When your employer deposits 100,000 shares of stock into your brokerage account after you’ve left the company, and you believe it was done in error, do you have taxable income? And what do you do in this case?

If the amount is taxable to you as compensation, then when do you report it? Should you report it in the year that you received it? Should you do so even if you do not believe that you are entitled to keep the shares? Can you wait to report it once the time period for the company to get the shares back expires?

The court addressed these questions in Feige v. Commissioner, T.C. Memo. 2025-88 (2025). The case provides an opportunity to consider how an employee should address situations where an employer makes a mistake as to the amount of type of compensation to avoid paying more in tax.

Facts & Procedural History

The taxpayer was employed by a U.S. subsidiary of an Australian corporation from February 2010 through November 5, 2014. As part of her compensation package, she participated in her employer’s Performance Rights Plan. This Plan allowed her to receive stock as compensation for services.

In July 2013, the taxpayer accepted an additional allocation of 400,000 rights under a four-year vesting schedule. 100,000 shares were to vest each December from 2013 through 2016.

The taxpayer’s employment terminated on November 5, 2014. The separation agreement said that all unvested performance rights would be forfeited. Despite this provision, on December 3, 2014, the employer transferred 100,000 shares of company stock to the taxpayer’s brokerage account–shares that would have vested on December 21, 2014, had she remained employed.

The taxpayer discovered the share transfer in January 2015. She attempted to contact company employees about what she believed was an error, but the employees she reached had also separated from the company. She never provided written notice to the employer about the disputed transfer, as required under the Performance Rights Plan. At the end of January 2015, she received a Form W-2 from her former employer reporting $75,660 as compensation from the exercise of nonstatutory stock options.

The taxpayer and her husband did not file their 2014 tax return. The IRS prepared a substitute for return and issued a Notice of Deficiency in 2020, determining a deficiency of $88,856 plus various penalties. The taxpayer challenged the assessment in the U.S. Tax Court.

Section 83 and Property Transferred for Services

To understand the timing aspects of this case, we have to start with Section 83 of the tax code.

Section 83 deals with tax on property transferred in connection with the performance of services. Under Section 83(a), when property is transferred to a taxpayer for services, the excess of the property’s fair market value over any amount paid for it is included in gross income in the first year the taxpayer’s rights in the property are either transferable or not subject to a substantial risk of forfeiture.

The rules define property broadly to include stocks and other assets, but explicitly excludes money or unfunded promises to pay. The timing of income recognition depends on two key factors. First, whether the property is transferable–meaning the recipient can sell, assign, or pledge their interest without restriction. Second, whether there’s a substantial risk of forfeiture–which exists only if the rights are conditioned on future performance of substantial services or the occurrence of a condition related to the transfer’s purpose.

When an employer transfers stock to an employee, courts generally find the transfer is in connection with services if governed by an employment agreement. This connection exists whether the transfer relates to past, present, or future services. The analysis focuses on the substance of the transaction rather than its form or the parties’ characterization.

What Makes Property “Treasure Trove” Under Tax Law?

In this case, the taxpayer cited the “treasure trove” cases as a defense. This is a timing defense.

The concept of treasure trove in tax law stems from the broad definition of gross income in Section 61. The case of Cesarini v. United States established that found property constitutes taxable income, but with an important timing rule–the income isn’t recognized until the finder has undisputed possession under state law.

In Cesarini, the taxpayers purchased a used piano at auction and seven years later discovered cash hidden inside. The court held that this found property wasn’t taxable until all potential claims under state law expired. The reasoning centered on the uncertainty of ownership–multiple unknown parties might have valid claims to found property, and taxing the finder before establishing clear title would be premature.

Under this doctrine, found property has several defining characteristics. The property must be discovered rather than transferred through a known transaction. The finder typically has no knowledge of the property’s origin or rightful owner. Multiple unknown parties might have competing claims. State law determines when the finder’s possession becomes undisputed, usually after a statutory limitations period expires.

The tax consequences of this classification can be significant. Income recognition is deferred until ownership disputes are resolved, which might take years depending on state law. And also, the character of the income is ordinary income under Section 61, not compensation under specific provisions like Section 83.

Can Stock Transferred by an Employer Ever Be Found Property?

The taxpayer argued that the 100,000 shares were found property because she wasn’t entitled to them under her separation agreement. She contended that, like the cash found in Cesarini, the shares weren’t includible in income until Alaska’s three-year statute of limitations for recovery expired. Under her theory, she knew the transfer was erroneous, making the shares subject to her former employer’s ongoing claim under Alaska law governing defective transfers of securities.

The U.S. Tax Court rejected this creative argument for several reasons. Unlike Cesarini, where the piano buyers had no idea who owned the hidden cash, the taxpayer knew exactly who transferred the shares–her former employer. The shares weren’t “discovered” property with unknown origins; they were deliberately transferred through the company’s stock plan. Only two parties could possibly claim the shares: the taxpayer and her former employer. This wasn’t a situation where multiple unknown claimants might emerge.

The court emphasized that treating employer-transferred stock as found property would conflict with Section 83’s specific rules for property transferred for services. Treasury Regulation § 1.61-2(d)(6)(i) explicitly provides that Section 83 governs stock transfers after June 30, 1969, superseding Section 61’s general income rules when inconsistent. As the more specific provision, the court said that Section 83 controls over Section 61’s general principles regarding found property.

When Does Mistakenly Transferred Stock Become Taxable?

Even if the employer transferred the shares by mistake, the U.S. Tax Court held that the taxpayer had taxable income in 2014. The court’s analysis focused on whether the shares were transferable and whether they were subject to a substantial risk of forfeiture – the two tests under Section 83.

Regarding transferability, the court found the taxpayer had complete ownership and control. She could sell, assign, or pledge the shares without restriction. No provision in the separation agreement or Performance Rights Plan prevented her from transacting in the shares. The employer never attempted to recover them in the months and years following the transfer. Any transferee from the taxpayer wouldn’t face a risk of having to return the shares.

On the substantial risk of forfeiture issue, the court noted that the taxpayer’s separation was complete before the share transfer. She wasn’t required to perform any future services to keep the shares. The separation agreement contained no ongoing obligations, non-compete provisions, or clawback conditions. The shares were transferred after the seven-day revocation period expired, making the separation final.

The court found circumstantial evidence that the employer’s board might have accelerated the vesting under its discretionary authority in the Performance Rights Plan. Section 6.3 gave the board “absolute discretion” to waive performance conditions for a “Qualifying Event,” which included termination. The timing of the transfer–after separation but before the scheduled vesting date–suggested board action rather than error.

Why Did the Court Reject Alaska Securities Law Arguments?

The taxpayer also argued that Alaska securities law prevented her from having complete dominion over the shares. She cited Alaska Statute §45.08.202, which governs defective transfers of investment securities. Under her interpretation, because she knew the transfer might be defective, she couldn’t transact in the shares without potential liability to her former employer.

The court found this argument misaligned with the facts. Alaska’s securities laws address situations where someone receives securities through genuinely defective transfers – forged endorsements, unauthorized transactions, or theft. They don’t create automatic restrictions on securities received from your employer through established compensation channels, even if you question your entitlement.

Furthermore, the court noted that the taxpayer’s subjective belief about the transfer’s validity didn’t create an actual legal impediment to transferability. Section 83 looks at objective restrictions on transfer, not the recipient’s concerns about potential claims. If subjective doubts could defer taxation, employees could manipulate the timing of income recognition simply by questioning their entitlement to compensation.

The absence of any actual attempt by the employer to recover the shares over several years demonstrated that no real restriction existed. The company’s issuance of a Form W-2 treating the transfer as compensation further evidenced its intent to transfer ownership. These facts distinguished the taxpayer’s situation from cases involving genuinely disputed ownership where competing claims are actually asserted.

What Happens When You Dispute Income Reported on Form W-2?

The court’s analysis also touched on an important procedural issue that often gets overlooked in compensation disputes. Section 6201(d) provides a special rule when taxpayers dispute income reported on information returns like Form W-2. If a taxpayer asserts a reasonable dispute about income reported on an information return and has fully cooperated with the IRS, the burden shifts to the IRS to produce reasonable and probative information about the deficiency beyond just the information return itself.

In this case, the taxpayer disputed the $75,660 reported on her Form W-2, noting that her brokerage statement showed the shares were worth only $68,670 when transferred. She argued this created a reasonable dispute that should have shifted the burden to the IRS under Section 6201(d).

The court rejected this argument as the taxpayer didn’t file a tax return for 2014 until 2021, after the IRS had already prepared a substitute for return. The court explained that failing to file a return constitutes a failure to cooperate with the IRS as required under Section 6201(d). As the court stated, “As a nonfiler, [the taxpayer] plainly did not bring her dispute over any item of income to the attention of the IRS within a reasonable period of time as contemplated by the terms and legislative history of section 6201(d).”

This holding reinforces a key principle for tax litigation: disputing reported income requires more than just disagreeing with the amount. Taxpayers must file returns and formally raise their disputes to preserve procedural advantages. The failure to file eliminates any chance of shifting the burden to the IRS, leaving taxpayers to prove that the IRS’s determinations are wrong.

The Takeaway

This case explains what employees are to do when their employer makes mistakes regarding employee compensation. When the taxpayer discovers the mistake, they should act to document efforts to correct the mistake. And when the mistake results in higher compensation reported to the IRS on a Form W-2, as in this case, the taxpayer should file a tax return to dispute the higher amount. Filing the tax return serves two purposes. First, it can shift the burden to the IRS under Section 6201(d) if the taxpayer asserts a reasonable dispute about the reported income and cooperates with the IRS. Without filing, as this case demonstrates, taxpayers lose this procedural advantage entirely. Second, filing starts the statute of limitations running for the IRS to challenge the amount, rather than leaving the tax year open indefinitely. These procedural steps can go a long way in helping the taxpayer eventually correct the mistake and avoid paying more tax than required. The lesson is clear: when faced with disputed compensation, filing a return that challenges the reported amount is always better than not filing at all, even if you believe the income was reported in error.

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