Apple Computer Inc. v. Commissioner 98 T.C. 232 (1992) acq 1992-2 CB 1
Apple Computer Incorporated treated incomes they earned from stock options as wages for increasing research activities in 1982, 1982 and 1983.
The main question for this court case is whether the income generated from stock options is appropriate and constitutes wages paid for increasing research activities.
- Apple Computer Incorporated is a California corporation based in Cupertino, California who designs, produces markets and services computer related products.
- Apple has maintained three employee stock option plans and they have been publicly held and listed since first offering in December of 1980
- During this time, there was an increase in stock price and these spreads were not reported as costs or expenses. Apple then deducted the spreads as wages and claimed these wages as increasing research activities.
- Qualified research expenses are defined as in-house research expenses and contract research expenses. Apple and Commissioner dispute over whether the spreads constitute wages for qualified research.
- Apple Computer Incorporated used an accrual accounting method which means that the taxpayer deducts expenses in the year they are incurred regardless of whether or not they are actually paid in that year. The Commissioner of Internal Revenue is arguing that Federal income tax laws should be controlled by financial accounting conventions. The Supreme Court rejected this idea and stated that if this were to occur, innumerable difficulties would arise in tax administration.
- Wages for Qualified Services: Apple Computers Incorporated asked for the spreads from stock options to be excluded from the definition of wages but there is no language to support this. The Court says that amounts of compensation are not subject to withholding, like certain fringe benefits, do not enter into the credit computation even if they are used in performing research. The language and legislative history does not allow Apple Computer Inc. to exclude spreads from the definition of wages.
- Expenses Paid or Incurred: The Respond states that Apple Computer Inc. did not pay or incur any costs when the employees excised their stock options. There is no requirement that the expense be paid in cash and Apple Computer Inc. recorded a liability when each option occurred. The Commissioner of Internal Revenue’s argument that Federal income tax laws should be controlled by financial accounting conventions.
- Expenses Incurred After Services Performed: The Ninth Circuit held that the legislative history does not clearly explain that expenses do not qualify unless paid or incurred in the year the services are performed. This circuit rejected the respondent’s argument of omitting expenses incurred after services performed.
- Options Granted Before the Enactment of Section 44F: All the expenses were incurred after June 30, 1981 and before January 1, 1986 and therefore all expenses were incurred when the employees exercised options.
An appropriate order will be issued.
Click here to view the full case: Apple Computer Inc. v. Commissioner 98 T.C. 232 (1992) acq 1992-2 CB 1.