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employee an option, the employer makes stock available to the
employee in exchange for a note. Sec. 1.83-3(a)(7), Example (2),
Income Tax Regs. Although the transaction is referred to as a
sale, in reality the employee has received an option. Id. The
employee may acquire the stock later if the employee chooses by
paying the note. Palahnuk v. United States, supra; sec. 1.83-
3(a)(7), Example (2), Income Tax Regs.
Petitioners disregard the fact that in Example 2 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).
Facq v. Commissioner, supra; Palahnuk v. United States, supra.
In this case, unlike Example 2, it was certain when Mrs. Racine
exercised her options that Allegiance would receive the cash in
full satisfaction of the exercise price. Mrs. Racine borrowed
money from CIBC, not Allegiance, to exercise her options. If she
failed to pay the loan, the shares would be (and eventually were)
forfeited to the margin account provider, who would liquidate the
shares. Mrs. Racine’s shares in Allegiance would not go back to
Allegiance regardless of what Mrs. Racine 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 Facq v. Commissioner, supra; Hilen v. Commissioner, T.C.
Memo. 2005-226; Palahnuk v. United States, supra; sec. 1.83-
3(a)(7), Example (2), Income Tax Regs.
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