This article examines the recent Tax Court Memorandum decision in Corri A. Feige v. Commissioner of Internal Revenue, T.C. Memo. 2025-88, a case that provides critical insights for tax professionals regarding the income inclusion of property transferred in connection with services, particularly when its receipt is disputed by the taxpayer. The Court’s analysis touches upon the applicability of Section 83, the concept of a "substantial risk of forfeiture," and the nuanced burden of proof rules for both income deficiencies and various additions to tax.

Factual Background

Corri A. Feige (Petitioner) was employed by Linc Energy Operations, Inc. (Linc), a U.S. subsidiary of Australian corporation Linc Energy, Ltd., from February 2010 to November 5, 2014. As part of her compensation, Petitioner participated in the Linc Energy Performance Rights Plan, which permitted her to receive Linc Energy stock for her services.

Under an initial rights issue offer (RIO) in August 2011, Petitioner received 60,000 unvested rights subject to a three-year vesting schedule. She received 20,000 shares each on July 31, 2011, 2012, and 2013. For these tranches, Petitioner elected to sell 33% of her vested shares to satisfy her U.S. tax obligations.

In July 2013, Petitioner accepted an additional allocation of 400,000 rights, with a four-year vesting schedule of 100,000 shares annually, starting December 21, 2013. Although this additional allocation did not include a specific tax election, Petitioner instructed Linc Energy via email to continue selling 33% of the rights to cover her tax obligations, a practice followed for the first tranche vesting in December 2013. All of the stock received under the Performance Rights Plan and RIO was in connection with her performance of services.

Linc Energy encountered financial difficulties, leading to Petitioner’s employment termination as of November 5, 2014, formalized by a separation agreement on November 24, 2014. This agreement stipulated that unvested performance rights would be forfeited upon termination. Notably, the agreement contained no ongoing obligations, covenant not to compete, or conditions requiring Petitioner to return remuneration.

On December 3, 2014, two days after the separation agreement’s revocation period ended, Linc transferred 100,000 shares of Linc Energy stock (the disputed shares) into Petitioner’s Charles Schwab account. Petitioner discovered this transfer in early January 2015 via her brokerage statement. She attempted to contact Linc and Linc Energy employees regarding the transfer but did not receive guidance. Crucially, she did not provide written notice of her belief that the transfer was in error, as required by the Performance Rights Plan.

At the end of January 2015, Petitioner received a Form W-2 from Linc reporting $75,660 as compensation from the exercise of nonstatutory stock options, attributable to the disputed shares. Petitioner never sold these disputed shares.

Petitioner and her husband typically filed joint tax returns and had a history of compliance, but they did not file their 2014 tax return. Her husband usually prepared their returns using TurboTax, without professional assistance. In 2019, after receiving a notice from the Internal Revenue Service (IRS), Petitioner and her husband sought legal counsel. The Commissioner had prepared a Substitute for Return (SFR) for 2014 and issued a Notice of Deficiency. Petitioner subsequently submitted a joint return for 2014 to the IRS Appeals office in March 2021, excluding the $75,660 reported by Linc.

Petitioner’s Contentions

The Petitioner sought relief on two primary fronts: the inclusion of the disputed stock in her gross income and the imposition of additions to tax.

Regarding the unreported income, Petitioner contended that she should not include the value of the disputed shares in her gross income because she lacked dominion and control over them. Specifically, she argued that the shares were transferred contrary to the terms of the Performance Rights Plan, making them subject to an ongoing claim by Linc Energy under Alaska law. She characterized these shares as "treasure trove" property, asserting that income inclusion should be delayed until she had undisputed possession, following the precedent of Cesarini v. United States, 296 F. Supp. 3, 6–7 (N.D. Ohio 1969), aff’d per curiam, 428 F.2d 812 (6th Cir. 1970). Petitioner also argued that the Linc Energy board of directors had not unilaterally amended the Performance Rights Plan to accelerate her vesting before her termination date, and that the separation agreement superseded the Performance Rights Plan, thus revoking the board’s authority to award shares. Furthermore, she suggested that Section 83 was inapplicable because she did not make an affirmative election under it.

Concerning the additions to tax, Petitioner argued that her failure to timely file her 2014 return was due to reasonable cause. Her arguments included the complexity of the tax issues, which were outside her understanding, and the lack of readily available tax professionals in her remote Alaskan location. She also cited personal hardships, such as unemployment and the illness and death of her father, and claimed to have exercised ordinary business care by requesting tax withholding and contacting Linc to recover the shares. Petitioner also asserted that the additions to tax should be abated under the first-time penalty abatement provision of the Internal Revenue Manual (IRM).

Court’s Analysis of the Law

The Court began by addressing the burden of proof. Generally, the Commissioner’s determinations in a Notice of Deficiency are presumed correct, and the taxpayer bears the burden of proving them incorrect (Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933)). While Section 7491(a) can shift the burden to the Commissioner if the taxpayer introduces credible evidence and meets other prerequisites, in unreported income cases, the Commissioner must first establish a minimal evidentiary showing connecting the taxpayer to the income-producing activity or demonstrate actual receipt (Walquist v. Commissioner, 152 T.C. 61, 67 (2019); Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979)). The Commissioner may rely on Forms W-2 and 1099-MISC from third-party payors when determining tax liability (Cabirac v. Commissioner, 120 T.C. 163, 165–67 (2003)). However, Section 6201(d) provides that if a taxpayer asserts a reasonable dispute regarding reported income and fully cooperates, the Commissioner has the burden of producing additional reasonable and probative information.

For the income inclusion issue, the Court focused on Section 83. Gross income generally includes compensation for services (Section 61(a)(1)). Section 83(a) specifically provides that if property is transferred in connection with the performance of services, its fair market value (less any amount paid) is included in gross income in the first year the taxpayer’s rights in the property are transferable or not subject to a substantial risk of forfeiture (Montgomery v. Commissioner, 127 T.C. 43, 53–54 (2006); Tanner v. Commissioner, 117 T.C. 237, 241–42 (2001)). Property is transferable if the recipient can sell, assign, or pledge their interest to someone other than the transferor, and the transferee is not required to give up the property if a substantial risk of forfeiture materializes (Treas. Reg. § 1.83-3(d)). A substantial risk of forfeiture exists only if rights in property are conditioned upon the future performance (or refraining from performance) of substantial services, or upon the occurrence of a condition related to the transfer’s purpose if the possibility of forfeiture is substantial (Treas. Reg. § 1.83-3(c)(1)). Stock is property for Section 83 purposes (Kadillak v. Commissioner, 127 T.C. 184, 195 (2006)). Property transferred in recognition of past, present, or future services is considered transferred "in connection with the performance of services" (Treas. Reg. § 1.83-3(f)). Whether property was transferred in connection with services is a factual question, generally found when governed by an employment agreement (Bagley v. Commissioner, 85 T.C. 663, 669 (1985); Wachner v. Commissioner, T.C. Memo. 1995-88). The Court clarified that Section 83 governs over the more general terms of Section 61 when inconsistent regarding the timing of income inclusion (Treas. Reg. § 1.61-2(d)(6)(i); Toso v. Commissioner, 151 T.C. 27, 34 (2018)).

For additions to tax, the Commissioner bears the burden of producing sufficient evidence to show that the additions are appropriate (Section 7491(c); Wheeler v. Commissioner, 127 T.C. 200, 206 (2006)). Once met, the taxpayer bears the burden of proving reasonable cause or other exculpatory factors.

Failure to File (Section 6651(a)(1)): Imposed for untimely filing unless due to reasonable cause and not willful neglect (United States v. Boyle, 469 U.S. 241, 245 (1985)). Reasonable cause requires exercising "ordinary business care and prudence" (Treas. Reg. § 301.6651-1(c)(1)). An SFR is disregarded for calculating this addition.
Failure to Pay (Section 6651(a)(2)): Imposed for untimely payment of tax shown on a return unless due to reasonable cause and not willful neglect (El v. Commissioner, 144 T.C. 140, 150 (2015)). An SFR meeting the requirements of Section 6020(b) constitutes the return for this purpose (Section 6651(g)(2)). A Section 6020(b) SFR must be subscribed, contain sufficient information to compute tax liability, and purport to be a "return" (Rader v. Commissioner, 143 T.C. 376, 382 (2014)).
Failure to Make Estimated Tax Payments (Section 6654(a)): Imposed for underpayment of estimated tax. The Commissioner must establish the "required annual payment" under Section 6654(d) for each year asserted, typically by showing the preceding year’s return or demonstrating no such return was filed (Wheeler, 127 T.C. at 212).

Application of Law to the Facts

The Court first confirmed that the disputed shares were property under Section 83. It then found that the shares were transferred to Petitioner in connection with her performance of services for Linc, citing her participation in the Performance Rights Plan, the connection of stock to service performance, her acknowledgment of this, and the consistency of the transfer with prior yearly stock allotments.

On the critical question of a substantial risk of forfeiture, the Court held there was none. The shares were transferred after Petitioner’s employment terminated, and she conceded no future services were expected. The separation agreement lacked a covenant not to compete, ongoing obligations, or a condition requiring the return of remuneration, thus failing both tests for a substantial risk of forfeiture under Treasury Regulation § 1.83-3(c)(1).

Regarding transferability, the Court rejected Petitioner’s "treasure trove" argument. The Court found that Section 83, as the more specific provision concerning compensation, governed over the general Section 61 rules Petitioner attempted to invoke. Furthermore, the facts of Feige’s case significantly differed from Cesarini; in Feige, the source of the property (Linc Energy) was known, unlike the unknown prior owner of the cash in Cesarini. Petitioner knew she and Linc Energy were the only parties with a potential claim. The Court concluded that Petitioner had full ownership and control over the disputed shares, with no impediments to her transacting in or selling them. Since there was no substantial risk of forfeiture, there was no risk to any transferee.

The Court also dismissed Petitioner’s argument that the shares were distributed in contravention of the Performance Rights Plan and separation agreement. The Court determined that the separation agreement did not supersede the Performance Rights Plan, noting that the latter included provisions (Section 4.4(b) and 6.3) allowing the board "absolute discretion" to waive conditions for vesting in "Qualifying Events" like employment cessation. While direct evidence of board action was absent, Linc Energy’s failure to seek recovery of the shares for months or years after the transfer strongly suggested they believed the shares rightfully belonged to Petitioner. Petitioner failed to meet her burden of proving the shares were mistakenly issued. Finally, the Court clarified that Section 83’s applicability is not subject to a taxpayer’s election, distinguishing the general applicability of Section 83(a) from the timing election available under Section 83(b) (Bumgarner v. Commissioner, T.C. Memo. 1997-48).

For additions to tax:

Failure to File (Section 6651(a)(1)): The Commissioner satisfied the burden of production by showing Petitioner’s 2014 transcript indicated no timely filing. The Court rejected Petitioner’s reasonable cause arguments. Petitioner’s prior filing history demonstrated awareness of her filing duty. The lack of local tax professionals did not excuse her, as she could have sought advice in Anchorage or remotely. Her personal hardships, while sympathetic, were not reasonable cause. The Court emphasized that upon receiving the Form W-2 for the shares, Petitioner should have sought professional tax advice rather than simply failing to file. The argument for first-time penalty abatement based on the IRM was rejected, as the IRM does not have the force of law.
Failure to Pay (Section 6651(a)(2)): The Commissioner failed to meet the burden of production because no certified copy of an SFR meeting the Section 6020(b) requirements was introduced into evidence. While a transcript referenced an SFR, this was insufficient to satisfy the burden (Gardner v. Commissioner, T.C. Memo. 2013-67).
Failure to Make Estimated Tax Payments (Section 6654(a)): The Commissioner failed to meet the burden of production because no evidence of Petitioner’s 2013 tax return or failure to file for 2013 was included in the record, which was necessary to determine the "required annual payment".

Court’s Conclusions

The Court held that Petitioner had unreported income for the 2014 tax year from the stock her former employer transferred to her. The value of the 100,000 shares reported on the Form W-2 ($75,660) was properly includible in Petitioner’s gross income for 2014 because, as of December 3, 2014, she could transfer the disputed shares, and they were not subject to a substantial risk of forfeiture.

Consequently, the Court sustained the deficiency and the addition to tax under Section 6651(a)(1) for failure to timely file. However, the Court ruled in favor of Petitioner regarding the additions to tax under Section 6651(a)(2) for failure to timely pay and Section 6654 for failure to make estimated tax payments, as the Commissioner failed to meet the burden of production for these additions.

This case underscores the importance of proper income reporting for stock compensation, even when the taxpayer believes the transfer was erroneous or unsolicited. It also serves as a crucial reminder for tax professionals of the specific evidentiary requirements the Commissioner must meet to sustain certain additions to tax.

Prepared with assistance from NotebookLM.