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administration. Petitioner was employed by Fluor as an
electrical engineer and manager from September 1966 until
February 2002. He remained a consultant to Fluor after his
retirement until 2004.3 Petitioner has also taught applied
economics.
Fluor granted stock options to petitioner at various times
during 1994 through 1998 pursuant to its "Executive Incentive
Performance Plan". On two occasions in 2002, petitioner acted
through a brokerage firm to exercise certain of his stock options
and immediately sell the acquired shares at the market price.
Petitioner accomplished these transactions through a process
known as the Cashless Exercise Program (CEP) at the brokerage
firm Morgan Stanley Dean Witter & Co. (Morgan Stanley). The CEP
was designed to allow participants to obtain the value of their
stock options without having to advance the purchase price for
the stock upon exercise of the option. Under the CEP, petitioner
would direct Morgan Stanley to exercise specified stock options
of his and immediately sell the acquired stock at the prevailing
market price. Petitioner would then receive the proceeds of the
sale less the stock's acquisition cost (at the option price),
withholding taxes, and brokerage commissions.
3 The record does not disclose whether petitioner performed
these consulting services as an employee of Fluor or as an
independent contractor.
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