                               PUBLISHED

                     UNITED STATES COURT OF APPEALS
                         FOR THE FOURTH CIRCUIT


                              No. 15-2192


QINETIQ US HOLDINGS, INC. & SUBSIDIARIES,

                  Petitioner - Appellant,

           v.

COMMISSIONER OF INTERNAL REVENUE,

                  Respondent - Appellee.



                Appeal from the United States Tax Court.
                         (Tax Ct. No. 14122-13)


Argued:   October 26, 2016                  Decided:   January 6, 2017


Before KING, KEENAN, and DIAZ, Circuit Judges.


Affirmed by published opinion. Judge Keenan wrote the opinion,
in which Judge King and Judge Diaz joined.


ARGUED: Gregory G. Garre, LATHAM & WATKINS LLP, Washington,
D.C., for Appellant.       Ellen Page DelSole, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.        ON
BRIEF: Gerald A. Kafka, Benjamin W. Snyder, Nicolle Nonken
Gibbs, LATHAM & WATKINS LLP, Washington, D.C., for Appellant.
Caroline D. Ciraolo, Acting Assistant Attorney General, Diana L.
Erbsen,   Deputy   Assistant   Attorney   General,   Gilbert  S.
Rothenberg, Teresa E. McLaughlin, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
BARBARA MILANO KEENAN, Circuit Judge:

       This appeal from a decision of the United States Tax Court

(the tax court) involves the federal income tax treatment of

shares    of       stock   issued          to    an       executive     employee        of    Dominion

Technology Resources, Inc. (DTRI), around the time of DTRI’s

founding.          The company’s successor in interest, QinetiQ U.S.

Holdings, Inc. & Subsidiaries (QinetiQ), contends that the stock

was issued in connection with the executive’s employment and was

subject to a substantial risk of forfeiture until 2008.                                        On this

basis, QinetiQ argues that it is entitled to a tax deduction for

the value of the stock as a trade or business expense in the tax

year ending March 31, 2009.

       After reviewing QinetiQ’s tax return, the Internal Revenue

Service    (IRS)         issued       a    Notice         of    Deficiency       concluding       that

QinetiQ had not shown its entitlement to the claimed deduction.

QinetiQ       later      filed    suit          in    the      tax    court,     raising       both    a

procedural and a substantive argument.                                QinetiQ argued that the

IRS    failed       to    give    a       reasoned         explanation      in    the        Notice    of

Deficiency for denying the tax deduction.                                  QinetiQ also argued

that    the    stock       qualified            as    a    deductible       trade       or    business

expense       in    tax    year       2008,       because        the    stock     was    issued       in

connection with services and was subject to a substantial risk

of    forfeiture         until    that          year.          The   tax   court    rejected          the

procedural         argument,          holding         that      the    Notice      of    Deficiency

                                                      2
provided sufficient explanation.                         The tax court also held that

QinetiQ failed to show that the stock was issued in connection

with    services          and     was     subject        to        a     substantial         risk    of

forfeiture.          Accordingly,          the     tax        court       entered      judgment      in

favor of the IRS.

       Upon our review, we conclude that the IRS complied with all

applicable         procedural          requirements           in       issuing    the       Notice   of

Deficiency to QinetiQ.                  We further hold that the tax court did

not err in concluding that the stock failed to qualify as a

deductible         expense       for    the   tax       year        ending       March      31,   2009,

because the stock was not issued subject to a substantial risk

of forfeiture.            We therefore affirm the tax court’s judgment.


                                                 I.

       In    March    2002,       Thomas      G.       Hume    (Hume)       formed       “Thomas     G.

Hume,       Inc.”    as     a     corporation          organized          under       the    laws    of

Virginia.          Hume was the sole shareholder, and served with his

wife, Karyn Hume, as the initial directors of the corporation.

Hume filed federal tax forms electing for the corporation to be

treated       as     an     “S     corporation,”              in       order     to      permit      the

corporation’s profits and losses to be passed through to him

individually.             See 26 U.S.C. § 1366(b).                       Thomas G. Hume, Inc.

appears      not    to     have    engaged       in     any        business      before      November

2002.


                                                   3
       In November 2002, Hume and Julian Chin took certain actions

to   facilitate       Chin’s     joining    the    business      enterprise.     On

December      6,    2002,   Hume    and   Karyn   Hume,     as   directors,    filed

articles of amendment with the Commonwealth of Virginia changing

the name of the corporation to Dominion Technology Resources,

Inc. and creating two classes of shares, class A voting stock

and class B nonvoting stock.               The next day, Karyn Hume resigned

from       DTRI’s   board   of     directors,     leaving    Hume   as   the    sole

director.       On December 9, 2002, Hume paid a par value 1 of $450 in

exchange for 4,500 shares of DTRI class A voting stock, and Chin

paid the same par value in exchange for 4,455 shares of DTRI

class A voting stock and 45 shares of DTRI class B nonvoting

stock.

       On December 12, 2002, Hume executed a “Consent in Lieu of

the Organizational Meeting of the Board of Directors of [DTRI]”

(December Consent), which offered for sale and issuance 4,500

shares of class A stock to Hume, and 4,455 shares of class A and

45 shares of class B stock to Chin.                  Attached to the December

Consent were letters signed by Hume and Chin acknowledging their

intent to subscribe to the stated stock shares.                     Also included

in the December Consent was authorization for DTRI to enter into

       1
       Par value is an “arbitrary dollar amount assigned to a
stock share by the corporate charter.”  Par Value, Black’s Law
Dictionary 1298 (10th ed. 2014).



                                           4
a Shareholders Agreement and employment agreements with Hume and

Chin.      In a separate paragraph, the December Consent further

authorized DTRI to enter into individual employment agreements

and restrictive stock agreements with other employees.

     The Shareholders Agreement entered into by DTRI, Hume, and

Chin stated that the parties

     believe that it is in their mutual best interest to
     make provisions for the future disposition of all of
     the shares of common stock of the Corporation to the
     end that continuity of harmonious management is
     assured, and a fair process is established by which
     said shares of common stock may be transferred,
     conveyed, assigned or sold[.]

To that end, the Shareholders Agreement prescribed provisions

for restricting the sale or transfer of stock and for returning

stock to the corporation in the event of either Hume’s or Chin’s

death, disability, or termination of employment with DTRI.

     The     Shareholders   Agreement        contained     provisions     for

calculating    the   “Agreement   Value”      of    the   shares   upon   the

occurrence of any of these events, and gave the corporation the

option of repurchasing Hume’s or Chin’s shares at the calculated

value in the event of such death, disability, or termination

without     cause.    Additionally,     in    the    event    of   voluntary

resignation by the employee, the Shareholders Agreement provided

DTRI the option of purchasing the shares at 5% of the Agreement

Value for every year of the departing employee’s employment, up

to a maximum of 100% after twenty years.            However, in the event

                                   5
that     the   employee         voluntarily     resigned        and     engaged    in

competition with DTRI, or that DTRI terminated the employee for

cause, the corporation would have the option to purchase the

shares    at   5%    of       the   Agreement   Value     for     every    year    of

employment, up to a maximum of 25% of the Agreement Value.

       Also in December 2002, DTRI entered into stock agreements

with other employees that were far more restrictive than the

terms of the Shareholders Agreement executed by Hume and Chin.

The stock agreements with the other employees contained greater

limitations on the transfer of stock and a less generous method

for calculating stock value for purposes of DTRI’s repurchase of

a departing employee’s stock.               Also, unlike Hume and Chin, the

other employees did not receive any voting rights in the stock

they received.

       DTRI entered into employment agreements with Hume, Chin,

and other employees in December 2002.                 The employment agreements

with   Hume    and   Chin       bore   no   reference     to    stock     issued   as

compensation.        In contrast, the employment agreements for the

other employees who received stock in December 2002 explicitly

referenced,    under      a    contract     section    labeled    “Compensation,”

nonvoting stock that was issued subject to restrictions.

       DTRI, Hume, and Chin filed yearly tax documents treating

DTRI as a pass-through entity between tax years 2002 and 2006,

with Hume and Chin identified as the shareholders.                        In DTRI’s

                                            6
tax filings from 2002 to 2006, DTRI allocated its net income or

loss to Hume and Chin, based on their respective percentage of

stock ownership in DTRI in each taxable year.                In December 2006,

DTRI revoked its S corporation election, effective January 1,

2007.      From 2002 through 2007, DTRI did not report the stock

issued in 2002 to Hume and Chin as employment compensation, and

therefore did not withhold federal payroll taxes on the issued

stock.     In contrast, DTRI, Hume, and Chin reported as employment

compensation shares later granted to Hume and Chin.

      In   2008,   QinetiQ    entered       into   negotiations   to   purchase

DTRI.      On August 4, 2008, QinetiQ, Project Black Acquisition

Corp., DTRI, Hume, and Chin entered into a final agreement and

plan of merger, with QinetiQ paying $123 million in exchange for

all     outstanding   stock    in   DTRI.          Immediately    before   the

transaction closed, Hume and Chin executed consent agreements

waiving     DTRI’s    rights     with        respect    to    stock    transfer

restrictions or partially vested stock.                The merger transaction

closed in October 2008.

      For the tax year ending on March 31, 2009, QinetiQ withheld

payroll taxes in accordance with the value of the stock received

by Hume and Chin in 2002, and claimed deductions under 26 U.S.C.

§ 83(h), as wages paid to Hume and Chin for the fair market

value of the shares originally issued to them in December 2002.

Hume and Chin filed personal income tax returns for tax year

                                        7
2008 claiming as wage income the 2008 value of their respective

shares issued in December 2002.

      The    IRS    transmitted           to     QinetiQ    a       Notice   of   Deficiency

stating     that    the       IRS   had    determined       that       QinetiQ    “ha[d]   not

established that [it was] entitled” to a deduction “under the

provisions     of       [26    U.S.C.]     § 83,”     and       that    QinetiQ’s    taxable

income for the year thereby was increased by “$117,777,501.”

The IRS did not give a further explanation of its decision in

its Notice of Deficiency.

      QinetiQ filed a petition in the tax court challenging the

sufficiency of the Notice of Deficiency, as well as the IRS’s

substantive determination with respect to Chin’s shares. 2                                 The

tax court ruled that QinetiQ had not demonstrated entitlement to

the deduction on two independent bases, namely, that the stock

was not property “transferred in connection with the performance

of   services”      and       was   not    “subject    to       a    substantial    risk    of

forfeiture”        at    the    time      Chin    acquired       the    shares.      QinetiQ

appeals from the tax court’s judgment.




      2Originally, QinetiQ challenged the classification of the
shares issued to both Hume and Chin but, during the pendency of
the tax court case, QinetiQ conceded that the stock shares
issued to Hume did not qualify as Section 83 property.



                                                 8
                                           II.

     We    first    address      QinetiQ’s       argument      that     the       Notice    of

Deficiency is invalid because it failed to provide a reasoned

explanation for the agency’s final decision, as required by the

Administrative Procedure Act (APA), 5 U.S.C. §§ 701–06.                                   This

issue    presents    a    question    of    law       that   we     consider       de   novo.

Starnes v. Comm’r, 680 F.3d 417, 425 (4th Cir. 2012).

                                           A.

     The APA authorizes district courts to review agency actions

with a “focal point” on the “administrative record already in

existence.”        Camp    v.    Pitts,     411   U.S.       138,     142    (1973)       (per

curiam).     The Supreme Court has held that a required component

of this administrative record is a “reasoned explanation for

[the agency] action.”           FCC v. Fox Television Stations, Inc., 556

U.S. 502, 515–16 (2009).             QinetiQ anchors its argument on this

principle,    maintaining        that      this    requirement         of     a    reasoned

explanation       necessarily     applies        to    a     Notice    of     Deficiency,

because that notice is a final agency action within the meaning

of the APA.        Thus, according to QinetiQ, failure by the IRS to

comply     with    this    APA    requirement           rendered       the     Notice      of

Deficiency invalid.

     We     disagree      with    QinetiQ’s           argument,       which       fails    to

consider the unique system of judicial review provided by the

Internal Revenue Code for adjudication of the merits of a Notice

                                            9
of Deficiency.         It is that specific body of law, rather than the

more general provisions for judicial review authorized by the

APA,    that    governs       the   content    requirements   of    a   Notice     of

Deficiency.

       Under the APA, the “task of the reviewing court is to apply

the    appropriate      APA    standard   of    review   . . .     to   the    agency

decision       based   on     the   record     the   agency   presents        to   the

reviewing court.”           Fla. Power & Light Co. v. Lorion, 470 U.S.

729, 743–44 (1985) (internal citation omitted).                     The reviewing

court in such a case generally is not authorized to conduct a de

novo evaluation of the record or to “reach its own conclusions”

regarding the subject matter before the agency.                  Id. at 744.

       Some agency-specific statutes, however, provide materially

different procedures for judicial review that predate the APA’s

enactment.       One such example is the Internal Revenue Code (the

Code), which authorizes de novo review in the tax court of a

Notice of Deficiency.           See 26 U.S.C. § 6214; Eren v. Comm’r, 180

F.3d 594, 597 (4th Cir. 1999).                We discussed this unique system

of judicial review in our decision in O’Dwyer v. Commissioner,

266 F.2d 575 (4th Cir. 1959).                  We explained that because the

Code’s provisions for de novo review in the tax court permit

consideration of new evidence and new issues not presented at

the agency level, those provisions are incompatible with the



                                          10
limited judicial review of final agency actions allowed under

the APA. 3     Id. at 580; see also 26 U.S.C. § 6214(a).

       Additionally, we observe that for an agency action to be

deemed “final” within the meaning of the APA and, thus, subject

to the APA’s requirement of a reasoned explanation, the agency

“action must be one by which rights or obligations have been

determined,         or     from   which    legal    consequences     will   flow.”

Bennett v. Spear, 520 U.S. 154, 178 (1997) (internal citation

and quotation marks omitted).                   “[L]egal consequences” include

agency determinations that restrict the government’s power to

take   contrary          litigation   positions    in   subsequent   proceedings.

See U.S. Army Corps of Eng’rs. v. Hawkes Co., 136 S. Ct. 1807,

1814       (2016)   (holding      that    agency   determinations     effectively

giving a five-year “safe harbor” from government suits create

“legal consequences” within the meaning of the Bennett test).




       3
       QinetiQ argues that this Court’s opinion in O’Dwyer no
longer is “good law” because O’Dwyer relied on an outmoded line
of reasoning that the APA’s procedures for judicial review apply
only to formal adjudications, to the exclusion of informal
agency actions.   Although the APA’s judicial review procedures
have since been held to apply to informal agency actions, as
well as to formal adjudications, see Fla. Power & Light Co., 470
U.S. at 744, we observe that the central holding of O’Dwyer
remains valid, namely, that the de novo review procedures
provided by the Internal Revenue Code, rather than the judicial
review procedures under the APA, govern judicial review of
deficiency proceedings.



                                           11
      After issuing a Notice of Deficiency, however, the IRS may

later assert in the tax court new legal theories and allege

additional deficiencies.                    See 26 U.S.C. § 6214(a); Tax Ct. R.

142(a)(1).         Likewise, a taxpayer may raise new matters before

the     tax        court        not        previously        considered        during        the

administrative process.                    26 U.S.C. § 6214(a).              In contrast to

these fluid procedures, the APA’s “arbitrary” and “capricious”

standard requires that judicial review of an agency action be

confined      to    the        static      administrative       record       with    deference

accorded to the agency’s decision, and that the agency action be

final in all respects before judicial review commences.                                    See 5

U.S.C. §§ 704, 706(2)(A); Pitts, 411 U.S. at 142.

      Given these significant variations in the scope of judicial

review under the two statutory schemes, we conclude that the

APA’s   general         procedures          for    judicial     review,       including      the

requirement        of      a     reasoned         explanation      in    a    final     agency

decision, were not intended by Congress to be superimposed on

the   Internal       Revenue       Code’s         specific    procedures       for    de    novo

judicial review of the merits of a Notice of Deficiency.                                As the

Supreme Court has emphasized, Congress did not intend for the

APA “to duplicate the previously established special statutory

procedures         relating           to     specific        agencies.”             Bowen     v.

Massachusetts,          487      U.S.      879,    903   (1988);    see      also    Hinck    v.

United States, 550 U.S. 501, 506 (2007) (“[I]n most contexts, a

                                                  12
precisely          drawn,     detailed        statute          pre-empts     more       general

remedies.”)         (internal       citation       and    quotation        marks    omitted).

Accordingly, we hold that the APA’s requirement of a reasoned

explanation in support of a final agency action does not apply

to a Notice of Deficiency issued by the IRS and that, therefore,

the Notice of Deficiency issued to QinetiQ in this case was not

subject to that APA requirement. 4

                                              B.

       We next consider whether the Notice of Deficiency in this

case       was    insufficient      to    satisfy        the    requirement        of   Section

7522(a) of the Code that the IRS “describe [in the Notice] the

basis for, and identify the amounts (if any) of, the tax due,

interest,          additional       amounts,        additions       to     the      tax,    and

assessable          penalties.”          26    U.S.C.      § 7522(a).         The       statute

further          provides    that    “an      inadequate        description        under   the

preceding         sentence    shall      not       invalidate      such     notice.”        Id.

However, the statute is silent regarding the circumstances, if

any, that will cause a Notice of Deficiency to be invalidated.

Id.



       4
       We acknowledge that the APA anticipates that “de novo”
determination of facts by the reviewing court may sometimes be
appropriate. 5 U.S.C. § 706(2)(F). However, this is not such a
case, because application of the APA would simply “duplicate the
previously established special statutory procedures” of the
Internal Revenue Code. Bowen, 487 U.S. at 903.



                                               13
       Some federal courts of appeal have held that a Notice of

Deficiency may be invalidated for the failure to include certain

information.            For example, before the 1988 enactment of Section

7522, 5     we    held    that   a    Notice       of    Deficiency    must   contain     a

statement that the IRS has examined a return and has determined

a deficiency in an “exact amount.”                        Abrams v. Comm’r, 787 F.2d

939, 941 (4th Cir. 1986).                  And, after the enactment of Section

7522, the Ninth Circuit implicitly has endorsed application of a

rule       that   major     errors     in    a     Notice     of    Deficiency      causing

prejudice to a taxpayer will render that determination invalid.

See    Elings      v.    Comm’r,     324    F.3d    1110,    1113     (9th   Cir.    2003).

Also, the Tenth Circuit has held that a Notice of Deficiency may

not be used to implicitly deny without explanation a taxpayer’s

request for discretionary relief. 6                     See Fisher v. Comm’r, 45 F.3d



       5The language now codified at 26 U.S.C. § 7522 was
originally codified at Section 7521 in 1988 and renumbered as
Section 7522 in 1990. See Omnibus Taxpayer Bill of Rights, Pub.
L. No. 100-647, § 6233, 102 Stat. 3342, 3735 (1988); Revenue
Reconciliation Act of 1990, Pub. L. No. 101-508, § 11704, 104
Stat. 1388, 1388-519 (1990).
       6
       We do not read Fisher, as QinetiQ urges, as requiring a
reasoned explanation in all Notices of Deficiency. The court in
Fisher was asked to review the Commissioner’s implicit denial,
through inaction, of a discretionary waiver of a tax penalty.
See Fisher, 45 F.3d at 396–97 (citing 26 U.S.C. § 6661(c)). The
court in Fisher held that without an explicit agency ruling to
review, the tax court “had no basis for determining what reasons
the Commissioner may have relied upon,” and that, therefore, the
Commissioner “failed to demonstrate that she had exercised her
discretion.” Id. at 397. The rationale of Fisher thus applies
(Continued)
                                              14
396, 397 (10th Cir. 1995).                     In contrast, some of our sister

circuits have held that minor, nonprejudicial flaws in a Notice

of   Deficiency      will       not    cause     such     notice       to    be    invalidated.

Elings, 324 F.3d at 1113; Smith v. Comm’r, 275 F.3d 912, 915 &

n.2 (10th Cir. 2001).

      Upon     consideration           of   this       authority,       we    hold    that     the

Notice    of   Deficiency         issued         to    QinetiQ     satisfied         the    basic

requirements        of    the    Internal         Revenue       Code.         The    Notice    of

Deficiency      informed         QinetiQ       that      the     IRS    had       determined    a

deficiency in an exact amount for a particular tax year, and

incorporated        by    reference         an        enclosed    statement          that    “the

deduction you claimed for Salaries and Wages in the amount of

$117,777,501 under the provisions of [Code] § 83 is disallowed

in full as you have not established that you are entitled to

such a deduction.”              The Notice of Deficiency further informed

QinetiQ      that    it    had        the   right       to     contest       this    deficiency

determination in the tax court.                          In light of the taxpayer’s

burden to show entitlement to a particular deduction, INDOPCO,

Inc. v. Comm’r, 503 U.S. 79, 84 (1992), we discern no prejudice

to QinetiQ due to the absence of additional information in the




only to cases in which courts review agency action for abuse of
discretion, rather than cases in which the tax court applies a
de novo standard of review. See id.



                                                 15
Notice of Deficiency.           Accordingly, we hold that its content was

sufficient to satisfy the requirements of the Internal Revenue

Code.


                                         III.

      Finally,      we   turn   to   the    merits    of   QinetiQ’s      claim    that

QinetiQ was entitled to a tax deduction in tax year 2008 for the

stock   Chin   acquired     from     DTRI    in    2002.      In   addressing      this

issue, we apply an established standard of review.                       Decisions of

the tax court are subject on appeal to the same standard we

apply to civil bench trials on appeal from the district courts.

Estate of Waters v. Comm’r, 48 F.3d 838, 841–42 (4th Cir. 1995).

Under this standard, we review factual findings for clear error,

legal questions de novo, and mixed questions of law and fact de

novo.    Waterman v. Comm’r, 179 F.3d 123, 126 (4th Cir. 1999);

Waters, 48 F.3d at 842.

      QinetiQ argues that the stock Chin acquired from DTRI in

2002 qualified as a trade or business expense in 2008, because

the stock was transferred “in connection with” Chin’s employment

with DTRI, and was “subject to a substantial risk of forfeiture”

until Chin sold the shares in 2008 as part of DTRI’s merger with

QinetiQ.       See 26 U.S.C. §§ 83(h), 162.                The IRS responds that

the   tax   court    properly     rejected        QinetiQ’s   claim      because    the

evidence     showed      that     Chin      subscribed      to     the    stock     for


                                           16
investment, rather than in connection with his employment with

DTRI, and that the stock was not issued subject to a substantial

risk of forfeiture.

      We agree with the IRS that the tax court did not err in

rejecting QinetiQ’s claimed deduction.                Section 83(a) of the

Code, in relevant part, generally treats property transferred

“in   connection     with   the   performance    of    services”   as    “gross

income of the person who performed such services.”                 26 U.S.C.

§ 83(a).      Because a transfer of this nature is treated as gross

income of the individual providing such services, the employer

ordinarily is entitled to a deduction for the equivalent value

as a trade or business expense.        26 U.S.C. §§ 83(h), 162(a).

      This rule is modified, however, when property transferred

“in connection with the performance of services” is “subject to

a substantial risk of forfeiture.”         26 U.S.C. § 83(a).       Property

transferred under such circumstances is not treated as gross

income   of    the   individual   providing     services   until   the    first

taxable year in which the property was no longer subject to a

substantial risk of forfeiture.            Id.     Therefore, an employer

seeking to establish entitlement to a deduction for property

transferred to an employee in a prior tax year must show both:

(1) that the property was transferred “in connection with the

performance of services”; and (2) that the property was “subject

to a substantial risk of forfeiture” from the time the property

                                      17
was transferred until the tax year for which the deduction is

claimed.     Id.; see also Strom v. United States, 641 F.3d 1051,

1055–56 (9th Cir. 2011); United States v. Bergbauer, 602 F.3d

569,   580   (4th     Cir.   2010).     Thus,   if   the    employer    fails   to

establish either of these two required elements, the employer is

not entitled to claim the property transferred in an earlier tax

year as a trade or business expense.                 See 26 U.S.C. §§ 83(a),

83(h), 162(a).

       In the present case, the tax court found that QinetiQ had

failed to prove either requirement for establishing its claimed

deduction.      We conclude that the record supports the tax court’s

determination that the stock transferred to Chin in 2002 was not

issued subject to a substantial risk of forfeiture.                      Because

this   factor    is   a   required    element   of   proof    for   establishing

entitlement to the claimed deduction in the tax year in dispute,

we limit our analysis to this single element and do not address

the other statutorily required element that the stock have been

transferred in connection with the performance of services.

       Under Treasury regulations implementing Section 83(a), the

term “substantial risk of forfeiture” is applied in the context

of the “facts and circumstances” of each individual case.                       26

C.F.R.     § 1.83-3(c)(1).            The    relevant      regulation    further

clarifies that property is not “subject to a substantial risk of

forfeiture to the extent that the employer is required to pay

                                        18
the fair market value of such property to the employee upon the

return of such property.”                   Id.    In addition, property is not

subject to a substantial risk of forfeiture if “at the time of

the transfer the facts and circumstances demonstrate that the

forfeiture condition is unlikely to be enforced.”                        Id. § 1.83-

3(c)(1),       (3).     Likewise,      conditions       imposed   at    the    time    of

transfer that require the return of property “if the employee is

discharged for cause or for committing a crime,” or “if the

employee      accepts     a    job   with     a    competing   firm,”   will    not    be

sufficient to constitute a substantial risk of forfeiture.                            Id.

§ 1.83-3(c)(2).

       Here, the terms of the Shareholders Agreement between DTRI,

Hume, and Chin recited certain conditions that would require

Chin to return the stock to DTRI.                   In the event of Chin’s death,

disability,       or    termination          without    cause,    the   Shareholders

Agreement provided a formula for DTRI to repurchase Chin’s stock

that       corresponded       with   “one    hundred    percent   (100%)      [of]    the

Agreement Value.” 7           Given this requirement of fair market value,

the repurchase of Chin’s stock under those circumstances would



       7
       The Shareholders Agreement prescribed an objective method
for calculating the value of the corporation, based on four
times the earnings of the corporation in the fiscal year
immediately preceding the event requiring valuation. Nothing in
the record indicates that this formula would not result in the
fair market value of the stock.



                                              19
not    be   considered         a     “forfeiture”          within        the    meaning       of   the

relevant regulation.                26 C.F.R. § 1.83-3(c)(1).

       In     the     event          of     Chin’s        voluntary         resignation,           the

Shareholders         Agreement             would        have       provided       for    DTRI      to

repurchase the stock at “five percent (5%) [of the Agreement

Value] for every full year of service” by Chin, up to the full

Agreement Value after 20 years of service.                                     However, if Chin

were terminated for cause or voluntarily resigned and engaged in

competition with DTRI, the stock repurchase price would be 5% of

the Agreement Value for each year of service, up to a maximum of

25% of the Agreement Value.

       Read       together,          these         additional            provisions          of    the

Shareholders Agreement indicate that the only circumstances in

which Chin would be required to forfeit his stock at a below-

market price would be if Chin voluntarily resigned before 20

years of employment, if Chin voluntarily resigned and entered

into    competition           with    DTRI,       or     if       Chin   were    terminated        for

cause.         Because         the        regulation           provides         that    forfeiture

provisions triggered by termination for cause or by engaging in

competition         do        not     constitute              a     “substantial         risk       of

forfeiture,”             26    C.F.R.        § 1.83-3(c)(2),             the     only    remaining

ground      for     forfeiture            would    be     the       circumstance        of    Chin’s

voluntary resignation.



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     With respect to this sole remaining ground for forfeiture,

the tax court concluded that the likelihood of forfeiture due to

Chin’s voluntary resignation did not amount to a “substantial

risk.”    The tax court made a factual determination that Hume

would have been unlikely to enforce the shareholder restrictions

on the stock in the event of Chin’s voluntary departure.                       In

concluding that Chin’s stock was not subject to a substantial

risk of forfeiture but was intended to be treated as “fully

vested   and   outstanding     stock”     without    restrictions,      the   tax

court cited Chin’s role as an initial investor in DTRI, Chin’s

“very close work relationship” with Hume, and Chin’s “vital role

within DTRI as the executive vice president, COO, and a 49.75%

shareholder in voting stock.”

     Based     on   our   review,   we    conclude   that   the   tax   court’s

factual conclusion, that Chin’s significant ownership position

in DTRI and his strong relationship with Hume demonstrated that

the stock was not transferred in 2002 subject to a “substantial

risk of forfeiture,” is not clearly erroneous and was supported

by the record.      We therefore hold that the tax court did not err

in concluding that QinetiQ failed to establish its entitlement

to the claimed deduction.




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                          IV.

For these reasons, we affirm the tax court’s judgment.

                                                    AFFIRMED




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