Tuff

I. BACKGROUND

The appeal turns on whether Tuff received income in the form of shares of stock when he exercised his options, or when Morgan Stanley liquidated the shares after their value had declined.

The material facts are not in dispute. Tuff was employed by RealNetworks, Inc., at a management level, and was classified as a corporate insider who could sell RealNetworks shares only during open trading windows approved by the company. As part of his compensation package Tuff received stock options, which he exercised twice in 1999 to purchase Real- Networks shares that had a total market value at the time of purchase of $460,093.75. The exercise, or “strike,” price of these shares was $6,137.00, making the difference, or spread, between their market value and exercise price $453,956.75. 19024 UNITED STATES v. TUFF Tuff financed these purchases by borrowing from Morgan Stanley, writing checks to RealNetworks from his Morgan Stanley account to cover both the strike price and federal withholding taxes each time he exercised an option. The shares were deposited in an account in Tuff’s name, and Tuff became the registered owner of the stock. He had the right to…