Paul A. Tanner, Sr. and Beverly N. Tanner - Page 1

                                   117 T.C. No. 20                                    

                               UNITED STATES TAX COURT                                

                     PAUL A. TANNER, SR. AND BEVERLY N. TANNER,                       
                                   Petitioners v.                                     
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 5738-00.                 Filed December 10, 2001.           

                    P planned to acquire control of C, a corporation.                 
               C required P to sign a lockup agreement, which                         
               restricted P’s sale of any C stock.  The agreement                     
               provided that, if P sold the stock within 2 years of                   
               its acquisition, he would be subject to sec. 16(b) of                  
               the Securities Exchange Act of 1934.                                   
                    On July 9, 1993, P received a nonstatutory                        
               employee stock option from C.  On Sept. 7, 1994, P                     
               exercised this stock option.  P pledged some of this                   
               stock as collateral for a loan, and the stock was sold                 
               by the lender.                                                         
                    C issued P a Form 1099 for 1994 reporting income                  
               from P’s exercise of the stock option.  On the basis of                
               the Form 1099, R issued a notice of deficiency for 1994                
               determining that P received “other income” of $728,000                 
               --the difference between the option price and the price                

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