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Year Royalty Income
1989 $82,933
1990 185,578
1991 213,507
1992 1180,895
1993 222,439
1994 224,717
1995 277,663
1996 305,002
1997 344,332
1998 372,119
1Petitioner originally reported $177,169 of royalty income
in 1992. The parties stipulated an increase in this amount to
$180,895.
In 1993, petitioner exercised options to purchase 380,000
shares of Zila stock worth $1,116,250 for an exercise price of
$285,000. After taking into account Zila’s blockage discount of
$282,979, petitioner realized ordinary income of $548,271 on the
exercise of his stock options. On petitioner’s 1993 Federal
income tax return, he claimed an additional discount of $282,979,
asserting that the sale of his Zila shares was restricted.
Petitioner reported the income from the exercise of his Zila
stock options on a supporting schedule attached to his 1993
return and attached an additional schedule fully describing the
total options exercised, the exercise amount, the fair market
value, the exercise price, the per-share blockage discount
applied by Zila, the amount of ordinary income to petitioner
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