Posted on January 29, 2009 by Joseph M. Wallin

Incentive Stock Option Alternative Minimum Tax Abatement

From the IRS on the ISO AMT abatement provisions in the Emergency Economic Stabilization Act of 2008: 

"The Act provides several changes to help taxpayers with ISO AMT liabilities.  First, the Act requires the abatement of any tax liability attributable to the requirement to include amounts in alternative minimum taxable income due to the exercise of the ISO for taxable years ending prior to January 1, 2008, as well as related penalties and interest, to the extent that the liability remains unpaid as of October 3, 2008.  Second, the Act accelerates the allowance of the long-term unused minimum tax credit allowing up to 50% of such amount to be a refundable credit for the 2008 and 2009 tax years.  Third, the Act allows taxpayers a minimum tax credit for the 2008 and 2009 tax years that is refundable if not otherwise allowable in reducing current tax liability, equal to 50% of the related interest and penalties paid by the taxpayer prior to October 3, 2008, attributable to the exercise of incentive stock options.  Thus, provided that an ISO AMT liability has resulted in a long-term unused minimum tax credit, the taxpayer may claim a total credit of 100% of the tax, penalties, and interest paid prior to October 3, 2008, attributable to the exercise of incentive stock options that resulted in those liabilities, over a two-year period."

For more, see here.

 "The IRS has identified taxpayers affected by this recent legislation and generally is not collecting on these accounts, pending recalculation of the taxpayers’ liabilities and abatement of appropriate amounts.  Taxpayers with ISO AMT liabilities that were unpaid as of October 3, 2008, can expect notification of abatement of the unpaid ISO AMT liability.  Taxpayers who believe that they have an unpaid ISO AMT liability, but have not received notification from the IRS regarding this liability by December 31, 2008, should contact the IRS."

Apparently taxpayers who paid the AMT on ISO exercises cannot apply for a refund and are left with the sole (probably completely unsatisfactory) remedy of the acceleration of the long-term unused minimum tax credit.
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Posted on August 29, 2008 by Joseph M. Wallin

IRS Suspends Collection of AMT on ISO Exercises, Temporarily

This is a big deal, and is reported in TaxProf Blog.

 

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Posted on September 12, 2007 by Joseph M. Wallin

ISOs, the AMT, and the Pain Taxpayers Feel

In a recently decided Tax Court case, Marcus v. Commissioner, 129 T.C. No. 4 (August 15, 2007), another taxpayer lost in a case involving the exercise of incentive stock options ("ISOs") in highly appreciated stock before the bursting of the stock market bubble in 2001.

In a series of option exercises beginning in 1998 and continuing through 2000, the taxpayer exercised ISOs on 40,362 shares of stock having an aggregate fair market value of $5.9M.  The taxpayer paid $175,000 to acquire this stock.  As a result of exercising the ISOs, the taxpayer incurred significant AMT liability, and on his first tax return filed for 2000 paid $1.6M in AMT.

In 2001, the taxpayer sold 30,297 of the shares for a total of $1.6 million.  The taxpayer had a regular tax basis in those shares of $127,920, the exercise price.  Thus, for regular income tax purposes in 2001 the taxpayer had capital gain of $1.5M.  The taxpayer's AMT basis in the shares sold in 2001 was $4.4M.  Thus, for AMT purposes the taxpayer had a capital loss of $2.7M in 2001.

The taxpayer filed an amended 2000 tax return and reduced his 2000 AMTI by a claimed alternative tax net operating loss ("ATNOL") deduction carried back from 2001 in the amount of $1.9M.  The IRS denied this deduction and issued the taxpayer a deficiency.

Generally, a taxpayer may carry back a net operating loss ("NOL") to the 2 taxable years preceding the loss, then forward to each of the 20 taxable years following the loss.  For AMT purposes, taxpayers take an ATNOL deduction in lieu of an NOL deduction.  An ATNOL is deduction is defined as the NOL allowable under Section 172, taking into account certain exceptions and adjustments and preference items. 

In Marcus, the Tax Court did not find any statutory support for the taxpayer's argument that the difference between the adjusted AMT basis and the regular tax basis was an adjustment, to the taxpayer's ATNOL, which would have created an ATNOL that the taxpayer could then carry back from 2001 to 2000.  The Tax Court also held that the stock sold was a capital asset and thus did not create an ATNOL due to the restrictions of Section 172(d) of the Internal Revenue Code, citing Merlo,a case we previously blogged about, and which the taxpayer also lost.

The result in Marcus is harsh.  It would seem fair that a taxpayer could carry back an AMT loss on stock sold when the taxpayer included a sizeable amount in AMT in a prior year on the exercise of an ISO.  However, it appears that taxpayers are going to have to wait for Congress to fix this, because the courts are not willing or unable to do so.
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Posted on August 18, 2007 by Joseph M. Wallin

Handicapping the Likelihood of Passage of the Carried Interest Tax Bill

The New York Sun reported on Friday, August 17, that Rep. Charles Rangel believes his plan to combine AMT reform with an increase in the carried interest tax may be veto proof.  President Bush opposes the tax.  We have previously blogged on Rep. Rangel's idea of combining the two measures.  In the Senate, Senator Charles Schumer has said he plans on introducing a bill that would increase the tax on carried interest in all partnerships, not just investment partnerships.  The bill co-sponsored by Rep. Rangel would create a new Internal Revenue Code Section 710, which would specifiy that any income with respect to an "investment services partnership interest" would be treated as ordinary income for the performance of services, not capital gain.

 

 

 

An "investment services partnership interest" as defined in Rep. Rangel's co-sponsored legislation is an interest in a  partnership held by a person if such person provides, directly or indirectly, in the active conduct of a trade or business, a substantial quantity of any of the following services to the partnership:
  • advising the partnership as to the value of any specified asset;
  • advising the partnership as to the advisability of investing in, purchasing, or selling any specified asset;
  • managing, acquiring, or disposing of any specified asset;
  • arranging financing with respect to acquiring specified assets; or
  • any activity in support of the above-described services.

"Specified assets" include, generally, securities, real estate, commodities, or options or derivatives contracts with respect to securities, real estate, or commodities.  There is a carve out for capital interests, but only if allocations with respect thereto are reasonable.  In other words, under the proposed legislation, partners who hold an "investment services partnership interest" and a capital interest cannot escape the ordinary income tax treatment on their income related to investment management services through an unreasonable allocation with respect to their capital interest.
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Posted on August 13, 2007 by Joseph M. Wallin

Incentive Stock Options and the AMT--Woes for Taxpayer

In Robert J. Merlo v. Commissioner, the taxpayer feels the full brunt of the the harshness of the alternative minimum tax in connection with the exercise of an incentive stock option.  The taxpayer exercised an incentive stock option for public company stock in the tax year 2000, when the stock was worth over $1 million.  The taxpayer could not sell the stock during 2000 because the company's blackout period was in effect throughout the remainder of the tax year 2000.  The stock became worthless in 2001, and the Tax Court held that the resulting capital loss could not be carried back as an alternative tax net operating loss to the tax year 2000 to offset the income from the options exercise. 

The United States Court of Appeals for the Fifth Circuit affirmed the Tax Court, holding that the taxpayer's stock was not subject to a substantial risk of forfeiture in 2000 despite the blackout, and that the taxpayer could not carry back the alternative tax net operating loss from the tax year 2001 to the tax year 2000.  "The mere fact that a restriction prevented Merlo from transferring the shares during the blackout period was not enough to cause Merlo to forfeit the shares."

One benefit of non-qualified or non-statutory stock options is that the spread on exercise is not an alternative minimum tax adjustment.  Sure, income and employment tax withholding is required upon exercise, and this can make exercise more difficult, but it certainly avoids the issue the taxpayer in Merlo confronted.
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