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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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