Henry v. Commissioner

Albert Henry (plaintiff) was an executive and director of IMED Corporation, which provided Henry with stock options. Henry reported the fair market value of the options as zero on his federal tax return (i.e., Henry assigned a zero basis to the options). Henry later sold the options, reporting the proceeds as a capital gain. Henry’s return also identified the options, clearly differentiated between stocks and options, and disclosed the relevant acquisition and disposition dates, sales prices, the initial zero basis, and the gain achieved. The commissioner of the Internal Revenue Service (IRS) (defendant) disagreed with Henry’s treatment of the options, assessing a deficiency of more than $2 million. The commissioner also imposed an addition to tax (i.e., penalty) pursuant to Internal Revenue Code (code) §§ 6653(a)(1) and 6661 (now both codified at § 6662) of approximately $105,000 and $525,000, respectively. Henry sued the commissioner in the United States Tax Court, challenging the deficiency and penalties. With respect to § 6661, Henry argued that the penalty was unwarranted because he adequately disclosed the relevant facts regarding his treatment of the options on his return. In support of this contention, Henry submitted the expert testimony of a former long-term IRS employee, who opined that (1) Henry’s initial zero valuation of the options adequately disclosed the relevant facts, (2) such disclosure was enough to apprise the IRS about a potential dispute regarding the options’ tax treatment, and (3) Henry’s return was likely to be selected for examination by the IRS due to Henry’s treatment of the options.