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 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 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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