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Sturges exercised all of the Cisco stock options. He sold some
of the Cisco stock acquired from the exercise of the stock
options and retained the rest in a Paine Webber joint margin
account. Petitioner and Mr. Sturges believed the retained Cisco
stock would be a conservative investment that would increase in
value. At the time the options were exercised, Cisco stock was
selling for approximately $64 per share.
A portion of the proceeds from the sale of the Cisco stock
acquired from the exercise of the stock options was invested in
stock of biotechnology companies. The biotechnology stock was
held in a separate Paine Webber joint account.
The exercise of the Cisco stock options generated
$1,596,461.44 of employment income to Mr. Sturges. Petitioner
informed Paine Webber that she wanted to put aside sufficient
funds to pay the tax liability resulting from the exercise of the
Cisco stock options.
Petitioner and Mr. Sturges withdrew $68,000 from their joint
Paine Webber account in September 2000. They used the money for
home improvements and their daughter’s tuition.
Cisco issued Mr. Sturges a Form W-2, Wage and Tax Statement,
for 2000 reporting wages of $1,683,886.77 that included Mr.
Sturges’s income from his exercise of the stock options. The
Form W-2 reported that $464,291.46 was withheld for Federal
income taxes.
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