Nield and Linda Montgomery - Page 1

                                   127 T.C. No. 3                                     

                               UNITED STATES TAX COURT                                

                     NIELD AND LINDA MONTGOMERY, Petitioners v.                       
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 633-05.       Filed August 28, 2006.                        

                    P-H, president and CEO of MGC Communications, Inc.                
               (MGC), received incentive stock options (ISOs) from MGC                
               between April 1996 and March 1999.  In November 1999,                  
               P-H resigned as president and CEO of MGC and entered                   
               into an employment contract with MGC which included                    
               provisions accelerating the vesting dates of his ISOs.                 
               In early 2000, P-H exercised many of his ISOs.  P-H                    
               subsequently sold shares of MGC stock in 2000 and 2001                 
               at prices above and below the exercise prices that he                  
               paid for the shares.                                                   
                    Ps filed a joint Federal income tax return for                    
               2000 reporting total tax of $2,831,360, including                      
               alternative minimum tax (AMT).  Ps subsequently                        
               submitted to R an amended return for 2000 in which they                
               claimed (1) they were not subject to AMT, and (2) they                 
               overpaid their taxes.  R rejected Ps’ claimed                          
               overpayment and issued to Ps a notice of deficiency for                
               2000.  R determined Ps failed to report wages, capital                 

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