Keith D. Hilen - Page 8

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          made a substantial payment on the debt.  Petitioner argues that             
          the exercise of his nonstatutory stock options falls under                  
          section 1.83-3(a)(2), Income Tax Regs., which provides:  “The               
          grant of an option to purchase certain property does not                    
          constitute a transfer of such property.”  While the instant case            
          concerns whether petitioner recognized income upon exercise of              
          his nonstatutory stock options, not upon the grant of those                 
          options to him, petitioner’s argument is that because he used a             
          loan from Comerica to exercise his nonstatutory stock options,              
          he, in effect, received options to buy the shares of stock.                 
               Petitioner relies on the further clarification provided by             
          the regulation:                                                             
               if the amount paid for the transfer of property is an                  
               indebtedness secured by the transferred property, on                   
               which there is no personal liability to pay all or a                   
               substantial part of such indebtedness, such                            
               transaction may be in substance the same as the grant                  
               of an option. * * * [Sec. 1.83-3(a)(2), Income Tax                     
          The regulation also suggests that “the extent to which the risk             
          that the property will decline in value has been transferred, and           
          the likelihood that the purchase price will, in fact, be paid”              
          should be taken into consideration in determining whether a                 
          transfer has occurred.  Id.                                                 
               In addition, petitioner cites section 1.83-3(a)(7), Example            
          (2), Income Tax Regs., and argues that when an employee exercises           
          stock options using nonrecourse debt, he does not bear the risk             

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