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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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Last modified: May 25, 2011