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Petitioner argues, in defense of his reporting of the stock
option transactions as capital gain, that the income he received
on account of the stock options was at risk from the time the
options were granted until they were exercised. By contrast,
petitioner argues, wage income is not at comparable risk. Thus,
petitioner believes, stock options are more akin to a capital
asset giving rise to capital gain than an item of compensation
income. From an economic perspective, wherein petitioner's
experience lies, there is some foundation for his position.
Employee stock options are, however, given in exchange for
services, and compensation for services generates ordinary income
for Federal income tax purposes. Consequently, the Federal
income tax treatment of employee stock options is a thornier
issue than petitioner's observations would allow. Nonetheless,
we conclude, in light of all the facts and circumstances, that
petitioner's reporting of the income from the stock option
transactions constituted an honest misunderstanding of the law
that is reasonable in light of his experience, knowledge, and
education. Consequently, there was reasonable cause for the
understatement attributable to the failure to report the stock
option proceeds as compensation income.
To reflect the foregoing, and after concessions by both
parties,
Decision will be entered
under Rule 155.
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