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margin account is properly treated as the grant of another option
to buy the shares and that petitioners were thus not taxable when
Mrs. Racine exercised her options. Instead, petitioners contend
that none of their own capital was at risk at the time the option
was exercised. Thus, according to petitioners, they should be
subject to tax only when the shares were sold to pay the margin
debt.
Respondent argues that the exception treating the exercise
of an option as the creation of another option does not apply and
that the income was properly reported when Mrs. Racine exercised
her options rather than when the shares were liquidated to pay
off margin debt. We agree with respondent.
The facts of the case are very similar to a case decided by
this Court. See Facq v. Commissioner, T.C. Memo. 2006-111.7 In
Facq, the taxpayer exercised stock options granted by his
employer using the stock as collateral in obtaining a loan from a
third party. Id. The stock declined and eventually the taxpayer
was forced to liquidate the stock in order to meet the margin
7See also Palahnuk v. United States, 70 Fed. Cl. 87 (2006)
(held that income from stock options exercised through margin
loan was properly reported in tax year in which the options were
exercised); United States v. Tuff, 359 F. Supp. 2d 1129 (W.D.
Wash. 2005) (shares of stock were transferred to taxpayer, as
required for shares to be taxable, at time taxpayer used margin
loan from broker to exercise stock options); Facq v. United
States, 363 F. Supp. 2d 1288 (W.D. Wash. 2005) (taxpayer’s
exercise of stock options was a taxable event); Miller v. United
States, 345 F. Supp. 2d 1046 (N.D. Cal. 2004) (taxpayer’s
exercise of stock options was a taxable event).
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