Robert C. and Gail K. Racine - Page 5

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          of $64,000 with their return.3  Respondent assessed the tax                 
          reported on the return.                                                     
               On November 21, 2003, petitioners filed a Form 1040X,                  
          Amended U.S. Individual Income Tax Return, for the 2000 year                
          reporting a tax liability of $259,685 and requesting a refund of            
          $368,170.4  The refund was based upon Mrs. Racine’s reduction of            
          wage income by the spread (between fair market value of the stock           
          and the option exercise price) generated by the exercise of her             
          nonstatutory stock options.  Petitioners contended that the                 
          exercise of these options should not have been taxed on the value           
          at the date of exercise according to section 1.83-3(a)(2) and (7)           
          Example (2), Income Tax Regs., because petitioners exercised                
          their shares with nonrecourse debt secured by the stock and did             
          not have their own capital at risk.  The requested refund amount            
          of $368,170, plus the statutory interest of $59,605.65, was paid            
          to petitioner on January 12, 2004.5                                         





               3Accompanying this underpayment was a letter outlining how             
          petitioners intended to pay the balance due.                                
               4This amount was obtained by taking the difference between             
          payment on the initial return ($563,855), the new tax liability             
          ($259,685), and then adding the subsequent payment made                     
          ($64,000).                                                                  
               5In respondent’s response to petitioners’ motion for partial           
          summary judgment, respondent alleges that after a review was                
          conducted by IRS Appeals Officer S. Danlowycz, the refund payment           
          was erroneously made to petitioners.                                        




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