Allen L. Davis v. Commissioner of IRS

RIPPLE, Circuit Judge:

In 2004, Allen Davis exercised an option to purchase additional shares in CNG Financial Corporation (“CNG”), a closely-held corporation. He did not report his exercise of the option as income on his federal income tax return, believing that it had no tax consequences. However, CNG took a deduction for the value of the shares Mr. Davis received through the option’s exercise, stating that it issued the option to Mr. Davis in connection with his performance of services. CNG’s shareholders, other than Mr. Davis, (the “CNG taxpayers”), 1 claimed their pro rata shares of this…