The Ninth Circuit yesterday, in United States v. Tuff, No. 05-35195 (9th Cir. 12/4/06), affirmed the district court (359 F. Supp. 2d 1129 (W.D. Wash. 2005)) and held that a taxable event occurred when an employee of Real Networks, Inc. exercised his stock options ($460,094 fmv; $6,137 strike price) and pledged the stock as collateral for a loan.  The Ninth Circuit held that the employee is not entitled to an ordinary loss deduction for the period his employer prohibited trade of the shares to guard against insider trading.  The Ninth Circuit noted:

Although we appear to be the first court of appeals to address these arguments, we note that both the United States Court of Federal Claims and the United States Tax Court have recently considered, and rejected, many of the same arguments Tuff urges here. See Palahnuk v. United States, 70 Fed. Cl. 87 (2006); Racine v. Commissioner, T.C. Memo. 2006-162; Hilen v. Commissioner, T.C. Memo. 2005-226. We largely agree with the analysis undertaken by these courts.