Facts
The Federal Court had to deal with an administrative appeal against the decision of the Federal Tax Appeals Commission of the Canton of Zurich. The appellants, [A.] and [B.] , had received 10,000 non-transferable employee stock options, which they exercised in 1998 and earned a profit of CHF 590,258.--. The options had not been declared in the tax return for 1997 for direct federal tax 1997/98 and the assessment of March 1, 1998, had become final.
The Cantonal Tax Office of Zurich qualified the options as non-transferable, objectively non-valuable employee stock options that are subject to income tax only when exercised, and recorded CHF 590,200.-- as taxable extraordinary income in the calendar year 1998. The Federal Tax Appeals Commission of the Canton of Zurich dismissed the appeal lodged against this decision and ruled that the non-transferable options were indeed valvable, but that taxation at the time of exercise was to be made up for.
Considerations
The Federal Court examined the admissibility of the administrative appeal and found that the appellants were entitled to appeal as affected taxpayers. It applied federal law ex officio and examined the question of whether the employee stock options were to be taxed as extraordinary income within the meaning of Art. 218 para. 3 DFTA.
The court concluded that the Federal Tax Administration had changed its practice on the taxation of employee stock options with the circular of 1997 and that this change was based on serious, objective reasons. It ruled that the old practice was to be continued until the time of exercise of the options, if the assessment that had been made on the basis of the previous practice, which provided for taxation upon exercise, had already been finalized.
The court…