Paul A. Tanner, Sr. and Beverly N. Tanner - Page 6




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          same day, Polyphase issued a Form 1099 to petitioner for the 1994           
          taxable year reporting “other income” of $728,000.                          
               On April 7, 2000, respondent issued a notice of deficiency             
          to petitioner for the 1994 taxable year, determining that                   
          petitioner received “other income” of $728,000.4  Respondent                
          conducted no examination of petitioner’s books and records before           
          issuing the notice of deficiency for 1994.  The sole basis for              
          the proposed adjustment was the Form 1099 from Polyphase to                 
          petitioner.  On May 22, 2000, petitioner filed a petition with              
          the Court disputing that he had “other income” of $728,000 for              
          1994.5                                                                      
                                       OPINION                                        
          A.   Is the Exercise of the Polyphase Stock Option Subject To               
               Taxation Under Section 83(a)?                                          
               Petitioner argues that his exercise of the stock option was            
          not subject to taxation under section 83(a).  Petitioner contends           
          that the exercise was exempted under section 83(c)(3) because a             
          sale of the stock would have given rise to suit under section               
          16(b) of the Securities Exchange Act of 1934, ch. 404, 48 Stat.             
          896, 15 U.S.C. sec. 78p(b) (1994) (hereinafter, section 16(b)).             


               4  In addition, respondent disallowed a deduction of $4,900            
          for personal exemptions.  With the addition of the “other income”           
          of $728,000, respondent determined that petitioners had too much            
          income to qualify for the deduction.                                        
               5  On May 25, 2000, a stipulated decision was entered                  
          dismissing the petition for the 1995 taxable year (docket No.               
          7281-99).                                                                   




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