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the option was nonassignable and nontransferable; and only
petitioner could exercise the option.
On September 7, 1994, petitioner exercised the stock option
and paid Polyphase $136,500 (i.e., 182,000 shares at 75 cents
each). In order to finance the exercise of the option,
petitioner obtained a loan from a friend, Mr. Don Ruben, and
pledged 122,000 Polyphase shares as collateral for the loan.
Sometime after the pledge of stock, Mr. Ruben sold the stock.
Of the remaining 60,000 shares, in December 1994, petitioner
gave 40,000 shares to his son and 20,000 shares to his brother-
in-law.
On February 21, 1996, Polyphase issued a Form 1099 to
petitioner reporting “other income” of $728,000 for the 1995
taxable year. The amount is the difference between the option
price of 75 cents per share and the price the stock was selling
for on the date that the option was exercised. On January 15,
1999, respondent issued a notice of deficiency for the 1995
taxable year which determined that petitioner received additional
income of $728,000. On April 19, 1999, petitioner filed a
petition with the Court to dispute, among other items, this
additional income.
After respondent’s determination for 1995, on October 21,
1999, Polyphase issued a corrected Form 1099 for the 1995 taxable
year reporting “other income” as “None”. In addition, on the
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Last modified: May 25, 2011