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 November 11, 2008 by Joseph M. Wallin

The Bailout Bill's Incentive Stock Option Savings Provisions

The Wall Street Journal reported yesterday that the Bailout Bill had in it provisions which "saved" taxpayers who had been stung by the alternative minimum tax on incentive stock options from their unpaid taxes and penalties and interest arising from their incentive stock option exercises prior to January 1, 2008.

The provision provides that any "underpayment of tax outstanding on the date of the enactment of this subsection which is attributable to the application of section 56(b)(3) for any taxable year ending before January 1, 2008, and any interest or penalty with respect to such underpayment which is outstanding on such date of enactment, is hereby abated."

Section 56(b)(3) is the provision which provides that the gain on the exercise of incentive stock options is an alternative minimum tax adjustment.  So, the Bailout Bill says, quite literally, if you owe taxes attributable to the exercise of incentive stock options for a tax year ending before January 1, 2008, and interest and penalties on such taxes, you don't have to worry about it!

Taxpayers who paid the AMT in ISO exercises prior to January 1, 2008, might want to consider their refund alternatives.

Taxpayers should also be aware that the provision is only effective for ISO exercises prior to January 1, 2008, and does not extend into the future.

 

 

 

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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 July 18, 2008 by Joseph M. Wallin

New Incentive Stock Option and ESPP Regulations Issued

The law has changed regarding reporting of incentive stock option exercises.  It used to be that issuers were only required to give optionees an information statement, but not report the exercise to the IRS.  Now reporting to the IRS is required.

You can read the new regulations here.

"As amended by the Act, section 6039 requires corporations to file an information return with the IRS, in addition to providing employees with an information statement, following a stock transfer. The time and manner for filing a return with the IRS, as well as the information to be contained in the return and furnished to employees, is addressed in these proposed regulations. Section 6039, as amended by the Act, applies to stock transfers occurring on or after January 1, 2007. However, in Notice 2008-8, 2008-3 IRB 276 (December 19, 2007) (see Sec.  601.601(d)(2)(ii)(b)), the IRS waived the obligation to file an information return for 2007 stock transfers governed by section 6039."

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Posted on January 2, 2008 by Joseph M. Wallin

IRS Waives Employer Reporting Obligation for Qualified Stock Options Exercised in 2007

By Stuart Harris and Jeni Lassell

For 2007 the IRS has waived the requirement that employers file an information return on the exercise of incentive stock options (ISO) or discounted options under a qualified Employee Stock Purchase Plan (ESPP). Employers must continue to provide certain written information to any person who has exercised an ISO, or who has received discounted stock during the year pursuant to an ESPP. Continue reading...

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Posted on December 21, 2007 by Joseph M. Wallin

IRS Waives ISO and ESPP Reporting to IRS for 2007

The requirement that employers file information returns with the IRS (in addition to providing information to employees, which is still required), with regard to incentive stock option exercises, and certain stock transfers pursuant to employee stock purchase plans, has been waived for 2007. Employers must continue to provide the information to employees, as before.  Notice 2008-8, 2008-3 IRB.  

 

 
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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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