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ANOTHER AMT ISO DEFEAT

June 27, 2006

If one door is locked, you try another. That one's locked, too?

That's the problem for taxpayers who exercised incentive stock options and then rode their new shares down to the basement. These taxpayers often owe large amounts of alternative minimum tax as a result of acquiring now-worthless stock.

James Pavlosky exercised ISOs in 2000, paying $96,120 for shares worth $1,612,500. While this generated no income in computing regular tax, the $1,516,380 difference was taxable in computing AMT. He apparently hoped to take advantage of the main ISO break - capital gain tax rates on the disposition of the shares one year after exercise.

Unforturnately, the stock collapsed. Mr. Pavlosky was unable to pay the $430,000 AMT bill and he ended up in bankruptcy.

The Tax Court has been unhelpful to ISO-AMT victims, like Iowan Ronald Speltz, so Mr. Pavlosky knocked at the Bankruptcy Court door for help. Earlier this month the Sourthern District of Texas U.S. Bankruptcy Court declined to open the door that the Tax Court left shut.

It doesn't seem like the courts are going to help the ISO-AMT victims. At this point they can only look to Congress.

The Moral: if you exercise incentive stock options, make sure you have enough resources to pay the AMT if the stock goes bad. If you don't, sell enough ISO stock to cover your taxes. You forfeit the regular tax breaks, but you may avoid a trip to bankruptcy court.