                               T.C. Memo. 2015-133



                         UNITED STATES TAX COURT



          DAVID S. STOUT AND CRYSTAL A. STOUT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16781-13.                          Filed July 21, 2015.



      David S. Stout and Crystal A. Stout, pro sese.

      Richard J. Hassebrock, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      FOLEY, Judge: After concessions, the issues for decision are whether

petitioners’ 2007 income, relating to a stock equivalent plan, is properly
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[*2] characterized as ordinary or capital gain and whether petitioners are liable for

a section 6651(a)(1) addition to tax.1

                               FINDINGS OF FACT

      From 1999 through 2012 David Stout worked as a software engineer for

Pole Zero Corp. (Pole Zero), an Ohio corporation that designs and manufactures

radio frequency interference mitigation products. In January 1995 Pole Zero

authorized and instituted a stock equivalent plan (plan) pursuant to which it issued

stock incentive units (SIUs) to “full-time salaried employees of the Company who

have been employed * * * a minimum of three (3) years and * * * serve in key

executive, administrative, professional or technical capacities”.

      Pole Zero credited SIUs to accounts maintained for the benefit of plan

participants. The value of each SIU was measured by, and adjusted to reflect

changes in, the fair market value of a share of Pole Zero common stock. In

addition, plan participants received, for each SIU, credits to their plan accounts

equal to cash dividends relating to each share of common stock. These dividend

equivalents accrued interest. The plan provided that amounts credited to a plan

participant’s account “represent only an unsecured promise * * * to pay in

      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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[*3] accordance with the terms of the Plan.” Plan participants would not, pursuant

to the plan, “acquire any right, title, or interest in any assets of the Company.”

Upon a merger or acquisition of Pole Zero, plan participants had the right to

receive cash payments equal to the value of their plan accounts.

      On February 27, 2007, Dover Electronics, a subsidiary of Dover Corp.,

acquired Pole Zero. On or around March 5, 2007, Pole Zero paid Mr. Stout

$319,559, reflecting the value of his plan account at the time of the acquisition.

The extended due date for filing petitioners’ 2007 Form 1040, U.S. Individual

Income Tax Return, was October 15, 2008. Petitioners filed their 2007 Form 1040

on February 1, 2011, and reported the $319,559 payment, relating to the plan, as

ordinary income. Respondent examined petitioners’ 2007 tax return. During the

examination petitioners contended the payment from Pole Zero, relating to the

plan, qualified for capital gain treatment. Respondent, on April 17, 2013, sent

petitioners a notice of deficiency relating to 2007. Respondent disallowed certain

itemized and business expense deductions and determined that petitioners were

liable for a $29,901 income tax deficiency and a $7,475 section 6651(a)(1)

addition to tax. On July 22, 2013, petitioners, while residing in Ohio, filed a

petition with the Court.
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[*4]                                 OPINION

       Capital gain is “gain from the sale or exchange of a capital asset”. See sec.

1222(1), (3). A right to receive a future payment of ordinary income is not a

capital asset. See Commissioner v. P.G. Lake, Inc., 356 U.S. 260, 265-266 (1958);

Davis v. Commissioner, 119 T.C. 1, 6-7 (2002). Petitioners contend that the plan,

pursuant to section 422, was an incentive stock option plan; they received stock;

and the payment received was capital gain income. We disagree. The plan

provided that Mr. Stout, in consideration for his services, would receive a cash

payment on a future date. See sec. 61(a)(1); Downs v. Commissioner, 49 T.C.

533, 539 (1968) (holding that compensation received as consideration for services

is ordinary income). The plan did not qualify as a section 422 incentive stock

option plan and did not grant Mr. Stout an option to buy or sell any Pole Zero

stock. See sec. 422(b) (providing that an “incentive stock option” is an option

granted to an individual to purchase the stock of a corporation). Indeed, it

expressly provided that participants would not receive any interest in the assets of

Pole Zero. Accordingly, the payment to Mr. Stout was ordinary income. See sec.

1222(1), (3); Commissioner v. P.G. Lake, Inc., 356 U.S. at 265-266; Davis v.

Commissioner, 119 T.C. at 6-7.
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[*5] Section 6651(a)(1) imposes an addition to tax for failure to timely file a

return unless it is shown that such failure is due to reasonable cause and not due to

willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985). Petitioners

filed their Form 1040 over two years after its due date but contend that they had

reasonable cause for doing so because Mr. Stout could not find relevant

documentation and he did not want to “get in trouble for filing false tax records”.2

In short, petitioners did not exercise ordinary business care and prudence, and

their failure to find particular documents does not excuse their failure to timely

file. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Accordingly, petitioners

are liable for a section 6651(a)(1) addition to tax.

      Contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                       Decision will be entered

                                               under Rule 155.




      2
       Respondent bears, and has met, the burden of production relating to the
sec. 6651(a)(1) addition to tax. See sec. 7491(c); Higbee v. Commissioner, 116
T.C. 438, 446 (2001). Petitioners bear the burden of proof relating to reasonable
cause. See Higbee v. Commissioner, 116 T.C. at 446.
