-16- sharing agreement, to share with XI the costs of certain ESOs. Respondent determined that the cost required to be taken into account equaled the spread (i.e., the stock’s market price on the exercise date over the exercise price) relating to ESOs exercised by petitioner’s employees (spread theory). Respondent defined the spread as the amount of petitioners’ section 83 deduction relating to the exercise of NSOs and disqualifying dispositions of ISOs and ESPP purchase rights.10 Respondent’s determination resulted in the following deficiencies and penalties:11 Penalty Year Deficiency Sec. 6662(a) 1996 $24,653,660 $4,935,813 1997 25,930,531 5,189,389 1998 27,857,516 5,573,412 1999 27,243,975 5,448,795 On March 26, 2001, and January 14, 2003, respectively, petitioners timely filed their petitions with the Court seeking a redetermination of the deficiencies set forth in the December 28, 2000, and October 17, 2002, notices. Petitioner’s principal place of business was San Jose, California, at the time the 10 ISOs and ESPP purchase rights meeting the requirements of secs. 422 and 423, however, were not included in respondent’s definition because they are not subject to tax under sec. 83 (see supra note 5). 11 Respondent’s reallocation of petitioner’s expenses, in turn, reduced petitioner’s deductible business expenses and increased petitioner’s taxable income.Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Next
Last modified: May 25, 2011