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Employee options count for research credit.

Certain Apple Computer employees were granted nonstatutory stock options. During 1982 and 1983, the employees exercised the options after Apple's stock price rose precipitously. Apple included the spread-the stock's market price minus the employee's option price-as wages for employee withholding purposes and deducted the spread as wages on its corporate tax return.

Apple also treated the spreads as wages in calculating the credit for increasing research (currently, IRC section 41; at the time, section 44F). The IRS disallowed portions of the claimed credit ($12 million in 1982 and $21 million in 1983), claiming the spreads did not qualify as wages for that purpose.

Section 41(b)(2)(A) allows employers to include "any wages paid or incurred to an employee for qualified services" in calculating the credit. (The employees who exercised the options were performing qualified services.") "Wages" are defined [in section 41(b)(2)(D)] by reference to IRC section 3401, dealing with wage withholding. Under section 3401, the spreads clearly are wages. But despite this, the IRS claimed Congress did not intend the spreads to be included in the credit calculation. The spreads, it argued, resulted from the fortuities of the stock market and had nothing to do with increased research spending.

Result: For Apple. The Tax Court agreed the spreads did not represent increased research spending but could not go against the statute's plain language, under which spreads on the exercise of employee options were definitely wages" when calculating the credit. Redrafting statutes must be done by Congress, not the courts.

Notes: (1) The credit for increasing research is scheduled to expire at the end of June 1993. However, proposed legislation would make it permanent.

(2) Although the credit has been changed by Congress since the tax years involved in this case, the statutory language the court interpreted [Sections 41(b)(2)(A) and (D)] remains the same.

* Apple Computer, Inc. 98 (TC No. 18).
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Publication:Journal of Accountancy
Date:May 1, 1992
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