T.C. M em o . 2 0 1 7 -1 7 9

UNITED STATES TAX COURT

J AM ES A. POW E RS AND J ENNIFER M . SCHERER, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 2 6 93 -1 3
. Fi l edSep t em b er 1 4 , 2 0 1 7
.
Th o m as Laffi t t e Ho ward , fo r p et i t i o ners . W i l l i am J . Greg g an dDeb o rah Al o o f, fo r res p on d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION
RUW E , J ud g e: Res p o n den td et erm i n edd efi ci en ci es i n p et it i o n ers ’ Fed eral i n co m e t ax , an ad di t i o n t o t ax u n der s ect io n 6 6 5 1 (a)(1 ), 1 an daccu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a) as fo l l o w s :

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ears i n i s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 2
-

[* 2 ] Ad d i t i on t o t ax Accu racy -rel at edp en al ty Year Defi ci en cy s ec. 6 6 5 1 (a)(1 ) s ec. 6 6 6 2 (a) 2 0 0 8 $ 1 4 4,7 5 3 $ 2 4 ,7 7 5 .8 0 $ 28 ,9 5 0
. 6 0 2 0 0 9 5 5 ,0 01 --- 1 1 ,0 0 0
. 2 0 Aft er co n ces s i o ns b y

the p art i es , th e i s s u es rem ai n i n g fo r d eci s io n are wh et h er p et i t i o n ers : (1 ) recei vedu n rep o rt edi nco m e i n 2 0 0 8 fro m th e ex erci s e o f 4 ,0 0 0
n o n qu al i fi eds to cko p t i o n s ; (2 ) are l i ab l e fo r an ad d i t i o n t o t ax u n d er s ect io n 6 6 5 1 (a)(1 ) fo r t h e t ax ab le y ear 2 0 0 8 ; an d(3 ) are l i ab le fo r an accu racy -rel at ed p en al ty u n d er s ect i o n 6 6 6 2 (a) fo r t h e t ax ab l e y ear 2 0 0 8
. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s, th e s t i pu lat i o n o f cert ai n s et t l edi s s u es , an dth e at t ach edex h i b it s are i n co rp o rat edh erei n b y

th is referen ce. Pet i t i o ners res i d edi n M ary l an dwh en th ey fi ledth ei r p et it i on . Pet i t i o ners , J am es A. Po wers an dJ en n i fer M . Sch erer, are h u s ban d an dwi fe wi th th e fi l i n g s t atu s o f m arri edfi l in g jo i n t l y fo r t h e t ax ab l e y ears 2 0 0 7 , 2 0 0 8 , an d 2 0 0 9
. In 2 0 0 0 M r. Po wers b ecam e t h e g en eral co u n sel an dv i ce p res i d en to f reg u l at o ry

affai rs atco m Sco re Net wo rk s , In c. (co m Sco re). In 2 0 0 3 M r. Po wers
an d co m Sco re n eg ot iat edan ds i g n edan em p l o ym en tt erm i n at i o n ag reem en twh i ch- 3
-

[* 3 ] i n cl u d ed , am o ng o ther t h i n g s , co m Sco re’ s g ran ti n g h i m n o n qu al i fi eds t o ck
o p t i o n s t o acq u i re 1 0 0 ,0 0 0 s h ares o f co m Sco re s t o ck fo r 2 5 cen t s p er s h are. Atth e t i m e t h e o p t i o ns were g ran t ed , th ey d idn o th av e a read i l y

as cert ai n ab l e fai r m ark et
v al u e. M r. Po wers s t o p pedwo rk i n g fo r co m Sco re i n 2 0 0 3
. In 2 0 0 7 , i n an t i ci p at i o n o f co m Sco re’ s p ub l i c o fferi n g , M r. Po wers ’ s t o ck
o p t i o n s were s ub

jectt o a 1 : 5 rev ers e s p l i t , wh i ch res u l tedi n h i s h o l d i n g o p t i o n s t o acq u ire 2 0 ,0 0 0 s h ares o f co m Sco re s t o ckfo r $ 1.2 5 p er s h are. Fo r 2 0 0 7 co m Sco re i s su edt o M r. Po wers a Fo rm W -2 , W ag e an dTax St at em en t , rep ort in g th ath e h adrecei v ed$ 1 3 1 ,0 0 0 o f “ W ag es , t ip s , o th er
co m p en s at i o n ”. Ro b ertBeat s o n II, p et i t i o n ers ’ cert i fi ed p ub l ic acco u nt an t , p rep aredth ei r 2 00 7 Fed eral i n co m e t ax retu rn . M r. Beat s o n co n t act ed M r. Po wers t o i nqu i re ab o u t th e ci rcu m s t an ces s u rro u nd i n g co m Sco re’ s i s s u an ce o f t h e Fo rm W -2 . OnAp ri l 1 4, 2 00 8 , M r. Po wers i n fo rm edM r. Beat s o n t h atth e Fo rm W -2 rep o rt edh i s ex erci s e o f 4 ,0 00 co m Sco re o p t i o n s an dthath e p ai d$ 5 ,0 0 0 t o
ex erci s e t h e o p t i o n s. Pet i t i o ners t i m el y

fi l edth ei r Fed eral i n co m e t ax retu rn fo r 2 0 0 7 , rep o rt i n g $ 2 5 7 ,4 6 7 i n wag es . Of th i s am o u n t , $ 1 2 6 ,0 0 0 was at tri b ut ab l e t o th e ex erci s e o f- 4
-

[* 4 ] 4 ,0 00 co m Sco re o p ti o n s . 2 M r. Beat s o n arri v edat$ 1 26 ,0 0 0 b y s ub tract i n g $ 5 ,0 0 0 , th e am o u ntM r. Po wers p ai dt o ex erci s e t h e 4 ,0 0 0 co m Sco re o p t io n s , fro m th e $ 1 31 ,0 0 0 i n wag es rep o rt edo n th e Fo rm W -2 i ss u edt o M r. Po wers . M r. Beat s o n p rep areda Fo rm 8 9 19 , Un co l l ect edSo ci al Secu ri ty an d M ed i care Tax o n W ag es , wh i ch p et i t i o n ers fi l edwi th th ei r 2 0 0 7 Fed eral i nco m e t ax return . Onthe Fo rm

8 9 1 9 p et i t i o n ers s t at edth atth e $ 1 3 1 ,0 0 0 i n wag es
co m Sco re rep o rt edo n t h e Fo rm W -2 was i n co rrect b ecau s e M r. Po w ers h ad $ 5 ,0 0 0 o f u n rei m

b u rs edem

p l o y ee ex p en s es i n 2 0 0 7. Ad d i t i o n al l y , p et it i o n ers
s t at edth atco m Sco re fai l edt o wi th h o l d So ci al Secu ri ty an dM ed i care t ax es fro m M r. Po wers ’ wag es . Fo r 2 0 0 8 co m Sco re i s su edt o M r. Po wers an d fi l ed wi th the In t ern al Rev enu e Serv i ce (IRS) a Fo rm 1 0 9 9 -M ISC, M i scel l an eo u s In co m e, rep o rt in g th at M r. Po wers h adrecei v ed$ 2 5 0 ,1 0 4 o f n o n em p l o y ee co m

p en sat i on . Pet i t i o ners recei v edan ex t en si o n o f t im e u nt i l Oct o b er 1 5 , 2 0 0 9 , t o fi l e t h ei r 2 0 0 8 Fed eral i n co m e t ax retu rn . Pet i t i o n ers d i dn o tfi l e b y th atd at e.

2 W e wi l l n o tad dres s wh et h er p et i t i o n ers ’ treat m en to f t h e $ 1 2 6 , 0 0 0 fro m th e ex erci s e o f 4 ,0 0 0 o p ti o n s as “ wag e” i n co m e was i m p ro per i n th e l i gh to f M r. Po wers ’ ex p l an at i o n. Ho wev er, h e was co rrect i n rep o rt i n g th e $ 1 2 6 ,0 0 0 as o rd i n ary i n co m e.- 5
-

[* 5 ] OnJ an u ary

2 9 , 2 0 1 0 , p et i t i o n ers l at e-fi ledth ei r 2 0 0 8 Fed eral i n co m e t ax retu rn . Pet i t io ners h av e co n ced edth at th ey erro n eo u s l y

rep o rt edth e n eti n co m e fro m th e ex erci se o f co m Sco re o p t i o n s i n 2 0 0 8 as l on g -t erm cap i t al g ai n i n co m e
an d th atth ey

were req u i red t o i n cl u d e $ 2 5 0 ,1 0 4 o f o rd i n ary i nco m e fro m th e
ex erci s e o f 1 4 , 0 0 0 op t i o n s, wh i ch m at ch es th e am o u n t rep o rt edo n th e Fo rm 1 0 9 9
- M ISC t h atco m Sco re i s s u edt o M r. Po wers an dfi l edwi th t h e IRS. Pet i t io n ers
co n ten d th atth e $ 25 0 ,1 0 4 fro m th e ex erci s e o f th e 1 4,0 0 0 co m Sco re o pt i o n s i n 2 0 0 8 rep res en t s th e o n l y

i n co m e fro m

th e ex erci s e o f co m Sco re o p t i on s duri n g 2 0 0 8
. Th e IRS s el ect edp et i t i o n ers ’ 2 00 8 an d 2 00 9 retu rn s fo r ex am i nat i o n . Th e IRS d et erm i n edth atp et i t i o n ers recei v edu n rep o rt edi n co m e fro m th e ex erci s e o f 1 8 ,0 0 0 co m Sco re o pt i o n s i n 2 0 0 8 . OnM arch 8 , 2 0 1 3 , res p o n d en t i s su edt o p et i t i o n ers a n o t i ce o f d efi ci en cy fo r the t ax ab le y ears 2 0 0 8 an d2 0 0 9. Pet it i o n ers t i m el y fi l eda p et i t i o n wi th th i s Co u rt . OnJ an u ary

1 3 , 2 0 1 7 , res p o n d en tfi l eda m o ti o n fo r l eav e t o fi l e o uto f t i m e
an am en d edan s wer, s eek i n g an i ncreas edd efi ci en cy , an i ncreas edad d i t i o n t o t ax , an d an i ncreas edaccu racy -rel at edp en al ty fo r 2 00 8 . By o rd er d at edFeb ru ary 2 , 2 0 1 7 , we d en i edres p o n d en t ’ s m o ti o n .- 6
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[* 6 ] OPINION As a g en eral ru l e, the Co m m i s s i on er’ s d et erm i nat i o n s i n the n o t i ce o f d efi ci en cy

are p res u m edco rrect , an dth e t ax p ay er b ears th e b u rd en o f p ro v i n g th at th e d et erm i n at i o n s are i n co rrect . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1, 1 1 5 (1 93 3 ). Un d er s ect i o n 7 49 1 (a), i f t h e t ax p ay er p ro vi d es cred i b l e ev i d en ce
co n cern in g an y

fact u al i s su e rel ev an t t o as cert ai n i n g t h e t ax p ay er’ s l i ab i l i ty an d
co m p l ies wi th cert ai n o th er req u i rem en ts , the b u rd en o f p ro o f s h i ft s t o th e Co m m i s s i o n er as t o th e factu al i s s ue. Ou r co n cl u s i o ns h ere are b as edo n a p rep o n d eran ce o f t h e ev i den ce, an d th u s the al lo cat i o n o f t h e b u rd eno f p ro o f i n th i s cas e i s i m

m at eri al
. See Es t at e o f Bo n g ard v . Co m m i s s io ner, 1 2 4 T.C. 9 5 , 1 1 1 (2 0 0 5); M cGo wen v . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -1 86 , 2 0 1 1 Tax Ct . M em o LEXIS 1 8 5 , at* 5 n .3
. 1 . Ex erci s e o f co m Sco re Op t i o n s Th e i s s u e we m

u s td eci d e i s wh et h er M r. Po wers ex erci s ed 4 , 0 0 0 o p t i o n s i n Decem b er 2 0 0 7 , as p et i t i o n ers co n t en d o r o n J an uary1 7 , 2 0 0 8 , as res p o nd en t
co n ten d s. In g en eral , th e t ax treat m en twi th res p ectt o the g ran to f an o p t io n t o p u rch as e s t o cki n co nn ect i o n wi th th e p erfo rm an ce o f s erv i ces , an dth e tran s fer o f
s t ockp u rs u an tt o t h e ex erci s e o f t h e o p ti on , i s d et erm i n ed u nd er s ect i o n 8 3 (a) an d- 7
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[* 7 ] th e reg u l at i on s th ereu n d er. Ki m v . Co m m i s s i o n er, T.C. M em o. 2 0 0 7 -1 4 , 2 0 0 7 Tax Ct . M em o LEXIS 1 4 , at* 1 1 -* 1 2 ; Sv o b o d a v . Co m m is s io n er, T.C. M em o. 2 0 0 6 -2 3 5 , 2 0 06 Tax Ct . M em o LEXIS 2 3 9, at* 8. Su ch o p t i o n s are k n o wn
as “ n o n qual i fi eds t o ck o p t i on s ” o r “ n o n st atut o ry s t o ck o p t i o n s ”. Sv o b o d a v . Co m m i s s i o n er, 2 0 0 6 Tax Ct
. M em o LEXIS 2 3 9 , at* 8
. If a n o n qu al i fi eds t o cko p t i o n d o es n o th av e a read i l y as cert ai n ab l e fai r
m ark etv al u e atth e t im e o f t h e g ran t , the ex erci s e o f th e o pt i o n g i v es ri s e t o g ro ss i n co m e atth e t i m e o f t h e ex erci s e, equ al t o t h e am o u n tb y wh i ch the fai r m ark et
v al u e o f t h e s t o ck atth e ex erci s e d at e ex ceed s th e o p ti o n p ri ce. Sec. 8 3 (a); Sv o b o d a v . Co m

m i s si o ner, 2 0 0 6 Tax Ct . M em o LEXIS 2 3 9, at * 9; s ec. 1 .8 3 -7 (a), In co m e Tax Reg s . Th e t ax p ay er t h en o b tai n s a b as i s i n th e acqu i reds t o ck equ al t o th e o p ti o n p ri ce p l u s an y

am ou n ti ncl u d i b l e i n g ro s s i nco m e as a res ul to f t h e
o p t i o n ex erci s e. Sv o b o d a v . Co m m i s s i o n er, 2 0 0 6 Tax Ct
. M em o LEXIS 2 3 9 , at
* 9 . An y g ai n o r l os s o n t h e s ub s equ en ts al e o f t h e s t o ckwi l l b e cap i tal . See s ecs . 1 0 0 1 , 1 2 2 1 (a); s ec. 1 .8 3 -4 (b )(1 ), In co m e Tax Reg s . Th ere i s n o d i s p u t e t h atth e co m Sco re o p t i o n s were n o n qu al i fi eds t o ck
o p t i o n s an dd i d n o th av e a read i l y as cert ai n ab l e fai r m ark et v al ue at the t im e t h e
o p t i o n s were g ran t ed . Th e p art i es ag ree t h atM r. Po wers ex erci sed1 4 ,0 0 0 o p t i o ns b et ween M arch an dDecem ber 2 0 08 b u td is ag ree as t o wh et her M r. Po wers- 8
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[* 8 ] ex erci s ed an ad d i t i on al 4 ,0 0 0 o p t i o n s i n 2 0 0 8 . Acco rd i n g l y , th e ques t i o n o f wh et h er p et i ti o n ers recei v ed u n rep o rt edi n co m e i n 2 00 8 fro m th e ex erci s e o f t h e 4 ,0 00 o p t i o n s i n d i sp u t e d ep en d s o n wh ether M r. Po wers ex erci s edth e o p t i o n s i n 2 0 0 7 o r i n 2 0 0 8. Al th ou g h n ei th er p et i t i o n ers n o r co m Sco re h av e an y reco rd s rel at i ng t o M r. Po wers ’ ex erci s e o f t h e o p t i o n s i n d i s p u te i n 2 0 0 7 , 3 p et i t io n ers h av e d em o n s trat ed th atM r. Po wers ex erci s edth es e o p ti o ns i n 2 0 0 7
. In an em ai l t o M r. Beat s o n d at edAp ri l 1 4, 2 0 0 8 , M r. Po w ers ex pl ai nedth at h e h adex erci s edth e 4 , 0 0 0 o p t i o n s i n d i s p u t e i n 2 00 7
. M r. Po wers s en tthe em ai l i n res p o n s e t o M r. Beat s o n ’ s req u es tfo r i n fo rm at i o n ab o utthe Fo rm W -2 fro m
co m Sco re rep o rt i n g thatM r. Po wers h adrecei v ed$ 1 3 1 ,0 00 i n wag es . M r. Po wers
ex p lai n edth at th e wag es rep o rt ed o n th e Fo rm W -2 were d eri v edfro m h i s ex erci s e
o f t h e o p t i on s i n d i s p u t e an dth ath e p ai d$ 5 ,0 0 0 t o ex erci se t he o p t i o n s . Th e
ex p lan at i o n o n th e Fo rm

8 9 1 9 th atp et i t i o n ers fi l edwi th th ei r 2 0 0 7 Fed eral i n co m e t ax return i s co n s is t en t . Al th o u g h M r. Beat s o n ex p l ai n edo n th e Fo rm 8 91 9 th at th e Fo rm W -2 was i n co rrect b ecau s e p et i t i o n ers h ad$ 5 , 0 0 0 o f u n rei m b u rs ed

3 M r. Po wers t es t i fi ed th ath e l o s tth e ex erci s e fo rm s du ri n g t h e ren o v at i o n o f p et i t i o n ers ’ h o us e i n 2 0 0 9 . Th o m as S. Cu s h i ng , d ep u ty g en eral co u n s el o f co m Sco re, t es t i fi edth atco m Sco re co u ldn o t acces s M r. Po wers ’ s t ocko p t i o n reco rd s fro m 2 0 0 7.- 9
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[* 9 ] em pl o y ee ex p en s es , M r. Beat so n cred i b l y t es t i fi edat tri al th ath e redu cedth e $ 1 3 1 ,0 0 0 i n wag es b y

$ 5 , 0 0 0 o n the b as i s o f t h e i nfo rm at i o n p ro v i d edb y M r. Po wers reg ard i n g h i s ex erci s e o f t h e o p ti o n s i n d i s p ut e. Pet i t i o ners ’ v ers i o n o f ev en t s i s s up p o rt edb y th e “ Tax es Du e an d Pai d Rep ort ” (rep o rt ) p rep aredb y co m Sco re. Th e rep ortco v ers M r. Po wers ’ ex erci se
o f co m Sco re o p t i on s fro m J an u ary 1 th ro u g h Decem

b er 3 1 , 2 0 0 8 . M r. Beat s o n t es t i fi edth atco m Sco re p rep aredth e rep o rti n res p o n s e t o a t el ep h o n e cal l M r. Po wers m ad e t o co m Sco re wh i l e M r. Beat s o n an d Lau ra Ro l an d , th e rev en u e ag en t
as s i g n edt o p et i t i o n ers ’ retu rn s, were p res en t . Th e rep o rts h o ws th atM r. Po wers
ex erci s ed1 4 ,0 0 0 co m Sco re o p ti o n s b et w een M arch an dDecem b er 2 0 0 8 an d recei v ed$ 2 5 0 ,1 04 o f i nco m e t h erefro m . M o re i m p o rt an t l y , the rep orti s co n s i s t en t wi th th e Fo rm

1 09 9 -M ISC co m Sco re i s s u edt o M r. Po wers an d fi l ed wi th th e IRS. Th ere i s n o th i n g i n t h e rep o rti n d i cat i n g thatM r. Po wers ex erci s edad d it i on al
co m Sco re o p t i o ns i n J an u ary 2 0 0 8
. Attri al p et it i on ers i n tro du ceda s u m m ary s h eetcreat edb y

M s . Ro l an dth at
co v ers M r. Po wers ’ ex erci s e o f co m Sco re o p t i o n s i n 2 0 0 8 . M s . Ro lan du s edth e rep o rtth atco m Sco re p rep aredt o reco n ci l e h er s u m m ary s h eet . Th e t ran s act i o n s
o n th e s umm ary s heet an dthe rep o rtare i den t i cal ex cep tth atM s . Ro lan d ’ s
s u m m ary s h eetal s o s h o w s th atM r. Po wers ex erci sed4 ,0 0 0 o pt i on s i n J an u ary- 1 0 -

[* 1 0 ] 2 0 0 8 . Th e s u m

m ary s h eets h o ws thatM r. Po wers ex erci s edth e 4 ,0 0 0
o p t i o n s i n d i s p u t e b et ween J anu ary 7 an d 8 , 2 0 0 8 , wh i ch co n trad i ct s res p o n d en t ’ s
co n ten t i o n o n b ri ef t h at th e o p t i o n s i n d i s p u t e were ex erci s edo n J an u ary 1 7 , 2 0 0 8
. Fu rt h er, M s . Ro l an d i n co rrect l y cal cu l at edth e i n co m e t hatres po n d en tal l eg es M r. Po wers recei v edfro m ex erci s i n g th e o p t i o n s i n d i s pu t e i n J anu ary 2 0 0 8 . Un d er
s ect i on 8 3 (a), i n co m e fro m th e ex erci s e o f n o nqu al i fi eds t o cko p t i o n s wi th o u ta read i l y as cert ai n ab l e fai r m ark etv al u e atth e t i m e o f t h e g ran ti s equ al t o the fai r
m ark etv al u e o f t h e s to ckl es s t h e ex erci se p ri ce. M s . Ro l an dd et erm in edM r. Po wers ’ i n co m e fro m

th e al l eg edex erci s e as th e p ri ce atwh i ch M r. Po wers ’ b ro k erag e s t at em en ts s h ow t h ath e s o l d 4 ,0 0 0 co m Sco re s h ares b et ween J an u ary 7
an d 8 , 2 0 0 8 , l es s th e ex erci se p ri ce. Res p o n d en t ’ s p ri m ary

p i ece o f ev id en ce i n s upp o rt o f h i s p o s it i on th at p et i t i o n ers ex erci sed th e 4 ,0 0 0 o p t io n s i n d i s p u t e o n J anu ary 1 7 , 2 0 0 8 , i s p et i t i o n ers ’ M org anSt an l ey Sm i t h Barn ey

acco u n ts t at em en tfo r t h e p eri o d J an u ary 2 0 0 8 . Th e s t at em en ts h o ws th at o n J an uary1 7 , 2 0 0 8 , 4 ,0 00 s h ares o f
co m Sco re s t o ckwere d ep o si t edi n t o M r. Po wers ’ b ro k erag e acco u n t , b u tth e
s t at em en td o es n o ts h o w th ath e ex erci s ed4 ,0 0 0 co m Sco re o p t i o n s o n th atd at e. Th ere i s n o ev i d en ce t h atan y o p t i o n s were ex erci sedo n J anu ary 1 7 , 2 00 8
.- 1 1 -

[* 1 1 ] M r. Po wers ’ b ro k erag e s t at em en t s al s o s ho w th ath e s o l d 4 ,0 0 0 co m Sco re
s h ares b et ween J an u ary 7 an d8 , 2 0 0 8 . Onb ri ef res p o n d en tag rees wi th th i s b u t fai l s t o ex p l ai n wh en M r. Po wers ex erci s ed th e o p t i o n s t o acq u i re t h es e 4 ,0 0 0
s h ares . Pres u m ab l y , th es e s h ares h ad t o b e acq u iredb efo re b ei n g s o ld
. Attri al res po n d en t as k edM r. Po wers wh et h er t h e 4 ,0 0 0 co m Sco re s h ares h e
s o l db et ween J an u ary

7 an d8 , 2 0 0 8 , were p u rch as edo n th e o p en m ark et . M r. Po wers t es t i fi edh e d i d n o tp u rch as e t h es e s h ares o n the o p en m ark et , an dth ere i s
n o th i n g i n th e reco rdt o s h o w th atM r. Po w ers h adan y co m Sco re h o l d i n g s ex cep t fo r t h e o p t io n s h e recei v edi n th e 2 0 0 3 t erm in at i o n ag reem en t. M r. Po wers t es t ifi edth atth e 4 ,0 0 0 s hares s o l d b et ween J an u ary 7 an d8 , 2 0 0 8 , were d eri v ed fro m

a Decem b er 2 0 0 7 ex erci s e o f th e 4 , 0 0 0 o p t i o ns i n d i s p u t e. M r. Po w ers ’ t es t i m on y i s co m pl et el y co n s i s t en twi th a Decem b er 2 0 0 7
ex erci s e o f t h e 4 ,0 0 0 o p ti o n s i n d i s p u t e an da s ub s equen tJ an uary7 an d8 , 2 0 0 8 , s al e o f t he 4 , 0 00 s h ares d eri v edfro m th es e o p t i o ns . Th ere i s a m u l t i tu de o f p o s s i b l e reas o ns wh y

th e s h ares o b t ai n edb y

th e ex erci s e o f o p t io n s i n Decem b er 2 0 0 7 were n o ts o l du n t i l J an u ary 2 0 0 8 , b u tth ere i s n o ev i d en ce o f a J an u ary 2 0 0 8
ex erci s e o f o p ti o n s . W e co ncl u d e t h at M r. Po wers d i dn o tex erci s e t h e 4 ,0 0 0 o p t i o n s i n d i s p u t e i n 2 0 0 8. Acco rd i n g ly , we rejectres po n d en t ’ s d et erm i n at i on th at p et it i on ers- 1 2 -

[* 1 2 ] recei v edu n rep o rt edi nco m e i n 2 0 0 8 fro m th e ex erci s e o f t h e 4 ,0 0 0
co m Sco re o p t i o ns i n d is p u t e. 2 . Sect i o n 6 6 5 1 (a)(1 ) Ad di t i o n t o Tax Al th ou g h p et i t i o n ers co n ced e i n th e s ti p ul at i o n o f s et t ledi s su es th at th ey are l i ab l e fo r t he ad d i ti o n t o t ax u n d er s ect i on 6 6 5 1(a)(1 ) fo r fai l in g t o t im el y fi l e t h ei r 2 0 0 8 retu rn , th ey

n o warg ue o n b ri ef t h atth ey are n o tl i ab l e fo r th e ad d i t i o n t o t ax . 4 St i p u l at i o n s are co n cl u s i v e ad m i s si o n s an db i nd i n g o n t h e p art i es u n l es s
o th erwi s e p erm i tt edb y

th e Co urto r ag reedup o n b y tho s e p art i es . Ru l e 9 1 (e); St am o s v . Co m

m i s si o n er, 8 7 T.C. 1 4 5 1 , 1 45 4 -1 4 5 5 (1 9 8 6 ). J u s t ice d o es n o t req u i re t h atwe d is reg ardth e s t i p u lat i o n , an dres p o n d en t h as n otag reedt o d i s reg ardth e s t i p u l at i o n . Acco rd i n g l y , we h o l dth atp et i t i o n ers are l i ab l e fo r t h e ad d i t i o n t o t ax u n d er s ect i o n 6 6 5 1 (a)(1 ) fo r t he t ax ab l e y ear 2 0 0 8
. 5 3 . Sect i o n 6 6 6 2 (a) Accu racy -Rel at ed Pen al ty Al th ou g h p et i t i o n ers co n ced e i n th e s ti p ul at i o n o f s et t ledi s su es th at th ey are l i ab l e fo r an accu racy -rel at edp en al ty u n d er s ect i o n 6 6 62 (a) fo r th e t ax ab l e y ear

4 Th e p art i es s t i p u lat e: “ Pet it i on ers are l i ab l e fo r t h e l at e fi l i n g ad d i ti o n t o t ax , u n der In t ern al Rev en ue Co d e s ect i o n 6 6 51 (a)(1 ), fo r t h e t ax ab l e y ear 2 0 0 8 .”

5 Th e ad di t i o n t o t ax i s b as edo n th e am o un treq u i red t o b e s h o wnas t ax o n th e ret urn . Th is am o u n twi ll b e d et erm i n edi n a Ru le 1 55 co m p u t at i o n.- 1 3 -

[* 1 3 ] 2 0 0 8 , p et i t i on ers n o w arg u e o n b ri ef th atth ey are n o tl i ab l e fo r t he accu racy rel at ed p en al ty . 6 J u s t i ce d o es n o treq u i re t h at we d i sreg ardth e s t ip u l at i o n, an d
res p o n d en t h as n o tag reedt o d i s reg ardth e s t i p u l at i o n . Acco rd i n g l y , we h o l dth at p et i t i o n ers are l iab l e fo r t he accu racy -rel at edp en al ty u n d er s ect i o n 6 6 6 2(a) fo r t he t ax ab l e y ear 2 00 8
. 7 In reach i n g o u r d eci s i o n , we h av e co n s id eredal l arg u m en t s m ad e b y th e p art i es , an dt o th e ex ten tn o tm en t i o n edo r ad dres s ed , th ey are i rrel ev an to r wi th o u tm eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.

6 Th e p art i es s t i p u lat e: “ Pet it i on ers are l i ab l e fo r t h e accu racy -rel at ed p en al ty , u n d er Co d e s ect i o n 6 6 6 2 (a), fo r t h e t ax ab l e y ears 2 0 0 8 [.] ”

7 Th e s ec. 6 6 6 2 (a) accu racy -rel at edp en al ty i s b as ed o n th e am o u n to f an y u n d erp aym en t o f t ax , wh i ch wi l l b e d et erm i n edi n a Ru l e 1 55 co m p u t at i o n.