IRS Suspends Collection of AMT on ISO Exercises, Temporarily
This is a big deal, and is reported in TaxProf Blog.
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.
