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YET ANOTHER LOSS FOR AMT-ISO VICTIMS
August 16, 2006
The Tax Court rejected yet another attempt to avoid the AMT consequences of incentive stock options gone bad yesterday.
While most employee stock options are taxable as ordinary income when exercised, incentive stock options are not, at least in computing regular tax; if you hold onto the stock for one year after exercising the option, you get capital gain on the sale, rather than ordinary income. The catch? It's all taxable for alternative minimum tax on exercise.
A Mark Spitz (not the Mark Spitz, as far as I can tell) exercised his ISOs and then saw the share value collapse before a year went by. He then had to pay AMT on the amount the value at exercise of the now-worthless shares exceeded thier exercise price. Like every ISO-AMT victim before him (including Iowan Ron Speltz), he lost.
Cite: Spitz, T.C. Memo 2006-168.
The Moral? If you exercise ISOs, exercise caution, too. If you can't afford to pay the AMT if the shares go bad, sell enough shares to make sure you stay solvent.
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