Can history repeat itself? That’s a question CFOs might want to ask themselves concerning a recently decided case that harks back to the early days of this century, when the bottom fell out of a supercharged stock market.

The case, Gudmundsson v. United States, has implications for finance chiefs in their capacity as employees who are often compensated in restricted shares. Affirming a 2009 U.S. district decision, the Second U.S. Circuit Court of Appeals issued a ruling that’s bound to spark some unpleasant memories among senior executives holding such shares — and future fears of the tax implications should a bubble burst again.

In short, the tax law cannot be used to bail out executives caught holding restricted shares when the market plummets. The case in question was brought by Olafur Gudmundsson and his then-wife Sally Rudrud against the U.S. government. Gudmundsson was an officer of Aurora, a company that marketed food products under such household brand names as Aunt Jemima, Duncan Hines, and Van de Kamp.

Following a corporate reorganization, Aurora made an initial public offering of 14,500,000 registered shares of common stock on July 1, 1998. Gudmundsson became entitled to and received 73,105 unregistered shares because of his participation in Aurora’s incentive-compensation plan. The plan provided for the stock to be distributed to him one year from the date of the IPO: July 1, 1999.

Aurora later issued Gudmundsson a W-2 that calculated his income from the distribution to be a little less than $1.3 million. That figure reflected a mean price of unrestricted shares of Aurora stock trading on the New York Stock Exchange on July 1, 1999, of about $18. In the federal tax return he filed jointly with Rudrud as of April 15, 2000, Gudmundsson reported that amount as income under Section 83 of the Internal Revenue Code. (Section 83 governs the taxation of property transferred in connection with the performance of services.)

Gudmundsson held the stock subject to several constraints. As restricted securities according to the Securities and Exchange Commission’s Rule 144, the stock could not be sold on a public exchange until the expiration of a holding period that ended on July 1, 2000. Further, the stock was subject to an agreement that barred its public disposition before July 1, 2000. Until then, transfers could be made only to “permitted transferees,” including family members and relatives, who were themselves bound by the agreement. Finally, Gudmundsson was subject to Aurora’s insider-trading policy.

Conditions at Aurora deteriorated in the year between Gudmundsson’s receipt of the stock and the expiration of the restrictions imposed by the agreement and by Rule 144. By the time the stock was freely marketable, on July 1, 2000, its price had fallen to about $4 a share.

Gudmundsson’s and Rudrud filed an amended tax return claiming a refund based on the market price of the stock on December 31, 1999, which was about $9 per share. The Internal Revenue Service disallowed the claim, and the U.S. District Court entered summary judgment in favor of the government. The district court held that the stock was reportable as of July 1, 1999, and that day’s exchange price was an appropriate basis for measuring the income received. On February 11, 2011, the appeals court agreed. In today’s tenuous economic times, executives negotiating their compensation packages would do well to take the outcome of the Gudmundsson case into account.

Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.