and an addition to tax of $543 under Code Sec. 6654(a) for failing to make estimated tax payments.

Under Code Sec. 83(a), if property is transferred to a taxpayer in connection with the performance of services, the excess of the fair market value of the property over the amount, if any, paid for the property must be included in the taxpayer's gross income in the first year in which the taxpayer's rights in the property are transferable or are not subject to a substantial risk of forfeiture. Reg. Sec. 1.83-1(a)(1) provides that property must be substantially vested for the transferee to be regarded as the owner of the property. Whether a risk of forfeiture is substantial depends on the facts and circumstances. Under Reg. Sec. 1.83-3(d), property is transferable if the person performing the services or receiving the property can sell, assign, or pledge (as collateral for a loan, or as security for the performance of an obligation, or for any other purpose) the interest in the property to any person other than the transferor of such property and if the transferee is not required to give up the property or its value in the event the substantial risk of forfeiture materializes.

While Corri did not contest receiving the disputed shares, she argued that (1) she was not entitled to the shares and therefore should not be liable for tax on them; (2) the amount reported on the Form W - 2 was incorrect because it differed from the value reported by Charles Schwab; (3) the shares were transferred contrary to the terms of the Performance Rights Plan and therefore they were subject to an ongoing claim by Linc Energy under Alaska law; and (4) the Linc Energy board of directors did not unilaterally amend the Performance Rights Plan to accelerate Corri's vesting in the disputed shares before her termination date. Thus, Corri challenged whether the disputed shares were transferable or subject to a substantial risk of forfeiture for purposes of Code Sec. 83.

Analysis

The Tax Court held that, when Linc Energy transferred the disputed shares to Corri on December 3, 2014, as compensation for her services, she had full ownership and control over the shares and there were no impediments to her transacting in or selling the disputed shares. Therefore, the Feiges were required to include on their 2014 tax return the value of the shares that was reported on Corri's Form W - 2 for the first tax year where Corri's interest in the property was either transferable or not subject to a substantial risk of forfeiture. The court concluded that as of December 3, 2014, (1) Corri could transfer the disputed shares and (2) there was no substantial risk of forfeiture. Accordingly, the value of the disputed shares that was reported on Corri's Form W - 2 should have been included in the Feiges' gross income for 2014.

With respect to the failure to file penalty assessed under Code Sec. 6651(a)(1), the court found that when Corri received the Linc Form W - 2 at the end of January 2015 showing the 100,000 shares as income to her, she should have sought the advice of a tax professional for how to file her 2014 return, rather than simply failing to file. The court thus concluded that the couple did not exercise ordinary business care and prudence with respect to the filing of their 2014 tax return and were thus liable for the late-filing penalty.

With respect to the Code Sec. 6651failure to pay penalty assessed under Code Sec. 6651(a)(2), the Tax Court noted that the IRS did not introduce into evidence a certified copy of the SFR for 2014 and thus failed to meet its burden of production by producing evidence of an SFR meeting the requirements of Code Sec. 6020(b). As a result, the court did not sustain the IRS's determination that the Feiges were liable for the Code Sec. 6651(a)(2) penalty.

Finally, the court also found that the IRS did not provide information relating to the couple's 2013 tax return, which would be necessary for determining the amount of any 2014 estimated payments that were due. The court thus did not sustain the IRS's determination that the Feiges were liable for the penalty for failing to make estimated tax payments for 2014.

For a discussion of whether a service provider must include in income property transferred by an employer in exchange for the performance of services, see Parker Tax ¶124,505. For a discussion of whether stock of a transferor is considered substantially vested in the transferee, see Parker Tax ¶124,515.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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