Section 1.83-7(a), Income Tax Regs., provides that, if section 83(a) does not apply to the grant of an option because it does not have a readily ascertainable fair market value at the time of grant, "the taxpayer realizes compensation income only when the option is exercised or otherwise disposed of in an arm's-length transaction." Pagel, Inc. v. Commissioner, 91 T.C. 200, 208 (1988), affd. 905 F.2d 1190 (8th Cir. 1990). When an option is not actively traded, the regulations provide that it does not; have a readily ascertainable fair market value unless the fail' market value of the option can be otherwise measured with reasonable accuracy.

In the alternative, they argue that the section 83 regulations are contrary to the intent of Congress and should not be followed. Although the taxpayers in Pagel, Inc. v. Commissioner, 91 T.C. 200 (1988), affd. 905 F.2d 1190 (8th Cir.1990), did not make a section 83(b) election, the Court's analysis there, regarding the interpretation of readily ascertainable fair market value, is applicable to the cases at hand: Our role in the constitutional scheme * * * is not to draft the law; it is solely to interpret it.

As previously stated, however, we think Centel's "safety net" argument has some merit in the right circumstance. Such a circumstance is our recent opinion in Pagel, Inc. v. Commissioner, 91 T.C. 200, (1988), on appeal (8th Cir. 12/12/88). In Pagel, we had to decide whether a warrant received in connection with the performance of services had a readily ascertainable fair market value for purposes of section 83.

14 As previously stated, however, we think Centel's ‘safety net‘ argument has some merit in the right circumstance. Such a circumstance is our recent opinion in Pagel, Inc. v. Commissioner, 91 T.C. 200, (1988), on appeal (8th Cir. 12/12/88). In Pagel, we had to decide whether a warrant received in CONNECTION WITH THE PERFORMANCE OF SERVICES had a readily ascertainable fair market value for purposes of section 83.

This is not a case where respondent issued a narrowly drawn notice of deficiency and subsequently advanced new grounds not directly or implicitly within the ambit of the determination. See Pagel, Inc. v. Commissioner, 91 T.C. 200, 212, 1988 WL 81469 (1988), affd. 905 F.2d 1190 (8th Cir.1990); Sorin v. Commissioner, 29 T.C. 959, 969, 1958 WL 1134 (1958), affd. per curiam 271 F.2d 741 (2d Cir.1959); Weaver v.. Commissioner, 25 T.C. 1067, 1085, 1956 WL 802 (1956). While the language contained in the notice of deficiency does not specifically state that the fees were costs incurred in connection with the acquisition of a capital asset, that is a reason for capitalization that is within the scope of the determination.

Further, under section 83, which was enacted prior to section 44F, the holder of a nonstatutory employee stock option (which did not have a readily ascertainable fair market value at grant) was required to recognize compensation income (and the employer could claim a deduction under section 162 for such compensation income) at the time the holder received property pursuant to either the exercise or the disposition of the option. Sec. 83 (e)(3) and (4), (h); secs. 1.83-1 (a), 1.83-6, 1.83-7 (a), Income Tax Regs.; see also Pagel v. Commissioner, 905 F.2d 1190, 1191 (8th Cir. 1990), affg. 91 T.C. 200 (1988); Rev. Rul. 67-257, 1967-2 C.B. 359, 360. Thus, at the time Congress enacted section 44F, section 83 as well as the regulations provided that spreads were compensation income.

Sec. 83(e)(3) and (4), (h); secs. 1.83-1(a), 1.83-6, 1.83-7(a), Income Tax Regs. See also Pagel v. Commissioner, 905 F.2d 1190, 1191 (8th Cir. 1990), affg. 91 T.C. 200 (1988); Rev. Rul. 67-257, 1967-2 C.B. 359, 360. Thus, at the time Congress enacted section 44F, section 83 as well as the regulations provided that spreads were compensation income.

482-2(e) In Pagel Inc. v. Commissioner, 91 T.C. 200, 211-212 (1988), affd. 905 F.2d 1190 (8th Cir. 1990), we said that: It is well established that a party may rely upon a theory if the opposing party has been provided with fair warning of the intention to base an argument upon that theory.

"The regulatory scheme is such that the provisions of sections 1.61-15 and 1.421-6, Income Tax Regs., govern property transferred on or before June 30, 1969, and the identical rules of section 1.83-7, Income Tax Regs., apply if the property was transferred after June 30, 1969." Pagel, Inc. v. Commissioner, 91 T.C. 200, 217 (1988) (emphasis supplied), affirmed on other grounds, 905 F.2d 1190 (8th Cir. 1990). Like Section 83, Section 1.61-15 applies only to transfers of property made in connection with the performance of services by employees or independent contractors.

The Commissioner may raise a new theory if the taxpayer receives fair warning of the intention to base an argument upon the new theory and the taxpayer is not unfairly surprised or prejudiced by it. See Pagel, Inc. v. Commissioner, 91 T.C. 200, 211-12 (1988), aff'd, 905 F.2d 1190 (8th Cir. 1990); Santos v. Commissioner, T.C. Memo. 2019-148, at *11.