25% or 50%: How much tax will the former CFO of Applied Materials pay on the sale of company shares?
Henry Shaul Schwarzbaum requested that profits from the sale of Applied Materials shares, received via options, be taxed at a rate of 25%. However, the District Court rejected his claim, ruling that the marginal tax rate must apply, as demanded by the tax assessor. The judge noted that Schwarzbaum benefited from the tax deferral under the agreement and cannot now disavow its terms.
The former CFO of Opal Technologies, which later became Applied Materials Israel, will pay income tax at a rate reaching 50% on profits from the sale of company shares received as part of an option allocation arrangement.
The Central-Lod District Court rejected the claim of Henry Shaul Schwarzbaum, who argued that profits from the sale of shares resulting from options to purchase parent company Applied Materials shares should be taxed at a rate of only 25%.
Schwarzbaum served as CFO at Opal Technologies Ltd. between 1990 and 2003. As part of his employment terms, he was allocated options in 1994–1996 to purchase shares of the parent company, Opal Inc., which were subsequently converted into options for Applied Materials Inc. shares. The options were held by a trustee in accordance with the "Section 102" tax arrangement, which governs the allocation of parent company shares to subsidiary employees.
In 2003, Schwarzbaum exercised the options and subsequently sold shares in 2005–2007, 2014, 2017, and 2018, reporting the sales in his annual tax returns.
The Tax Dispute
The court was tasked with deciding whether Section 6(b) of the Income Tax Rules (tax relief for employee share allocations) applied to the sold shares. Schwarzbaum argued for a 25% tax rate, while the Rehovot tax assessor maintained that the income was subject to the employee's marginal tax rate.
The court accepted the position of the tax assessor, represented by Adv. Yael Hershman-Axen of the Central District Attorney's Office. Judge Shmuel Bornstein ruled that because the options were allocated before 2003, the tax arrangement—while allowing for the deferral of the tax event until the date of sale—did not convert the income into capital gains taxable at 25%.
"The appellant seeks to expand this arrangement beyond its scope and interpret it as allowing him to apply Section 6(b) at any time before converting options into traded shares. This interpretation does not align with the wording of the section. Taxation must be at the marginal rate, as is the case for all options allocated before January 1, 2003," the judge stated.
The court emphasized that Schwarzbaum had benefited for years from the central tax advantage provided by the arrangement: the deferral of tax until the date of sale. Judge Bornstein also criticized Schwarzbaum for attempting to "revive" a previous legal proceeding regarding the same shares after having withdrawn a prior appeal at an advanced stage.
The court concluded that Schwarzbaum is effectively attempting to disavow a tax arrangement he helped formulate as CFO, only after having already reaped its benefits.
