                  T.C. Memo. 2006-242



                UNITED STATES TAX COURT



  ROBERT C. and PATRICIA C. HUMPHREY, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19295-03L.             Filed November 9, 2006.



      P-H, as vice president of i2 Technologies, Inc.
(i2), received incentive stock options (ISOs). On Dec.
31, 1999, P-H resigned as i2’s senior vice president of
marketing. On Nov. 13, 2000, P-H exercised many of his
ISOs.

     Ps filed a joint Federal income tax return for
2000, wherein they reported ordinary gain for regular
income tax purposes from the exercise of the ISOs and
reported a regular income tax of $8,772,392. Ps did
not fully pay the tax liability. Ps subsequently
submitted to R an amended return for 2000 in which they
claimed they were not subject to regular income tax
upon the exercise of the ISOs because P-H was an
employee of i2 within 3 months of exercising the ISOs
as required pursuant to secs. 421(a) and 422(a)(2). R
rejected Ps’ 2000 amended return and issued to Ps a
notice of Federal tax lien. Ps requested a hearing
under sec. 6330. The Appeals Office rejected Ps’
                               - 2 -

     arguments, and Ps timely petitioned this Court for
     review of R’s lien action.

          Held: P-H was not an employee within 3 months of
     exercising his ISOs for purposes of sec. 422(a)(2).



     Brian Gary Isaacson and Don Paul Badgley, for petitioner.

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

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Petitioners filed a petition with this Court

in response to Notices of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 for 2000.   Pursuant to

section 6330(d), petitioners seek review of respondent’s

determinations.1   All references to petitioner in the singular

are to petitioner Robert C. Humphrey.   After concessions,2 the



     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.
     2
       Petitioners concede that nonrecourse debt incurred to
purchase the stock which in turn was pledged to the lender to
secure the debt resulted in the shares’ being transferred to
petitioner. See sec. 1.83-3(a)(2), Income Tax Regs.

     Petitioners also concede that pursuant to sec. 1.83-1(e),
Income Tax Regs., petitioner is not allowed an ordinary loss when
his substantially vested stock was forfeited pursuant to a lapse
restriction.
                                 - 3 -

issues for decision are:    (1) Whether pursuant to section

422(a)(2) petitioner remained an employee with i2 until 3 months

prior to the exercise of his incentive stock options (ISOs); (2)

if petitioner remained an employee of i2 until 3 months prior to

exercising his ISOs, whether the capital loss limitations of

section 1211 apply to the computation of alternative minimum

taxable income (AMTI); (3) if petitioner remained an employee of

i2 until 3 months prior to exercising his ISOs, whether

alternative minimum tax (AMT) capital losses can be carried back

as an alternative tax net operating loss (ATNOL) to reduce AMTI.

                           FINDINGS OF FACT

      The parties’ stipulation of facts and attached exhibits are

incorporated herein by this reference, and the facts stipulated

are so found.   At the time the petition was filed, petitioners

resided in Southlake, Texas.

A.   i2 Employment and Stock Options

      1.   Employment with i2

      Headquartered in Dallas, i2 is a Delaware corporation that

develops and markets enterprise chain management solutions,

including supply chain software and consulting services.      In

1988, i2’s founders created the company’s first software program,

which was groundbreaking in the supply chain management industry.

      On February 3, 1995, petitioner was recruited as i2’s vice

president and eventually became i2’s senior vice president of
                               - 4 -

marketing.   As part of his compensation package, petitioner

received a monthly salary of $10,000 and a $300,000 yearly bonus

if his target goals were reached.    Petitioner was also granted

several stock options pursuant to i2’s Stock Option Agreement

(Agreement), which consisted of ISOs and nonstatutory stock

options (NSOs).   To the extent relevant to this case, these

options are set forth in the table below:

Option grant      ISO or NSO as of     Number of        Exercise
date              date of option       shares granted   price per
                  grant                                 share

12/29/95          ISO                  276,000          $0.1475
12/15/97          ISO                   78,272           5.10938
12/15/97          NSO                    1,728           5.10938
10/21/98          ISO                   28,696           3.48438
10/21/98          NSO                   91,304           3.48438

     The Agreement provided, among other things, that ISOs would

cease to qualify for favorable tax treatment if (and to the

extent) they were exercised more than 3 months after the date the

employee/optionee ceased to be an employee of i2 for any reason

other than death or permanent disability.        The Incentive Stock

Option Agreement (ISO Agreement), accompanying the Agreement,

stated that if the ISOs did not qualify as an incentive stock

option, there might be a regular Federal income tax liability

upon the exercise of the option.
                               - 5 -

     On December 17, 1999, the president of i2, Greg Brady, sent

an e-mail to certain i2 employees announcing the resignation and

retirement of petitioner effective December 31, 1999.   The e-mail

stated:

     To i2 Management:

     It is with great regret that I announce the resignation
     and retirement of Robert Humphrey from i2 effective
     December 31, 1999. Robert has been a strong and
     visible force during the critical growth of i2 for the
     past 4 1/2 years serving as our Vice President of
     Marketing. We will miss Robert’s leadership, energy
     and passion.

     Robert is planning on taking time off with his family
     and then his focus will be on charitable work and
     personal investments.

     We are actively searching for a new VP of Marketing.
     In the interim, Jim Wilson will be assuming the
     leadership role for i2’s Marketing organization.

     Please wish Robert well in the next stage of his life
     as we will surely miss him.

     Sanjiv Sidhu, i2’s CEO, responded to Mr. Brady’s e-mail,

advising him to send the e-mail to all i2 employees.    On December

31, 1999, Mr. Humphrey’s employment as i2’s Senior Vice President

of Marketing was terminated.

     An employee termination form for petitioner was completed,

identifying December 31, 1999, as his “Qualifying Event Date” and

the qualifying event was “Termination or Reduction of Hours”.   On

January 9, 2000, i2’s benefits manager completed a Notice of

Right to Convert Group Life Insurance for petitioner, identifying

December 31, 1999, as his “Termination Date of Insurance and/or
                                - 6 -

Employment”.    It stated that the reason for termination of group

insurance for petitioner was termination of employment.

     In 2000, i2 paid petitioner a bonus for 1999 of $59,177.      Of

this amount, $36,035 was paid to petitioner on January 31, 2000,

and $23,142 was paid to him on February 29, 2000.      The i2 payroll

register for the period ending February 29, 2000, showed

petitioner’s status as “TERMINATED”.

     2. Exercise of Stock Options

     Almost 11 months after retiring, on November 13, 2000,

petitioner acquired 346,000 shares of i2 stock by exercising his

stock options.    Pledging the stock as collateral, petitioner

borrowed $3,555,045 from his brokerage house to pay the purchase

price of the exercised ISOs and NSOs and a portion of the income

tax liability owing from exercising the shares.3    The stock so

acquired was transferable and not subject to a substantial risk

of forfeiture.    Petitioner was not a dealer or trader in

securities.    The details of these transactions are set forth

below.

Option date      Shares      Total       FMV on         FMV less
and type of      exercised   exercise    exercise       exercise
option                       price       date           price

12/29/95 ISO     276,000     $ 40,710    $16,232,250    $16,191,540
12/15/97 ISO      39,136      199,961      2,301,686      2,101,725


     3
       Petitioner also contributed $2,694,482 of his own funds to
pay a portion of the balance of the tax liability.
                                 - 7 -

12/15/97 NSO         864         4,415          50,814       46,399
10/21/98 NSO      30,000       104,532       1,764,375    1,659,843

B.   2000 Federal Income Tax Returns

     Petitioner filed his 2000 Federal income tax return on April

16, 2001, which was prepared by Henry, Held and Associates, P.C.

The return reported wages of $20,243,699, taxable interest of

$5,521, ordinary dividends of $190,346, capital gains of

$3,587,913, miscellaneous income of $16,000, and, after a self-

employment tax deduction of $215 and itemized deductions of

$45,905, taxable income of $23,997,359.     The return reported

regular tax of $8,772,392, AMT of zero, and a self-employment tax

of $429.   After applying a foreign tax credit of $312 and total

payments of $6,067,851, the remaining unpaid income tax liability

was $2,704,658.    Respondent assessed the income tax liability on

May 28, 2001.   Petitioner has not fully paid the balance.

     On March 25, 2002, 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

income tax return (2000 amended return) with a Form 8275,

Disclosure Statement.4     The 2000 amended return reported wage

     4
       The amended return prepared by Mr. Isaacson included a
Form 8275, 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
the portions of the accuracy-related penalty due to disregard of
                                                   (continued...)
                               - 8 -

income of $244,190 rather than the $20,243,699 initially

reported.   Other than wage income, the 2000 amended return

reported the same income and deductions as initially reported,

resulting in regular taxable income of $3,997,850.   The 2000

amended return reported a reduced regular tax of $852,586, AMT of

zero, self-employment tax of $429, and after deducting the same

foreign tax credit and total payments as initially reported,

claimed a refund of $4,815,148.   The 2000 amended return was not

accepted by the Internal Revenue Service.

     On April 15, 2003, petitioner filed a separate Form 1040X

for 2000 containing the following statement:

     The taxpayer’s original return erroneously reported an
     amount due based on an incorrect valuation and/or
     inclusion of stock options (both qualified and non
     qualified) and the incorrect application of 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 exclusion 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
      (...continued)
rules or regulations or to a substantial understatement of income
tax for non-tax-shelter items if the return position has a
reasonable basis.
                                  - 9 -

C.      Collection Actions

     Respondent filed a Notice of Federal Tax Lien on July 15,

2002.     On July 18, 2002, respondent mailed petitioners a Notice

of Federal Tax Lien Filing and Your Right to a Hearing Under IRC

6320 (NFTL), regarding their unpaid 2000 taxes.      Petitioners

submitted Form 12153, Request for a Collection Due Process

Hearing, to respondent indicating that they contested the filed

lien.     On their request, petitioners wrote only “see return

amended pursuant to IRC 83(c)” as their reason for disagreeing

with respondent’s NFTL.

     Petitioners’ request for a hearing was assigned to an

Appeals officer in Dallas, Texas.      Upon petitioners’ request, the

case was transferred to respondent’s Seattle, Washington, Appeals

Office and assigned to Denise Mountjoy.      On September 30, 2003,

Appeals Officer Mountjoy had a conversation with petitioners’

counsel, Mr. Isaacson, during which she declined to consider

petitioner’s request for relief because she could not consider

their underlying liability.      On October 8, 2003, respondent

issued a Notice of Determination Concerning Collection Action(s),

sustaining the lien against petitioners.

     Petitioner timely filed a petition for lien or levy action

with the Court on November 12, 2003.      On August 19, 2004, this

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

in Seattle, Washington.      On November 8, 2004, respondent moved
                                - 10 -

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 liability for the years at issue.

     On March 2, 2005, Appeals Officer Mountjoy held an

administrative hearing with Mr. Isaacson during which he argued

that:    (1) The stock at issue was not transferred to petitioner

because it was pledged to a lender as security for nonrecourse

debt;5 and (2) petitioner continued his employment with i2 after

his resignation and termination on December 31, 1999, until

October 2000, and as a result, the exercise of the options

qualified for nonrecognition of income pursuant to section 421.

     During the conference, Mr. Isaacson said he would provide

additional documents to support petitioner’s claim that he

continued his employment with i2 after December 31, 1999, and

provide a declaration from petitioner’s former boss, Greg Brady,

which would indicate that Mr. Brady accepted petitioner’s

resignation in December 1999 and petitioner continued on as an

employee with i2 after January 2000.

     On April 19, 2005, Appeals Officer Mountjoy mailed a letter

to Mr. Isaacson requesting him to submit the documentation and

declaration supporting petitioner’s claim.     On August 1, 2005,




     5
         This issue has been conceded.   See supra note 2.
                                - 11 -

Appeals Officer Mountjoy received Mr. Brady’s declaration,6 and

on August 12, 2005, she received a letter from Mr. Isaacson

stating no further documentation would be submitted.

     Appeals Officer Mountjoy examined all available information

and issued a Supplemental Notice of Determination on September

28, 2005, which rejected petitioners’ challenge to the amount of

the underlying tax liability reported on their original 2000

return.     Respondent has not issued a notice of deficiency for the

years at issue.    This case was tried during the October 31, 2005,

Trial Session in Seattle, Washington.

                                OPINION

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); Montgomery v.

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

Admin. Regs.



     6
       Mr. Brady’s declaration was not received into evidence,
and he did not appear to testify at trial.
                               - 12 -

     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, petitioners were not

issued a notice of deficiency and did not have a prior

opportunity to dispute the tax liability.    Therefore, the proper

standard of review for the arguments challenging the underlying

tax liability is de novo.    Sego v. Commissioner, supra at

609-610.

B.   ISOs and the Employee Requirement Under Section 422(a)(2)

     Petitioner’s original 2000 return reported ordinary gain

resulting from the exercise of his ISOs for 315,136 shares

pursuant to section 83.7    Petitioner now contends that he was

employed by i2 within 3 months of exercising his options as

required under section 422(a)(2), allowing him to apply section

421(a) to the transactions so that he does not have to recognize

the ordinary gain reported on his original 2000 return.8

     Respondent argues petitioner was not an employee of i2

within 3 months of exercising his ISOs, and section 83, not


     7
       Petitioner was granted options to acquire 346,000 shares
of stock, 315,136 of which were ISOs and 30,864 were NSOs.
     8
       Petitioner does not allege, and the record does not
suggest, that his ownership right in his i2 stock was
nontransferable or subject to a substantial risk of forfeiture
when he exercised his options on Nov. 13, 2000.
                               - 13 -

section 421(a), applies to the exercise of the ISOs.     Thus,

respondent contends that petitioners properly reported the gain

recognized from exercising those ISOs as ordinary income for

regular tax purposes on their original 2000 return under section

83.

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

422(a) are met, a taxpayer does not recognize income either upon

the granting9 of an ISO to the taxpayer or when the stock is

transferred10 to the taxpayer upon exercise of an ISO.

Recognition of income is deferred until disposition of the

stock.11   Sec. 421(a); sec. 14a.422A-1, Q&A-1, Temporary Income

Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981).    If the

requirements of section 422(a) are satisfied, gain on the sale of

the stock is characterized as capital gain.12    Secs. 1221 and

1222; sec. 14a.422A-1, Q&A-1, Temporary Income Tax Regs., supra.



      9
       The date on which an 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.
      10
       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.
      11
       A disposition of ISO stock generally means any sale,
exchange, gift, or transfer of legal title to, the stock. Sec.
424(c)(1).
      12
       New regulations under sec. 422 became effective Aug. 3,
2004, but they are not applicable to this case. Sec. 1.422-5(f),
Income Tax Regs.
                                 - 14 -

      Section 422(a)(2)13 requires the taxpayer to be an employee

of the corporation granting the option at all times from the date

the option is granted until 3 months before the date of

exercise.14    Sec. 422(a)(2).   If the taxpayer exercises his ISOs

more than 3 months after termination of employment from the

grantor corporation, section 83, not section 421, applies to the

transfer of stock.    Secs. 421(a); 83(e)(1); sec. 1.83-7, Income

Tax Regs.

     Section 83(a) provides in pertinent part that if property is

transferred to a taxpayer in connection with the performance of

services (e.g., stock transferred to a taxpayer upon the exercise

of a stock option), the excess of the fair market value of the

stock (measured as of the first time the taxpayer’s rights in the

stock are transferable or are not subject to a substantial risk

of forfeiture) over the amount, if any, paid for the stock (the

exercise price) shall be included in the taxpayer’s gross income

in the first taxable year in which the taxpayer’s rights in the

stock are transferable or are not subject to a substantial risk




     13
          Sec. 422(a)(1) is not at issue.
     14
       The taxpayer may also be a employee of a parent or
subsidiary corporation of the corporation granting the stock
option, or a corporation or a parent or subsidiary corporation of
such corporation issuing or assuming a stock option in a
transaction to which sec. 424(a) applies. Sec. 422(a)(2).
                               - 15 -

of forfeiture.15   See Tanner v. Commissioner, 117 T.C. 237, 242

(2001), affd. 65 Fed. Appx. 508 (5th Cir. 2003); sec. 1.83-7(a),

Income Tax Regs.

     Petitioner argues he continued his employment with i2 in an

advisory capacity through October 2000.     In support of his

argument, petitioner testified that, when he expressed his desire

to leave i2, he was pressured by i2’s president, Mr. Brady, to

remain with the company until a replacement could be found.

After December 31, 1999, his primary role was to assist in

finding a replacement and to a lesser extent, assist with

business development, media and analyst relations, and

establishing a new venture company.     As compensation for

remaining with i2, he would receive his full 1999 bonus and

permission to exercise his stock options without restriction.




     15
        Section 83(a) may apply to a nonqualified stock option
as follows:

     If there is granted to an employee or independent
     contractor * * * in connection with the performance of
     services, an option to which section 421 * * * does not
     apply, section 83(a) shall apply to such grant if the
     option has a readily ascertainable fair market value *
     * * at the time the option is granted. * * * . If
     section 83(a) does not apply to the grant of such an
     option because the option does not have a readily
     ascertainable fair market value at the time of grant,
     sections 83(a) and 83(b) shall apply at the time the
     option is exercised or otherwise disposed of, even
     though the fair market value of such option may have
     become readily ascertainable before such time. * * *
     [Sec. 1.83-7(a), Income Tax Regs.]
                              - 16 -

     The taxpayer has the burden of proving the existence of an

employment relationship.   Rule 142(a); Ellison v. Commissioner,

55 T.C. 142, 152 (1970).

     Similar to section 422(a)(2), section 1.421-7(h)(1) and (2),

Income Tax Regs., provides that for purposes of determining

whether section 421 applies to a statutory option,16 the taxpayer

must be an employee of the corporation granting the option at all

times from the date the option is granted until 3 months before

the date of exercise.   To determine whether the taxpayer is an

employee, the rules contained in section 3401(c) and the

regulations thereunder are applicable.   Sec. 1.421-7(h)(1),

Income Tax Regs.

     Section 3401(c) and the regulations thereunder define

“employee” for purposes of withholding from wages.   In relevant

part, section 31.3401(c)-1(b), Employment Tax Regs., provides:

     (b) Generally the relationship of employer and employee
     exists when the person for whom services are performed
     has the right to control and direct the individual who
     performs the services, not only as to the result to be
     accomplished by the work but also as to the details and
     means by which that result is accomplished. That is, an
     employee is subject to the will and control of the
     employer not only as to what shall be done but how it
     shall be done. In this connection, it is not necessary
     that the employer actually direct or control the manner
     in which the services are performed; it is sufficient
     if he has the right to do so. The right to discharge is


     16
       The term “statutory option” means “a qualified stock
option, as defined by section 422(b)”. Sec. 1.421-7(b)(1),
Income Tax Regs. Sec. 422(b) defines an “incentive stock
option”.
                                - 17 -

     also an important factor indicating that the person
     possessing that right is an employer. Other factors
     characteristic of an employer, but not necessarily
     present in every case, are the furnishing of tools and
     the furnishing of a place to work to the individual who
     performs the services. In general, if an individual is
     subject to the control or direction of another merely
     as to the result to be accomplished by the work and not
     as to the means and methods for accomplishing the
     result, he is not an employee.

     In United States v. W.M. Webb, Inc., 397 U.S. 179, 194

(1970), the Supreme Court stated with respect to section

31.3121(d)-1(c)(2), Employment Tax Regs., which has language

almost identical to section 31.3401(c)-1(b), that “the regulation

provides a summary of the principles of the common law, intended

as an initial guide for determination * * * [of] whether a

relationship ‘is the legal relationship of employer and

employee.’”    The regulations applicable to this case, section

31.3401(c)-1(b), Employment Tax Regs., adopt the common law test

for purposes of determining when an employee-employer

relationship exists.17    Taylor v. Commissioner, 71 T.C. 124, 127

(1978).

     Whether an individual is a common law employee is a question

of fact,18 to be determined applying the following factors:    (1)

The degree of control exercised by the principal; (2) which party



     17
       An exception to the common law test may apply in
situations involving leaves of absence. See sec. 1.421-7(h)(2),
Income Tax Regs.
     18
          Ellison v. Commissioner, 55 T.C. 142, 152 (1970).
                               - 18 -

invests in work facilities used by the individual; (3) the

opportunity of the individual to realize profit or loss; (4)

whether the principal can discharge the individual; (5) whether

the work is part of the principal’s regular business; (6) the

permanency of the relationship; and (7) the relationship the

parties believed they were creating.    Ewens & Miller, Inc. v.

Commissioner, 117 T.C. 263, 270 (2001); Weber v. Commissioner,

103 T.C. 378, 387 (1994), affd. 60 F.3d 1104 (4th Cir. 1995);

Potter v. Commissioner, T.C. Memo. 1994-356.    No single factor is

dispositive.    Ewens & Miller, Inc. v. Commissioner, supra.

            (1) Degree of Control

     The “degree of control” test requires the Court to examine

not only the control exercised by an alleged employer, but also

the degree to which the alleged employer may intervene to impose

control.    Weber v. Commissioner, supra at 387-388.

     Petitioner testified he was constrained by the same controls

and expectations while operating as an adviser as during his

position as senior vice president of marketing.   The record does

not establish that i2 exercised control or had the capacity to

impose control over petitioner after his retirement on December

31, 1999.    On the contrary, the record indicates i2 lacked

control because petitioner did not have the same responsibilities

after December 31, 1999; his previous position was filled by

another i2 employee; he no longer had an office with the company;
                               - 19 -

he did not have a budget; he was not required to work a certain

number of hours or particular days of the week; and he held

positions with other noncompeting companies in 2000.     The absence

of control indicates the absence of an employee-employer

relationship after December 31, 1999.

          (2)    Investment in Facilities

     The fact that a worker provides his or her own tools

generally indicates a nonemployee status.      Ewens & Miller, Inc.

v. Commissioner, supra at 271.    Petitioner testified after

December 31, 1999, he worked primarily for i2 at home using his

own computer and telephone.   Petitioner did not produce evidence

indicating i2 provided a facility to work, equipment, supplies,

or money for work-related expenses such as travel and phone

usage.   This factor is not indicative of an employee-employer

relationship between i2 and petitioner after December 31, 1999.

           (3)   Opportunity for Profit or Loss

     A worker’s opportunity to earn a profit and assume risk of

loss may indicate a nonemployee relationship.      Simpson v.

Commissioner, 64 T.C. 974, 988 (1975).      On the other hand,

earning an hourly wage or salary indicates an employee-employer

relationship exists.    Del Monico v. Commissioner, T.C. Memo.

2004-92; Kumpel v. Commissioner, T.C. Memo. 2003-265.

     After December 31, 1999, i2 did not pay petitioner either a

salary or an hourly wage.   Petitioner testified his compensation
                               - 20 -

for advisory services was receiving the full amount of his 1999

bonus without having to negotiate the amount, and i2 would

refrain from interfering with his ability to exercise his i2

stock options.   However, the record indicates petitioner’s bonus

was already established and set forth in his 1995 employment

compensation package and indicates i2 did not have the legal

right to limit petitioner’s ability to exercise his stock

options, unless he started working for a competing company soon

after departing i2.

     The record also fails to show he had any opportunity to earn

a profit or to risk loss.   This factor indicates an absence of an

employee-employer relationship.

          (4)    Right To Discharge

     The record is silent with respect to whether i2 retained the

right to discharge petitioner.     Petitioner expressed only that he

would be terminated from his advisory role when a replacement was

found.   This factor is neutral.

           (5) Integral Part of Business

     Petitioner’s testimony indicates his post December 31, 1999,

services were mostly advisory in nature on issues peripheral to

i2’s principal business of creating supply chain management

solutions.   This factor indicates an absence of an employee-

employer relationship.
                               - 21 -

          (6)   Permanency of the Relationship

     A relationship established to accomplish a specified

objective is not indicative of an employment relationship.

Ellison v. Commissioner, 55 T.C. at 155.   A transitory work

relationship may point toward a nonemployee status.   Ewens &

Miller, Inc. v. Commissioner, supra at 273.

     Petitioner testified neither he nor i2 contemplated a

continuing relationship.   He asserted his advisory position began

in January 2000 and terminated in October 2000, when his

replacement was found.   The continued relationship was for a

brief period and merely to accomplish a specific objective.     This

factor indicates an absence of an employee-employer relationship.

          (7)   Relationship the Parties Thought They Created

     Petitioner argued at trial and in brief that he and Mr.

Brady created a new employee-employer relationship before he

retired on December 31, 1999, which lasted until October 2000.

The record indicates no such relationship was created with i2

after his retirement.

     An e-mail written by Mr. Brady to i2’s management praising

petitioner’s accomplishments stated petitioner’s termination was

effective December 31, 1999.   In response, i2’s CEO asked Mr.

Brady to send the e-mail to all employees of i2.   Furthermore,

petitioner’s Employee Termination Form and Notice of Right to

Convert Life Insurance stated he was terminated on December 31,
                              - 22 -

1999, and i2’s February 29, 2000, payroll register stated

petitioner was terminated.   The evidence indicates an employee-

employer relationship did not exist after December 31, 1999.

     None of the factors listed above support petitioner’s

position.   Considering all of the facts and circumstances, this

Court finds petitioner was not a common law employee of i2 after

he retired on December 31, 1999, and was not an employee within 3

months of exercising his ISOs on November 13, 2000, for purposes

of section 422(a)(2).   As a result, section 421 did not apply to

the exercise of petitioner’s ISOs on November 13, 2000, and

section 83 did.

     The remaining issues will not be addressed because they rely

upon this Court’s finding petitioner was an employee within 3

months of exercising his ISOs for purposes of section 422(a)(2).

     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.
