-15-
Petitioners ignore a key feature of Example 2: there, it is
not certain whether the employee will pay the debt to the
employer (i.e., exercise the employee’s option to purchase the
stock). Palahnuk v. United States, supra. Unlike Example 2, it
was certain when Mr. Facq exercised his options that InfoSpace
would receive the cash in full satisfaction of the exercise
price. Mr. Facq borrowed money from Hambrecht and Quist, not
InfoSpace, to exercise his options. If he failed to pay the
loan, the shares would be (and eventually were) forfeited to the
margin account provider, who would sell the shares. Mr. Facq’s
shares in InfoSpace would not go back to InfoSpace regardless of
what Mr. Facq did. See Palahnuk v. United States, supra. The
transaction at issue in this case is therefore not similar to the
transaction described in Example 2. See Hilen v. Commissioner,
T.C. Memo. 2005-226; Palahnuk v. United States, supra; sec. 1.83-
3(a)(7), Example (2), Income Tax Regs.
Moreover, the transaction at issue here is not in substance
the same as a grant of an option. See Hilen v. Commissioner,
supra; sec. 1.83-3(a)(2), Income Tax Regs. As noted previously,
we, as well as three District Courts and the Court of Federal
Claims, have since found that the purchase of stock with third-
party margin debt under similar circumstances is not in substance
the same as the grant of an option. Hilen v. Commissioner,
supra; Palahnuk v. United States, supra; United States v. Tuff,
359 F. Supp. 2d 1129 (W.D. Wash. 2005); Facq v. United States,
363 F. Supp. 2d 1288 (W.D. Wash. 2005); Miller v. United States,
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