Held, petitioner's stock is stock subject to restrictions significantly affecting its value, rather than a second class of unrestricted stock, for purposes of secs. 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs. Held, further, restrictions imposed by the Commissioner of Corporations pursuant to California securities laws, are “restrictions” within the meaning of secs. 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs. Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971), distinguished on the ground that the securities law restrictions involved therein did not have a significant effect on value. Held, further, on the facts of the instance case, all restrictions imposed by the permit were terminated during 1968.

[ 45 T.C. at 197.] In Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971), which concerned the receipt of options by an officer-employee, we again commented on the application of section 1.61-15, Income Tax Regs., as follows: Section 1.61-15, Income Tax Regs., which was added to the regulations subsequent to the years at issue makes the rules contained in sec. 1.421-6 of such regulation applicable to options granted certain non-employees after July 11, 1963.

(45 T.C. at 197.) In Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971), which concerned the receipt of options by an officer-employee, we again commented on the application of section 1.61-15, Income Tax Regs., as follows: Section 1.61-15, Income Tax Regs., which was added to the regulations subsequent to the years at issue makes the rules contained in sec. 1.421-6 of such regulation applicable to options granted certain non-employees after July 11, 1963.

It is a far cry from contractual or statutory provisions which limit a shareholder's ability to dispose of his stock or legal deterrents against "insider trading" and the phenomenon of "blockage." Robinson, on the other hand, correctly notes that this Court has held that blockage does not constitute a restriction within the meaning of section 1.421-6 (d)(2)(i), Income Tax Regs. Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971). To the extent that Centronics would have us hold that any factor which may decrease fair market value is a limitation (and thus a restriction) insofar as it discourages the shareholder from selling his stock, we cannot agree.

This would result in a vast expansion of sec. 83 to a degree clearly never intended by Congress. Income Tax Regs. Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971). That subsection provided in pertinent part:* * * If the option is exercised by the person to whom it was granted but, at the time an unconditional right to receive the property subject to the option is acquired by such person, such property is subject to a restriction which has a significant effect on its value, the employee realizes compensation at the time such restriction lapses or at the time the property is sold or exchanged, in an arm's length transaction, whichever occurs earlier, and the amount of such compensation is the lesser of—(a) The difference between the amount paid for the property and the fair market value of the property (determined without regard to the restriction) at the time of its acquisition, or(b) The difference between the amount paid for the property and either its fair market value at the time the restriction lapses or the consideration received upon the sale or exchange, whichever is applicable.

When dealing with stock options, however, respondent has been less reluctant to find a transaction open. Cf. Frank v. Commissioner, 447 F.2d 552 (7th Cir 1971), affg. 54 T.C. 75 (1970). See generally secs. 1.61-15, 1.83-7, and 1.421-6, Income Tax Regs.

Petitioners' premise is invalid; section 16(b), Securities Exchange Act of 1934, is a restriction within the meaning of section 83(a). Cf. Kolom v. Commissioner, supra; cf. Pledger v. Commissioner, 71 T.C. 618 (1977), on appeal (9th Cir., Feb. 7, 1978); cf. Frank v. Commissioner, 54 T.C. 75, 95-96 (1970); cf. Hirsch v. Commissioner, 51 T.C. 121, 134-137 (1968); but cf. Frank v. Commissioner, 447 F.2d 552, 556 (7th Cir. 1971), affg. 54 T.C. 75 (1970). Therefore, under section 83(a), the fair market value of the stock received must be determined as it was above, i. e., without regard to the restrictions imposed by section 16(b), Securities Exchange Act of 1934.

To hold otherwise would be to encourage estimates of fair market value of such rights on the basis of pure speculation and surmise. Weigl v. Commissioner, 84 T.C. at 1216; Frank v. Commissioner, 54 T.C. 75, 94 (1970), affd. 447 F.2d 552 (7th Cir. 1971). That policy is not altered by the enactment of section 83.

There are many court decisions which have made adjustments to the quoted market price of stock, which is restricted in order to arrive at its fair market value. LeVant v. Commissioner, 376 F.2d 434 (7th Cir. 1967), affg. in part and revg. in part 45 T.C. 185 (1965); Nee v. Katz, 163 F.2d 256 (8th Cir. 1947); Bassick v. Commissioner, 85 F.2d 8 (2d Cir. 1936), cert. denied 299 U.S. 592 (1936); Bolles v. Commissioner, 69 T.C. 342 (1977); Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971); Husted v. Commissioner, 47 T.C. 664 (1967). As one Court of Appeals stated, “A commodity freely salable is obviously worth more on the market than a precisely similar commodity which cannot be freely sold.”

Petitioners' stock would not be less marketable than other ISS shares in general or those sold during the period under consideration in particular, and consequently there would not be a discount applied premised upon these restrictions. See Frank v. Commissioner, 54 T.C. 75, 96 (1970). Petitioners point to Central Trust Co. v. United States, 305 F.2d 393 (Ct.Cl. 1962), where the court did not accept as indicative of fair market value the prices at which isolated sales of a closely held corporation took place.