-8-
the W-2 versus the amount petitioners reported on their return.
The disclosure statement stated that Mr. Facq’s exercise of his
options was not taxable because the shares he received were
subject to a substantial risk of forfeiture and nontransferable.
Petitioners cited section 1.83-3(k), Income Tax Regs., and
argued that the shares were subject to restrictions on transfer
due to pooling of interest accounting rules. Petitioners have
since conceded that no pooling restrictions applied that made Mr.
Facq’s shares subject to a substantial risk of forfeiture and
nontransferable when he received them in 2000.
Mr. Facq is not educated in the tax laws of the United
States and is not a lawyer or an accountant. He relied on his
accountants, Sweeny Conrad, and his tax attorneys, Chicoine &
Hallett, to prepare the return for 2000 and the accompanying
disclosure statement.
Respondent examined petitioners’ return for 2000 and issued
petitioner a notice of deficiency (deficiency notice) dated
December 22, 2004. Respondent determined in the deficiency
notice that petitioners should have included in income the spread
between the fair market value of the shares and the exercise
price for the shares pursuant to section 83. Respondent
accordingly determined that $25,047,304 was the correct tax
liability, giving rise to a $6.7 million deficiency. Respondent
also determined that petitioners were liable for the accuracy-
related penalty. Petitioners timely filed a petition for review
with this Court.
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