After some time had elapsed and the value of the shares had increased, the employee exercised the options and purchased the stock at less than the then current market price.

The employee did not report as taxable income any of the gain resulting from the exercise of the option The Internal Revenue Service levied a deficiency assessment against him.

The Third Circuit affirmed a Tax Court decision that found stock options exercised by respondent represented a proprietary interest in a corporation and not compensation for services.

The Court held that the interpretation given to § 22(a) of the Internal Revenue Code of 1939 was too narrow and that the options were compensation, includible as taxable income.

(a) In defining "gross income" as broadly as it did in § 22 (a) of the Internal Revenue Code of 1939, as amended, Congress intended to tax all gains except those specifically exempted.

(c) There is no statutory basis for excluding such transactions from "gross income" on the ground that one purpose of the employer was to confer on the employee a "proprietary interest" in the business.