T.C. Memo. 2007-14
UNITED STATES TAX COURT
TAE M. & YOUNG J. KIM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13586-04. Filed January 18, 2007.
Tae M. Kim and Young J. Kim, pro sese.
Karen Lynne Baker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined a deficiency in, and
an accuracy-related penalty under section 6662(a)1 on, petition-
ers’ Federal income tax (tax) for their taxable year 2002 of
1
All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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$8,411 and $1,682, respectively.
The issues remaining for decision for the year at issue are:
(1) Do petitioners have certain compensation income with
respect to the exercise of certain stock options granted under an
employee stock purchase plan? We hold that they do.
(2) Do petitioners have certain claimed long-term capital
losses? We hold that they do not.
(3) Do petitioners have certain interest income from the
United States Department of the Treasury? We hold that they do.
(4) Do petitioners have certain income from the sale of
certain stock? We hold that they do.
(5) Did petitioners fail to include in the total interest
income reported in their tax return certain interest from Wash-
ington Savings Bank? We hold that they did not.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time petitioners filed the petition in this case,
they resided in Bowie, Maryland.
During 2002, petitioner Young J. Kim (Ms. Kim) was employed
by Fannie Mae as a systems analyst. At a time not disclosed by
the record before January 17, 2002, Fannie Mae granted Ms. Kim
certain options to buy Fannie Mae stock under an employee stock
purchase plan (Fannie Mae ESPP). Each option under that plan had
an exercise price of $66 per share.
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Pursuant to the Fannie Mae ESPP, on the dates indicated, Ms.
Kim exercised certain options granted to her, and acquired the
number of shares of Fannie Mae stock shown, when the Fannie Mae
stock had the fair market value indicated:
Fair Market
Value of
Shares
Number of Total Acquired
Date of Shares Exercise on Date
Exercise Acquired Price of Exercise
1
Jan. 17, 2002 138.351 $9,131.17 $11,362.08
2
Jan. 18, 2002 79.936 5,275.77 6,576.73
3
Jan. 22, 2002 86.085 5,681.61 7,129.99
4
Jan. 23, 2002 16.628 1,097.45 1,386.28
1
Fair market value per share was $82.125
2
Fair market value per share was $82.275
3
Fair market value per share was $82.825
4
Fair market value per share was $83.370
In order to have the money to pay the exercise price of the
options exercised, on the dates indicated, Ms. Kim sold for the
gross proceeds shown the following shares of Fannie Mae stock
acquired as a result of the exercise of such options:
Number of Gross
Date Shares Sold Proceeds
1
Jan. 17, 2002 111.198 $9,136.19
2
Jan. 18, 2002 64.248 5,289.03
3
Jan. 22, 2002 69.190 5,728.23
4
Jan. 23, 2002 13.364 1,114.87
1
Sales Price per share was $82.161500
2
Sales Price per share was $82.322123
3
Sales Price per share was $82.789796
4
Sales Price per share was $83.423100
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On or about May 17, 2002, the United States Department of
the Treasury (U.S. Treasury) issued a refund check for $1,585.99
with respect to petitioners’ taxable year 1997, consisting of
$1,203 of tax and $382.99 of interest.
On or about May 30, 2002, the U.S. Treasury issued a refund
check for $1,101.39 with respect to petitioners’ taxable year
1998, consisting of $862 of tax and $239.39 of interest.
Fannie Mae issued to Ms. Kim Form W-2, Wage and Tax State-
ment (Fannie Mae Form W-2), for her taxable year 2002. That form
showed total wages, tips, and other compensation of $95,323.62.
Such total wages, tips, and other compensation included $4,234.94
that was shown as “ESPP” in Box 14 of the Fannie Mae Form W-2.
Fannie Mae also gave Ms. Kim a document entitled “2002 Gross Wage
Analysis” (Fannie Mae wage analysis). That document showed,
inter alia, $95,323.62 as “2002 W2 WAGES”. Such wages included
$4,234.94 that was shown as “ESPP-CEP” and “NON-PAYROLL EARNINGS”
in the Fannie Mae wage analysis.
Petitioners timely filed Form 1040, U.S. Individual Income
Tax Return, for their taxable year 2002 (petitioners’ 2002 re-
turn). In petitioners’ 2002 return, petitioners showed, inter
alia, on page one “Wages, salaries, tips, etc.” of $95,323.62 on
line 7 and “Taxable interest” of $565.43 on line 8a and claimed a
net capital loss of $3,000 on line 13. The $95,323.62 of “Wages,
salaries, tips, etc.” included the $4,234.94 that was shown as
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“ESPP” in Box 14 of the Fannie Mae Form W-2.
In Schedule B—Interest and Ordinary Dividends (2002 Schedule
B) included as part of petitioners’ 2002 return, petitioners
showed, inter alia, the following interest income:
Name of Payer Amount
Washington Savings Bank $521.61
BB&T 21.30
Chevy Chase Bank 14.52
In the 2002 Schedule B, petitioners incorrectly showed the total
of such interest income as $565.43. The correct total is
$557.43. The total interest income of $565.43 shown in the 2002
Schedule B is the amount that petitioners reported as “Taxable
interest” on page one, line 8a, of petitioners’ 2002 return.
In Schedule D, Capital Gains and Losses (2002 Schedule D),
included as part of petitioners’ 2002 return, petitioners claimed
a long-term capital loss and a net long-term capital loss of
$3,117.40 from the sale during 2002 of 300 shares of “TWA”.2 As
prescribed by section 1211(b), petitioners claimed as a deduction
in petitioners’ 2002 return only $3,000 of such net capital loss.
Respondent issued to petitioners a notice of deficiency
(notice) for their taxable year 2002. In that notice, respondent
determined, inter alia, to include in petitioners’ gross income
$622 of interest income from the U.S. Treasury, $16 of income
2
Petitioners claimed no capital gains in their 2002 Schedule
D.
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from the sale of certain stock of a company described as “TRAVEL-
ERS PROP”, and $8 of interest income from Washington Savings Bank
in excess of the $521.61 of interest income from that bank shown
in the 2002 Schedule B included as part of petitioners’ 2002
return. Respondent based the foregoing determinations on infor-
mation returns that the respective payers provided to respondent.
On December 12, 2005, after petitioners filed the petition
commencing this case, respondent received from petitioners Form
1040X, Amended U.S. Individual Income Tax Return, with respect to
their taxable year 2002 (petitioners’ 2002 amended return). In
petitioners’ 2002 amended return, petitioners reduced by
$4,234.94 the adjusted gross income reported in petitioners’ 2002
return and claimed a refund of $1,255. In support thereof,
petitioners gave the following explanation in petitioners’ 2002
amended return: “Excluding $4,234.94 ESPP gain from W-2. In-
cluding $4,234.94 ESPP gain in Capital Gains on Schedule D.”
Petitioners included as part of petitioners’ 2002 amended return
a copy of the 2002 Schedule D that they included as part of
petitioners’ 2002 return, on which they made certain changes.
(We shall refer to the copy of the 2002 Schedule D on which
petitioners made certain changes as petitioners’ amended 2002
Schedule D.) Petitioners made the following changes in petition-
ers’ amended 2002 Schedule D. Petitioners claimed short-term
capital gains totaling $4,234.94 from the sales of certain Fannie
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Mae stock that Ms. Kim acquired as a result of the exercise of
certain options granted under the Fannie Mae ESPP. Petitioners
also claimed in petitioners’ amended 2002 Schedule D long-term
capital losses of $6,410.70, $6,808.36, and $2,730 from the
respective sales of certain stock of three companies. In peti-
tioners’ amended 2002 Schedule D, petitioners (1) added the three
new long-term capital losses claimed in that amended schedule to
the $3,117.40 long-term capital loss that they claimed in peti-
tioners’ 2002 Schedule D included as part of petitioners’ 2002
return and (2) claimed long-term capital losses totaling
$19,066.46. In petitioners’ amended 2002 Schedule D, petitioners
netted the $4,234.94 of short-term capital gains and the
$19,066.46 of long-term capital losses claimed in that amended
schedule and claimed a net capital loss of $14,831.52.3
3
As discussed above, in petitioners’ 2002 return, as pre-
scribed by sec. 1211(b), petitioners claimed as a deduction only
$3,000 of the $3,117.40 net capital loss claimed in the 2002
Schedule D included as part of that return. Thus, the $14,831.52
net capital loss claimed in petitioners’ amended 2002 Schedule D
did not entitle petitioners to a larger net capital loss deduc-
tion for 2002. However, the increased net capital loss claimed
in petitioners’ amended 2002 Schedule D did affect the amount of
petitioners’ claimed capital loss carryover to other taxable
years. See sec. 1212(b)(1).
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OPINION
Petitioners bear the burden of proving that the determina-
tions in the notice are erroneous.4 Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Exercise of Fannie Mae ESPP Options
In petitioners’ 2002 return, petitioners included in “Wages,
salaries, tips, etc.” the $4,234.94 that was shown as “ESPP” in
the Fannie Mae Form W-2. At trial, petitioners take the position
that such amount constitutes short-term capital gains.5 In
support of their position, petitioners argue (1) that the income
at issue arose from the sales of certain Fannie Mae stock that
Ms. Kim acquired as a result of the exercise of certain options
under the Fannie Mae ESPP, (2) that such stock was a capital
asset, and (3) that therefore such income is capital in charac-
ter. Respondent counters that the $4,234.94 that petitioners
reported in petitioners’ 2002 return as “Wages, salaries, tips,
etc.” constitutes compensation income that petitioners properly
reported in that return.
4
Petitioners do not claim that the burden of proof shifts to
respondent under sec. 7491(a). In any event, petitioners have
failed to establish that they satisfy the requirements of sec.
7491(a)(2). On the record before us, we find that the burden of
proof does not shift to respondent under sec. 7491(a).
5
Petitioners took the same position in petitioners’ 2002
amended return.
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In general, the tax treatment with respect to the grant of
an option to purchase stock in connection with the performance of
services, and the transfer of stock pursuant to the exercise of
such an option, is determined under section 83(a) and the regula-
tions thereunder.6
Under section 83(a), a taxpayer who receives an option in
connection with the performance of services has compensation
income in the year in which the option is granted to the taxpayer
if the option has a readily ascertainable fair market value at
the time of grant. Sec. 1.83-7(a), Income Tax Regs. If the
option does not have a readily ascertainable fair market value at
the time of grant, the exercise of the option gives rise to
compensation income in the year of exercise.7 Such compensation
income is equal to the amount by which the fair market value of
the stock on the date (exercise date) of the exercise of the
option pursuant to which the stock was transferred to the tax-
payer exceeds the price (option price) that the taxpayer paid to
acquire the stock under the option.8 Sec. 83(a); sec. 1.83-7(a),
Income Tax Regs.
6
Svoboda v. Commissioner, T.C. Memo. 2006-235.
7
There is no dispute between the parties that none of the
options granted to Ms. Kim pursuant to the Fannie Mae ESPP had a
“readily ascertainable fair market value” at the time of grant.
8
Svoboda v. Commissioner, supra.
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Section 421(a) provides an exception to the tax treatment
prescribed by section 83 for certain types of employee plans,
including employee stock purchase plans such as the Fannie Mae
ESPP involved here. Section 421(a) provides, inter alia, that no
income will result when a taxpayer acquires stock upon the exer-
cise of an option granted under an employee stock purchase plan,
as defined in section 423(b). Sec. 421(a)(1). In general, the
stock so acquired qualifies as a capital asset in the hands of
the taxpayer. When the taxpayer disposes of such stock, the
difference between the amount received on such disposition and
the taxpayer’s basis is capital in character. See secs. 421,
1001, 1221, 1222; cf. sec. 14a.422A-1, Q&A-1, Temporary Income
Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981).9 If, however, the
taxpayer disposes of the stock acquired pursuant to an employee
stock purchase plan within two years of the granting of the
option or within one year after the transfer of the stock to the
taxpayer, such disposition is a “disqualifying disposition”. See
secs. 421(b), 423(a)(1). In that event, the taxpayer is required
to recognize for the year of disposition compensation income that
is equal to the amount by which the fair market value of the
stock on the exercise date exceeds the option price of such
stock. Secs. 83(a), 421(b); sec. 1.83-7(a), Income Tax Regs.;
9
See also Humphrey v. Commissioner, T.C. Memo. 2006-242;
Svoboda v. Commissioner, supra.
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cf. sec. 14a.422A-1, Q&A-1, Temporary Income Tax Regs., 46 Fed.
Reg. 61840 (Dec. 21, 1981);10 see also Xilinx v. Commissioner, 125
T.C. 37, 41 n.5 (2005).
Ms. Kim sold 258 of the 321 shares of Fannie Mae stock that
she acquired under the Fannie Mae ESPP on the respective dates on
which such shares were transferred to her as a result of her
exercising certain stock options under that plan.
On the record before us, we find that petitioners properly
reported the $4,234.94 at issue as compensation income in peti-
tioners’ 2002 return.11
Certain Claimed Long-Term Capital Losses
Petitioners contend that, in addition to the $3,117.40 long-
term capital loss that petitioners claimed in petitioners’ 2002
return, petitioners have $15,949.06 of long-term capital losses
10
See also Svoboda v. Commissioner, supra.
11
Respondent claimed for the first time in respondent’s
opening brief that, in addition to the $4,234.94 of compensation
income reported in petitioners’ 2002 return with respect to Ms.
Kim’s exercise of the options granted to her under the Fannie Mae
ESPP, petitioners have a $5.34 net short-term capital gain from
the respective sales of certain Fannie Mae stock that Ms. Kim
acquired as a result of such exercise. We conclude that if we
were to consider whether respondent’s claim is correct, peti-
tioners, who were pro sese, would be substantially disadvantaged.
We shall not consider respondent’s claim. See Considine v.
Commissioner, 74 T.C. 955, 964-966 (1980). We note, and respon-
dent agrees, that the $5.34 net short-term gain that respondent
claims petitioners have would not affect the amount of the
deficiency for the year at issue. Assuming arguendo that peti-
tioners have such a net short-term gain, any such gain would
affect the amount of the net capital loss carryover to other
taxable years. See sec. 1212(b)(1).
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for their taxable year 2002, or a total of $19,066.46 for that
year. In support of that contention, petitioners rely on peti-
tioners’ 2002 amended return, in which petitioners claimed such
additional long-term capital losses.
A tax return is nothing more than a statement of a tax-
payer’s position and does not establish the existence or the
amount of any item shown therein. See Wilkinson v. Commissioner,
71 T.C. 633, 639 (1979).
On the record before us, we find that petitioners have
failed to carry their burden of establishing that they have for
their taxable year 2002 long-term capital losses of $15,949.06 in
addition to the long-term capital loss of $3,117.40 claimed in
petitioners’ 2002 return.
Interest From the U.S. Treasury
Respondent determined that petitioners have for the year at
issue $622 of interest income from the U.S. Treasury. In his
direct testimony, petitioner Tae M. Kim (Mr. Kim) testified that
petitioners were unaware of any such interest. On cross-examina-
tion, Mr. Kim conceded that petitioners received the respective
refund checks that the U.S. Treasury issued to petitioners with
respect to their taxable years 1997 and 1998. The refund check
issued with respect to petitioners’ taxable year 1997 included
interest of $382.99, and the refund check with respect to their
taxable year 1998 included interest of $239.39.
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On the record before us, we find that petitioners have
failed to carry their burden of establishing that they did not
have for their taxable year 2002 interest income of $622 from the
U.S. Treasury.
Sale of Certain Stock
Respondent determined that petitioners have for the year at
issue $16 of income from the sale of certain stock of a company
described as “TRAVELERS PROP”. Mr. Kim testified that petition-
ers were unaware of any such income.
On the record before us, we find that petitioners have
failed to carry their burden of establishing that they did not
have for their taxable year 2002 income of $16 from the sale of
certain stock of a company described as “TRAVELERS PROP”.
Interest From Washington Savings Bank
Respondent determined that, although petitioners reported
$521.61 of interest income from Washington Savings Bank in the
2002 Schedule B included as part of petitioners’ 2002 return,
they failed to report for the year at issue $8 of interest income
from that bank. We have found that petitioners showed $565.43 as
the total of the three items of interest income reported in the
2002 Schedule B included as part of petitioners’ 2002 return and
as “Taxable interest” on page one, line 8a, of that return. We
have also found that the correct total of the three items of
interest income reported in the 2002 Schedule B would have been
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$557.43, or $8 less than the total interest income of $565.43
shown in that schedule and page one of that return.
On the record before us, we reject respondent’s determina-
tion that petitioners failed to include in income for their
taxable year 2002 $8 of interest income from Washington Savings
Bank.
We have considered all of the parties’ contentions and
arguments that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of respondent,
Decision will be entered under
Rule 155.