United States v. James H. Tuff

James H. Tuff (“Tuff’) appeals the summary judgment granted the United States in its action to recover $208,513.20 refunded to Tuff by the Internal Revenue Service (“IRS”) in connection with stock options Tuff exercised in 1999 through a margin loan from Morgan Stanley. We affirm the judgment.

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 Real-Networks 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 RealNetworks 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.

Tuff financed these purchases by borrowing from Morgan Stanley, writing checks to RealNetworks from…