-14-
a margin account provider. According to petitioners, Congress
intended to deny capital gains treatment to those who do not make
any capital investment in their options. See Palahnuk v. United
States, 70 Fed. Cl. at 92. In keeping with their argument,
petitioners note that Mr. Facq exercised his options using a loan
from Hambrecht and Quist and therefore Mr. Facq had no capital at
risk. Accordingly, petitioners argue, no transfer occurred until
Hambrecht and Quist sold the stock to satisfy the margin calls on
Mr. Facq’s account.
We disagree with petitioners’ position. Example 2's focus
is on what the employer transferred or received in exchange, not
on what the employee has at risk.9 Palahnuk v. United States,
supra. Example 2 describes an alternative method of providing an
employee an option to purchase property. Palahnuk v. United
States, supra; sec. 1.83-3(a)(7), Example (2), Income Tax Regs.
Rather than grant the employee an option, the employer makes
stock available to the employee in exchange for a note. Sec.
1.83-3(a)(7), Example (2), Income Tax Regs. Although the
transaction is referred to as a sale, in reality the employee has
received an option. Id. The employee may acquire the stock
later if the employee chooses by paying the note. Palahnuk v.
Commissioner, supra; sec. 1.83-3(a)(7), Example (2), Income Tax
Regs.
9In fact, options with a readily ascertainable fair market
value are taxed at the time of grant, when the employee has no
capital at risk. Sec. 83(e)(3), (4); Palahnuk v. United States,
70 Fed. Cl. 87, 93 (2006).
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