Court Opinion

ID: 4336218
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:42:00.886318+00
Date Added: 2024-06-11T14:48:02.230126
License: Public Domain

127 T.C. No. 13

                UNITED STATES TAX COURT

          ANTHONY J. KADILLAK, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2860-04L.                 Filed November 7, 2006.

     P, as a sales assistant with Ariba Technologies,
Inc. (Ariba), received incentive stock options (ISOs)
subject to an employment termination restriction,
whereby Ariba had the right to repurchase nonvested
stock on the date of termination for its exercise
price. On Apr. 5, 2000, P exercised his ISOs and was
transferred all vested stock. The nonvested stock was
placed in escrow and transferred to P as the shares
vested on a monthly basis over 4 years. P timely filed
a sec. 83(b), I.R.C., election in May 2000 for the
exercised ISOs. P’s employment with Ariba was
terminated on Apr. 4, 2001. Ariba timely exercised its
repurchase rights with respect to nonvested stock.

     P filed a Federal income tax return for 2000
reporting the gain resulting from the exercise of the
ISO on the vested and the nonvested stock for
alternative minimum tax (AMT) purposes. P subsequently
submitted amended returns for 2000 and 2001 in which he
claimed he was not subject to AMT for nonvested stock
                              - 2 -

     because the sec. 83(b), I.R.C., election was invalid.
     P also claimed that the capital loss limitations of
     secs. 1211 and 1212, I.R.C., do not apply for purposes
     of the AMT so that he may use his capital losses
     realized in 2002 to reduce his alternative minimum
     taxable income (AMTI) in 2000. R rejected P’s amended
     returns and issued to P a notice of Federal tax lien
     and notice of intent to levy. After a sec. 6330,
     I.R.C., hearing, the Appeals Office rejected P’s
     arguments, and P timely petitioned this Court for
     review of R’s lien and levy.

         Held: P’s sec. 83(b), I.R.C., election required
    him to recognize as AMTI the excess of his vested and
    nonvested stock’s fair market value (FMV) over its
    exercise price on the date of exercise. Held, further:
    P acquired beneficial ownership of the nonvested stock
    when he exercised his ISOs; thus, the nonvested shares
    were transferred to P within the meaning of sec. 1.83-
    3(a)(1), Income Tax Regs. Held, further: P was not
    required to return the nonvested stock upon the
    happening of an event that was certain to occur
    pursuant to sec. 1.83-3(a)(3), Income Tax Regs.; thus,
    the nonvested shares were properly transferred to P
    within the meaning of sec. 1.83-3(a)(1), Income Tax
    Regs. Held, further: P is not entitled to a deduction
    under sec. 1341(a), I.R.C. Held, further: The capital
    loss limitations of secs. 1211 and 1212, I.R.C., apply
    for purposes of calculating alternative minimum taxable
    income. Held, further: P may not carry back
    alternative minimum tax net operating losses to reduce
    his AMTI in 2000.

    Don Paul Badgley, Duncan C. Turner, and Brian G. Isaacson,

for petitioner.

     Kirk M. Paxson, Julie L. Payne, and William C. Schmidt, for

respondent.
                                  - 3 -

                                 OPINION

       HAINES, Judge:    Petitioner filed a petition with this Court

in response to Notices of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 for 2000 and 2001 (years

at issue).      Pursuant to section 6330(d), petitioner seeks review

of respondent’s determinations.1

       The remaining issues for decision are:

       1.   Whether petitioner’s section 83(b) election for 2000 was

valid.      This Court holds the section 83(b) election was valid.

       2.   Whether petitioner is entitled to an alternative minimum

tax (AMT) ordinary loss pursuant to section 1341 for stock

forfeited under a lapse provision.        This Court holds he is not so

entitled.

       3.   Whether petitioner may carry back capital losses

pursuant to section 1211 to reduce the amount of his alternative

minimum taxable income (AMTI) for 2000.       This Court holds he may

not.

       4.   Whether petitioner may carry back alternative minimum

tax net operating losses (AMTNOL) to reduce the amount of his

AMTI for 2000.      This Court holds he may not.

       1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended. All Rule
references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated. Amounts are rounded to the nearest
dollar.
                                - 4 -

                             Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.    The parties’ stipulations of facts, with attached

exhibits, are incorporated herein by this reference.     At the time

the petition was filed, petitioner resided in San Francisco,

California.

A.   Ariba Technologies, Inc., Incentive Stock Options

     From April 24, 1997, through April 4, 2001, petitioner was

employed as a sales assistant with Ariba Technologies, Inc.

(Ariba) at an annual salary of $38,000.

     1.     Grants and Exercise of Stock Options

     In addition to his salary, on July 21, 1997, Ariba issued to

petitioner option No. 34 under its 1996 Stock Option Agreement

(agreement) and 1996 Stock Option Plan (plan).     Option No. 34,

which qualified as an incentive stock option (ISO), granted

petitioner the option to acquire 2,000 shares of Ariba common

stock.2

     On March 2, 1998, Ariba issued option No. 117 to petitioner

under its agreement and plan.    Option No. 117, which qualified as

an ISO, granted petitioner the option to acquire 2,000 shares of

     2
       The stock granted under option No. 34 will not be
discussed in this Opinion. When the ISOs granted under option
No. 34 were exercised, both the stock’s purchase price and FMV
were 20 cents per share. As a result, no AMTI gain or loss was
generated upon the exercise of these shares or their subsequent
sale.
                               - 5 -

Ariba common stock at $1.50 per share.    The option was

exercisable any time after the grant date.

     Pursuant to option No. 117 petitioner’s right to own the

Ariba stock was subject to an employment termination restriction

whereby, if petitioner’s employment terminated for any reason

before petitioner’s rights in the stock fully vested, Ariba had

the right to repurchase all the nonvested stock.    Petitioner’s

vesting commencement date was February 1, 1998.    Upon

petitioner’s completion of 1 year of employment, his rights to 25

percent of the stock under option No. 117 vested, and Ariba’s

right to repurchase those shares lapsed.    Petitioner’s rights in

the remaining shares under option No. 117 vested on a monthly

basis (approximately 667 shares per month) ending on February 1,

2002.   As petitioner’s rights in the stock vested, the employment

restriction no longer applied, and Ariba’s right to repurchase

the stock lapsed.

     In March 1999, April 1999, December 1999, and April 2000,

Ariba’s common stock was subject to a 2-for-1 stock split.    As a

result, the number of shares granted under option No. 117

increased from 2,000 to 32,000.

     On April 5, 2000, petitioner exercised option No. 117 and

purchased all 32,000 shares of Ariba common stock for $0.0938 per

share, or a total price of $3,002.     The shares had a FMV of $102

per share and a total FMV of $3,264,000 at the date of exercise.
                                 - 6 -

Ariba transferred to petitioner share certificates for the 17,333

shares that had vested by April 5, 2000, and deposited the

remaining 14,667 nonvested share certificates into an escrow

account.   As the nonvested shares vested they were transferred to

petitioner.

     According to the agreement and plan, when petitioner

exercised the ISOs granted under option No. 117, he acquired

stockholder rights in all shares subject to the ISOs including

the nonvested shares held in escrow.       Pursuant to the agreement,

petitioner had the right to receive all “regular cash dividends”

on the nonvested shares held in escrow.

     2. Section 83(b) Election

     Petitioner timely filed a section 83(b) election in May 2000

for the 32,000 exercised shares granted under option No. 117.3

The section 83(b) election stated:       (1) Petitioner’s name,

address, and Social Security number; (2) a description of the

stock with respect to which the election was made; (3) the date

the stock was transferred to petitioner and the taxable year in

which the election was made; (4) the nature of the restriction to

which the property was subject; (5) the FMV at the time the stock

was transferred with respect to which the election was being

     3
       A sec. 83(b) election must be filed no later than 30 days
after the date the property was transferred. Sec. 1.83-2(b),
Income Tax Regs.
                                 - 7 -

made; (6) the amount paid for the stock; and (7) a confirmation

that copies of the election were furnished to Ariba.

     3. Sale and Repurchase of Stock

     Petitioner’s employment with Ariba was terminated on April

4, 2001.     On May 30, 2001, Ariba gave petitioner notice it was

exercising repurchase rights with respect to 6,667 nonvested

shares granted under option No. 117 for a total purchase price of

$642.     On December 30, 2002, petitioner sold to a third party the

remaining 25,333 shares granted under option No. 117.     All of

those shares had vested.

B.   Income Tax Returns and Assessments

     1.      Original Federal Income Tax Returns Prepared for 2000
             and 2001

     Petitioner timely filed his Form 1040, U.S. Individual

Income Tax Return, for 2000, which was prepared by a certified

public accountant and accepted by the Internal Revenue Service

(IRS).     The return reported wages of $204,722, capital gains of

$691,615, dividend income of $18,135, itemized deductions of

$112,744, and taxable income of $801,728.     The return also

reported AMTI of $4,136,705, $3,260,998 of which consisted of the

gain recognized from the receipt of 32,000 vested and nonvested

shares of Ariba stock under option No. 117.     The return reported

a regular tax of $167,139 and an AMT of $932,309 for a total tax

liability of $1,099,448.     After applying a foreign tax credit of

$60 and withholding and estimated tax payments of $135,791, the
                               - 8 -

remaining liability due was $963,597.   Petitioner failed to remit

the full amount of tax due with his return.

     Respondent assessed a tax liability of $1,099,388 (IRS

reduced total tax by $60 foreign tax credit) for 2000 and mailed

petitioner a notice of balance due on June 4, 2001.   Petitioner

has not fully paid the balance.

     Petitioner filed his 2001 Federal income tax return on or

about April 20, 2002, which was also prepared by a certified

public accountant and accepted by the IRS.4   The return reported

wages of $204,722, capital loss of $865, dividend income of

$3,279, and, after itemized deductions of $292,525, zero taxable

income.   The 2001 return also reported zero tax and zero AMT,

with an overpayment of $12,720.   The return did not report gain

or loss from the forfeiture of the 6,667 nonvested shares granted

under option No. 117 for regular tax or AMT purposes.   Respondent

assessed a tax liability of zero for 2001 on June 10, 2002.

     2.    Amended Federal Income Tax Returns for 2000 and 2001

     On March 25, 2003, relying on the advice of Brian G.

Isaacson, a tax attorney, petitioner filed a Form 1040X, Amended

U.S. Individual Income Tax Return, amending his 2000 Federal

     4
       The return was originally sent to the IRS on approximately
Mar. 30, 2002, and returned to petitioner on approximately Apr.
17, 2002, because petitioner’s signature was missing.
                               - 9 -

income tax return (2000 amended return) together with an attached

Form 8275, Disclosure Statement.5

     The 2000 original return was amended to reflect petitioner’s

assertion that the section 83(b) election, for the nonvested

stock granted under option No. 117, was invalid.    Petitioner

contended no AMTI was realized (the spread between FMV and the

exercise price on the date of exercise) in 2000 from the exercise

of the option for nonvested shares.    The AMTI reported on the

2000 amended return reflected only the spread between the FMV and

exercise price of vested stock on the date of exercise and the

remaining shares that vested each subsequent month until the end

of the 2000 tax year.   As a result, the 2000 amended return

substantially reduced AMT by $915,597 for a total AMT of $16,712,

and reported a regular tax of $166,872, with a tax owing of

$47,733, after deducting a foreign tax credit of $22 and total

payments of $135,791.   The 2000 amended return prepared by Mr.

Isaacson was not accepted by the IRS.

     5
       Each return and amended return Mr. Isaacson prepared
included a Form 8275, Disclosure Statement, which contained Mr.
Isaacson’s tax opinion letter to petitioner. To avoid certain
penalties, Form 8275 is used by taxpayers to disclose items or
positions that are not otherwise adequately disclosed on a tax
return. The form is filed to avoid an accuracy-related penalty
due to disregard of rules or regulations or due to a substantial
understatement of income tax for non-tax-shelter items if the
return position has a reasonable basis.
                              - 10 -

     On March 22, 2003, petitioner filed a Form 1040X amending

his 2001 Federal income tax return (2001 amended return) together

with an attached Form 8275.   The return was prepared by Mr.

Isaacson and was initially accepted by the IRS.   It reported the

same regular income and itemized deductions as the original 2001

return.   However, unlike the original 2001 return, the 2001

amended return reflected petitioner’s assertion that the section

83(b) election made in 2000 was invalid as to the nonvested

shares.   As a result, the amended return reported $340,213 of

AMTI, which was the spread between FMV and the exercise price for

the Ariba stock granted under option No. 117, which vested in

petitioner throughout the 2001 tax year.

     After deducting a $12,720 payment, the return reported a

total tax liability of $88,125 consisting entirely of AMT.

Petitioner failed to remit the full amount of tax due with his

amended return.   Respondent assessed a tax liability of $100,845

for 2001 and sent a notice of balance due on May 19, 2003.

Petitioner has not fully paid the balance.

     3.    Other Amended Returns for 2000 and 2001

     Petitioner filed additional Forms 1040X for 2000 and 2001

based upon Mr. Isaacson’s advice.   Each Form 1040X was prepared

by Mr. Isaacson and included Form 8275, although neither was

accepted by the IRS.   The 2000 Form 1040X Explanation of Changes

to Income, Deductions and Credits stated:
                              - 11 -

     The taxpayer’s original return erroneously reported an
     amount due based upon an incorrect valuation and/or
     inclusion of stock options (both qualified and
     unqualified) and the incorrect application on the AMT
     net operating loss and AMT credit. A list of the legal
     grounds supporting the amended return’s valuation of
     stock options and/or exclusions of such options from
     income along with the correct application of the AMT
     net operating loss and AMT credit is attached to this
     form. The application of the attached legal arguments
     to the taxpayer’s stock option transactions will result
     in a change in the amount due for lines 1, 5 through
     10, and 19 through 24 on the front of this 1040X form.
     The exact amount of the refund will be determined
     pending the final determination of facts and the
     release of a technical advice memo or court decision.

     4.   Respondent’s Concession

     Respondent concedes, if this Court finds petitioner’s 83(b)

election to be valid and the liability reported on petitioner’s

original 2000 return to be correct, respondent will abate

petitioner’s 2001 liability, which was based upon petitioner’s

2001 amended return, and accept petitioner’s original 2001

return.

C.   Collection Actions

     On June 30, 2003, respondent mailed petitioner a Notice of

Federal Tax Lien Filing and Your Right to a Hearing regarding his

unpaid 2000 taxes.   Petitioner submitted Form 12153, Request for

a Collection Due Process Hearing, to respondent requesting an

administrative hearing under section 6330.   Petitioner also

sought the removal of any liens and a temporary reprieve from

collection activity, pending the release of a technical advice
                                - 12 -

memorandum by the IRS regarding the issues surrounding

petitioner’s stock acquisitions.

     On September 4, 2003, respondent mailed to petitioner a

Final Notice of Intent to Levy with respect to petitioner’s 2001

tax liability.   Petitioner’s counsel, Mr. Isaacson, wrote to

respondent and requested an administrative hearing.

     Appeals Officer Lawrence Dorr conducted a telephonic hearing

with Mr. Isaacson on December 3 and 5, 2003.     Mr. Dorr declined

to consider petitioner’s request for relief and issued Notices of

Determination Concerning Collection Actions for the years at

issue on January 15, 2004, and February 5, 2004, respectively.

In the determination, Mr. Dorr found “there was no mechanism in

the Collection Due Process venue for withholding collection in

this circumstance”.   Mr. Dorr did not review the underlying

liability for the years at issue.

     Petitioner timely filed a petition for lien or levy action

with the Court on February 18, 2004.     On August 19, 2004, this

case was set for trial during the January 24, 2005, Trial Session

in Seattle, Washington.   On October 27, 2004, respondent moved

for a continuance and remand.    On December 8, 2004, the Court

retained jurisdiction and remanded this case to respondent’s

Appeals Office for another administrative hearing to consider

petitioner’s underlying tax liabilities for the years at issue.
                               - 13 -

     On January 6, 2005, this case was reassigned to Appeals

Officer Lenora Miles.    On March 2, 2005, Mr. Isaacson sent Ms.

Miles a written explanation of petitioner’s position.    On March

4, 2005, Ms. Miles held an administrative hearing with Mr.

Isaacson, during which he argued:    (1) Petitioner’s section 83(b)

election was invalid; (2) even if the section 83(b) election were

valid, petitioner could apportion a lesser value to the nonvested

shares to reflect Ariba’s repurchase at cost; (3) even if the

section 83(b) election were valid, it could be revoked due to

mistake of fact;6 (4) AMT capital losses are not limited by

section 1211; and (5) AMT capital losses can be carried back as

an AMTNOL.

     After considering petitioner’s arguments, on April 5, 2005,

Ms. Miles sent a letter to petitioner setting forth her

determination that there was no basis for settlement.    On May 10,

2005, respondent issued a Supplemental Notice of Determination

Concerning Collection Actions to petitioner regarding the years

at issue.    Respondent determined the filing of the notice of

Federal tax lien and the proposed levy action with respect to the

unpaid assessments for the years at issue were appropriate.

     On June 3, 2005, this case was calendared for trial during

the October 31, 2005, Trial Session in Seattle, Washington.      At

     6
         Petitioner abandoned the second and third arguments.
                                - 14 -

trial the parties agreed to submit this case fully stipulated

under Rule 122.

                            Discussion

A.   Standard of Review

     To determine the correct standard of review in a case

instituted under sections 6320 and 6330, the Court must first

decide whether petitioner’s underlying tax liability is properly

at issue.    Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza

v. Commissioner, 114 T.C. 176, 181-182 (2000).    The term

“underlying tax liability” under section 6330(c)(2)(B) includes

amounts self-assessed under section 6201(a), together with

penalties and interest.   Sec. 6201(a)(1); Montgomery v.

Commissioner, 122 T.C. 1, 9 (2004); sec. 301.6203-1, Proced. &

Admin. Regs.

     The amount of the underlying tax liability may be placed at

issue if the taxpayer did not receive a statutory notice of

deficiency or otherwise have an opportunity to dispute the tax

liability.   Sec. 6330(c)(2)(B); see Behling v. Commissioner, 118

T.C. 572, 576-577 (2002).    In this case, petitioner was not

issued a notice of deficiency and did not have a prior

opportunity to dispute his tax liabilities for 2000 and 2001.

Therefore, the proper standard of review for the arguments

challenging the underlying tax liability is de novo.     Sego v.

Commissioner, supra at 609-610.
                                - 15 -

B.   ISOs Generally

     Section 421(a) provides, if the requirements of section

422(a) are met,7 a taxpayer does not recognize income for regular

income tax purposes either upon the granting8 of an ISO to him or

when the stock is transferred9 to the taxpayer upon exercise of

an ISO.   The recognition of income is deferred until the

disposition of the stock.10    Sec. 421(a); sec. 14a.422A-1, Q&A-1,

Temporary Income Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981).

Because of the application of section 421(a), when petitioner was

granted and exercised option No. 117, he did not recognize income

for regular tax purposes.     If section 421 applies, section 83

does not.   Sec. 83(e)(1).

C.   Section 83 Impact on the Exercise of ISOs for AMT Purposes

     However, section 421 does not apply to AMT.     Sec. 56(b)(3).

Because it does not apply, section 83 controls the determination

     7
       At all times from the date of granting the option until 3
months before the date of exercise, the option holder must be an
employee of the company granting the option. Sec. 422(a)(2).
     8
       The date on which a ISO is granted is the date on which
all corporate action necessary for the grant of the ISO is
completed. Sec. 1.421-7(c)(1), Income Tax Regs.
     9
       For purposes of secs. 421 through 424, the term “transfer”
means the transfer of ownership or substantially all rights of
ownership of a share of stock to an individual pursuant to his
exercise of a statutory option. Sec. 1.421-7(g), Income Tax
Regs.
     10
       A disposition of ISO stock generally means any sale,
exchange, or gift of, or transfer of legal title to, the stock.
Sec. 424(c)(1).
                               - 16 -

of what income the taxpayer recognizes for AMTI purposes.   See

sec. 56(b)(3); Speltz v. Commissioner, 124 T.C. 165, 178 (2005),

affd. 454 F.3d 782 (8th Cir. 2006); sec. 1.83-7(a), Income Tax

Regs.

     Section 83(a) generally requires a taxpayer to recognize as

AMTI the spread between the stock’s FMV and the exercise price

when a taxpayer is transferred a share of stock pursuant to the

exercise of an ISO and its FMV exceeds the exercise price on the

date of exercise.   Secs. 55(b)(2), 56(b)(3), 83(a); Tanner v.

Commissioner, 117 T.C. 237, 242 (2001), affd. 65 Fed. Appx. 508

(5th Cir. 2003).    A taxpayer generally will not recognize income

for AMT purposes under section 83(a) if the stock included in an

ISO is subject to a substantial risk of forfeiture on the date of

exercise.   Sec. 83(a).

     Pursuant to section 83(a), when petitioner exercised option

No. 117, he would recognize as AMTI $1,766,340,11 the excess of

the vested stock’s FMV over its exercise price on the date of

     11
       The FMV of the vested shares on the date of exercise was
$1,767,966 (17,333 (vested shares on date of exercise) x $102
(FMV per share of stock) = $1,767,966 (total FMV)).

     The vested shares exercise price on the date of exercise was
$1,626 (17,333 (vested shares on date of exercise) x $0.0938
(exercise price per share) = $1,626 (total exercise price of
vested shares)).

     The AMTI recognized from exercising the vested shares was
$1,766,340 ($1,767,966 (total FMV of the vested shares) - $1,626
total exercise price of the vested shares) = $1,766,340)).
                              - 17 -

exercise.   Absent a section 83(b) election, petitioner would not

recognize as AMTI, $1,496,034,12 the same spread for the

nonvested shares because those shares were subject to a

substantial risk of forfeiture; i.e., Ariba’s right to repurchase

the nonvested shares.

     Section 83(b) allows a taxpayer to elect to include in

income in the year of receipt the excess of the value of the

stock subject to a substantial risk of forfeiture (determined

without regard to any restriction other than a nonlapse

restriction)13 over any amount paid for the stock.   Although a

taxpayer who makes a section 83(b) election after exercising ISOs

will not recognize income for regular tax purposes (because

section 421 applies to the transfer), the taxpayer will recognize

ordinary income for AMT purposes.   If petitioner’s section 83(b)

election was validly made, petitioner would recognize as AMTI,

     12
       The FMV of the nonvested shares on the date of exercise
was $1,496,034 (14,667 (nonvested shares on date of exercise) x
$102 (FMV per share of stock) = $1,496,034 (total FMV)).

     The vested shares exercise price on the date of exercise was
$1,376 (14,667 (vested shares on date of exercise) x $0.0938
(exercise price per share) = $1,376 (total exercise price of
vested shares)).

     The AMTI recognized from exercising the vested shares was
$1,494,658 ($1,496,034 (total FMV of the vested shares) - $1,376
total exercise price of the vested shares) = $1,494,658)).
     13
       A nonlapse restriction is a permanent limitation on the
transferability of property. Sec. 1.83-3(h) and (i), Income Tax
Regs.
                               - 18 -

$3,260,998,14 the excess of the vested and nonvested stock’s FMV

over its exercise price on the date of exercise.15

     There is no dispute section 421 applies to the grant and

exercise of option No. 117 and that no income for regular income

tax purposes was recognized in 2000 from the exercise of ISOs.

There also is no dispute that petitioner’s section 83(b) election

complied with the procedural requirements set out in section

1.83-2, Income Tax Regs.16   Petitioner contends, however, the

section 83(b) election was invalid as to the nonvested Ariba

stock because the nonvested shares were not legally transferred

to him, which results in his not having to recognize as AMTI the

excess of the FMV of the nonvested stock on the date of

exercise over the exercise price until the underlying shares

vested; i.e., the substantial risk of forfeiture lapsed.

     14
       $3,264,000 (total FMV) - $3,002 (total exercise price) =
$3,260,998.
     15
       When a sec. 83(b) election is made, the taxpayer is
betting that the value of the stock will continue to appreciate.
The purpose of making a sec. 83(b) election is to accelerate
recognition of ordinary income when the stock’s FMV is
comparatively low, thereby eliminating the chance of having to
recognize a larger amount of ordinary income when the stock is no
longer subject to a substantial risk of forfeiture. But, the
election can backfire if the stock depreciates rather than
appreciates over that period or if the stock is forfeited, in
which event sec. 83(b) bars the deduction of the amount
previously recognized as income. Having gambled and lost,
petitioner now wants to invalidate his own election.
     16
       Petitioner abandoned his argument that he revoked his
sec. 83(b) election pursuant to sec. 1.83-2(f), Income Tax Regs.
                              - 19 -

D.   Whether the Transfer of Nonvested Stock Pursuant to the
     Section 83(b) Election Was Valid

     1.    Section 83(b) and the California Commercial Code

     Petitioner argues he did not receive a beneficial ownership

interest in the nonvested stock granted under option No. 117 on

the date of exercise because he was not a holder in due course

under the California law.   Cal. Com. Code sec. 3203 (West 2002).

Accordingly, petitioner reasons his section 83(b) election was

invalid.

     Stock is property for purposes of section 83.   Childs v.

Commissioner, 103 T.C. 634, 648-649 (1994), affd. without

published opinion 89 F.3d 856 (11th Cir. 1996); sec. 1.83-3(e),

Income Tax Regs.   Property is “transferred” for purposes of

section 83(b) when a taxpayer acquires a beneficial ownership

interest in the property (disregarding any lapse restrictions).

Facq v. Commissioner, T.C. Memo. 2006-111; sec. 1.83-3(a)(1),

Income Tax Regs.   A beneficial owner is one who does not have

title to property but has rights in the property which are

equivalent to normal incidents of ownership.   Sec. 1.83-3(a)(1),

Income Tax Regs.; see Hilen v. Commissioner, T.C. Memo. 2005-226;

United States v. Tuff, 359 F. Supp. 2d 1129, 1133 (W.D. Wash.

2005); Miller v. United States, 345 F. Supp. 2d 1046, 1050 (N.D.

Cal. 2004).   Beneficial ownership is identified by a taxpayer’s

command over property or enjoyment of its economic benefits.

Yelencsics v. Commissioner, 74 T.C. 1513, 1527 (1980).   A sale or
                               - 20 -

transfer occurs when a taxpayer acquires a beneficial ownership

interest in property rather than meeting the technical

requirements for a transfer of an instrument under State law.

See id.; Schnurr v. Commissioner, T.C. Memo. 1989-275.

       According to the agreement and plan, when petitioner

exercised the ISO granted under option No. 117, he acquired

stockholder rights in all exercised shares including the

nonvested shares held in escrow.    Pursuant to the agreement,

petitioner also was entitled to receive all regular dividends on

the nonvested shares held in escrow.    Because petitioner acquired

beneficial ownership of the nonvested stock held in escrow upon

the exercise of the ISO granted under option No. 117, the

nonvested shares were transferred to petitioner within the

meaning of section 1.83-3(a)(1), Income Tax Regs.

       2.   An Event Certain To Occur

       Petitioner argues the transfer of the nonvested stock was

ineffective pursuant to section 1.83-3(a)(3) and (5), Income Tax

Regs., because his termination of employment from Ariba was

certain to occur and upon his termination he was required to

surrender the nonvested stock for its option price instead of

FMV.

       Section 1.83-3(a)(3) and (5), Income Tax Regs., states:

       (3) Requirement that property be returned. Similarly,
       no transfer may have occurred where property is
       transferred under conditions that require its return
       upon the happening of an event that is certain to
                              - 21 -

     occur, such as the termination of employment. In such a
     case, whether there is, in fact, a transfer depends
     upon all the facts and circumstances. Factors which
     indicate that no transfer has occurred are described in
     paragraph (a) (4), (5), and (6) of this section.
     * * * .

     *        *         *          *      *       *           *

     (5) Relationship to fair market value. An indication
     that no transfer has occurred is the extent to which
     the consideration to be paid the transferee upon
     surrendering the property does not approach the fair
     market value of the property at the time of surrender.
     * * * .
     [Emphasis added.]

     Whether property is “transferred under conditions that

require its return upon the happening of an event that is certain

to occur”, depends on a facts and circumstances analysis.17       Sec.

1.83-3(a)(3), Income Tax Regs.   Section 1.83-3(a)(5), Income Tax

Regs., is one factor to consider when determining whether a valid

transfer occurred.   However, it is unnecessary to reach the facts

and circumstances analysis in cases where a “condition certain to

occur” has not been established.

     Although the restriction placed upon petitioner’s nonvested

shares is conditioned upon his termination, all the stock could

     17
       The factors considered indicative that no transfer has
occurred, include the following: (1) The extent to which the
arrangement is similar to an option, sec. 1.83-3(a)(4), Income
Tax Regs.; (2) the extent to which the consideration to be paid
the transferee upon surrender is less than the FMV of the
property, sec. 1.83-3(a)(5), Income Tax Regs.; and (3) the extent
to which the transferee does not incur the risk of a beneficial
owner (i.e., the extent to which the transferee does not bear the
risk of loss with respect to the investment as well as the
opportunity for gain), sec. 1.83-3(a)(6), Income Tax Regs.
                                - 22 -

have vested in petitioner before he was terminated.    All ISOs

were granted to petitioner pursuant to a lapse restriction which

required petitioner to be employed by Ariba for 1 year for 25

percent of the shares to vest and another 3 years for the

remaining 75 percent to vest.    Once the stock petitioner acquired

upon the exercise of option No. 117 had vested, petitioner was

not required to return the shares under any condition.

     Because the condition under which petitioner was required to

return the stock was not permanent, i.e., it was a lapse

restriction, it was not certain that petitioner’s services would

be terminated before the stock vested.    See sec. 1.83-3(a)(7),

Example (1) and (3), Income Tax Regs.18   The Ariba stock was not

transferred on the date of exercise under a condition that was

     18
       Example (1). On Jan. 3, 1971, X corporation sells for
$500 to S, a salesman of X, 10 shares of stock in X corporation
with a fair market value of $1,000. The stock is nontransferable
and subject to return to the corporation (for $500) if S’s sales
do not reach a certain level by Dec. 31, 1971. Disregarding the
restriction concerning S’s sales (since the restriction is a
lapse restriction), S’s interest in the stock is that of a
beneficial owner, and therefore a transfer occurs on Jan. 3,
1971.

     In contrast to petitioner and the taxpayer in Example (1),
the taxpayer described in Example (3), sec. 1.83-3(a)(7), Income
Tax Regs., exemplifies a situation where the taxpayer’s stock is
subject to a nonlapse restriction, requiring the taxpayer to
return the stock upon termination of employment (which is always
certain to occur) and without the option to acquire ownership of
the stock before termination. Thus, in Example (3) the stock
will be returned “upon the happening of an event that is certain
to occur” because termination is certain to occur, and the
taxpayer will never have the opportunity to keep the shares after
termination.
                                - 23 -

certain to occur.     It follows that consideration of section 1.83-

3(a)(5), Income Tax Regs., is unnecessary because the

prerequisite condition was not satisfied.     Accordingly, the stock

was properly transferred to petitioner pursuant to section 83(b)

when petitioner exercised option No. 117.19

     After petitioner exercised option No. 117 on April 5, 2000,

he made a timely section 83(b) election applicable to all the

nonvested stock subject to the employment restriction.    As a

result, he recognized AMTI in 2000 to the extent the FMV of the

underlying shares of stock on the date of exercise exceeded the

option price.   See sec. 83.

E.   Claim of Right

     If the section 83(b) election is valid, petitioner argues

that because he forfeited 6,667 shares of nonvested Ariba stock

for its exercise price on May 30, 2001, he is entitled to a 2001

tax deduction under section 1341(a) equal to the 2000 AMT

attributable to the inclusion of AMTI of $679,825.

      A taxpayer qualifies for a deduction under section 1341 if

(1) an item was included in the taxpayer’s gross income in a

     19
       Petitioner also argues that the transfer of nonvested
stock was invalid because it was subject to the claims of Ariba’s
creditors. Petitioner cites the definition of property as his
authority. Sec. 1.83-3(e), Income Tax Regs. There is nothing in
the record to support petitioner’s claim that creditors of Ariba
could reach petitioner’s shares of nonvested stock while in
escrow. Furthermore, shares of stock clearly constitute
property, and the nonvested shares were transferred to petitioner
subject to a lapse provision.
                              - 24 -

prior year; (2) it appeared that the taxpayer had an unrestricted

right to the item in the prior year; and (3) the taxpayer is

entitled to a deduction (in excess of $3,000) under another

section of the Code for the loss resulting from the restoration

of the item to another in the current tax year.   Sec. 1341(a);

sec. 1.1341-1(a)(1), Income Tax Regs.

     Section 1.1341-1(a)(2), Income Tax Regs., continues with the

definition:

     “income included under a claim of right” means an item
     included in gross income because it appeared from all
     the facts available in the year of inclusion that the
     taxpayer had an unrestricted right to such item, and
     “restoration to another” means a restoration resulting
     because it was established after the close of such
     prior taxable year (or years) that the taxpayer did not
     have an unrestricted right to such item (or portion
     thereof).

     Although petitioner may recognize losses on the sale of

stock for AMT purposes, there is no deduction for a loss

attributable to a forfeited nonvested share of stock subject to a

section 83(b) election.   Pursuant to section 83(b)(1), if

property to which a section 83(b) election is made “is

subsequently forfeited, no deduction shall be allowed in respect

of such forfeiture.”

     Similarly, pursuant to section 1.83-2(a), Income Tax Regs.:

     If property for which a section 83(b) election is in
     effect is forfeited while substantially nonvested, such
     forfeiture shall be treated as a sale or exchange upon
     which there is realized a loss equal to the excess (if
     any) of--
                               - 25 -

       (1) The amount paid (if any) for such property, over,

       (2) The amount realized (if any) upon such forfeiture.

       If such property is a capital asset in the hands of the
       taxpayer, such loss shall be a capital loss. * * * .

       Petitioner is not a securities dealer, and he held his Ariba

shares strictly as an investor.    Stock is a capital asset.     Sec.

1221(a)(1).    Thus, petitioner’s nonvested Ariba stock was a

capital asset in his hands, and any loss realized upon its

forfeiture is characterized as a capital loss.    See sec. 1.83-

2(a), Income Tax Regs.

       Furthermore, the phrase “amount paid” in section 1.83-

2(a)(1), Income Tax Regs., refers “to the value of any money or

property paid for the transfer of property to which section 83

applies”.    Sec. 1.83-3(g), Income Tax Regs.   Therefore, pursuant

to sections 1.83-2(a) and 1.83-3(g), Income Tax Regs., a taxpayer

is barred from recognizing as a capital loss the previous amount

included as compensation when nonvested stock subject to a

section 83(b) election is subsequently sold for less than its

FMV.    Theophilos v. Commissioner, 85 F.3d 440 (9th Cir. 1996),

revg. T.C. Memo. 1994-45.

       Petitioner paid Ariba $625 in 2000 to exercise the option to

acquire 6,667 shares of subsequently forfeited stock and elected

to recognize the excess of the FMV over the exercise price on the

date of exercise as compensation for AMT purposes.    Ariba paid

petitioner $625 to repurchase the 6,667 shares in 2001, causing
                              - 26 -

petitioner to realize an AMT capital loss of $679,825.    However,

pursuant to section 83(b)(1) and section 1.83-2(a), Income Tax

Regs., petitioner cannot recognize the $679,825 AMT capital loss.

     Because petitioner fails to satisfy the requirement under

section 1341(a) that the taxpayer is entitled to a deduction

under another section of the Code for the loss, we need not

consider whether petitioner satisfies other requirements of

section 1341, e.g., whether petitioner had an unrestricted right

in the nonvested Ariba stock in the year he made the section

83(b) election.

F.   Carryback of AMT Capital Losses

     Petitioner argues he may carry back capital losses pursuant

to section 1211 to reduce the amount of his AMTI for 2000 and

that he may carry back an AMTNOL to reduce the amount of his AMTI

for 2000.   Similar arguments, by the same counsel, have been

rejected in Merlo v. Commissioner, 126 T.C. 205 (2006),

Montgomery v. Commissioner, 127 T.C. 43 (2006), and Spitz v.

Commissioner, T.C. Memo. 2006-168.     Consistent with these cases,

the Court finds petitioner may not carry back his AMT capital

losses to reduce his AMTI in 2000, and petitioner may not claim

an AMTNOL carryback to reduce his AMTI for 2000.    See Merlo v.

Commissioner, supra.
                             - 27 -

     In reaching these holdings, the Court has considered all

arguments made and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing and the concessions of the parties,

                                        Decision will be entered

                                   for respondent.