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YET ANOTHER AMT-ISO VICTIM LOSES IN TAX COURT

August 29, 2006

The Tax Court shot down another taxpayer attempt to avoid alternative minimum tax from ISO exercise yesterday. Neild Montgomery was an executive for MCG Holdings, a Nevada telephone company. When he left the company his options vested and he exercised shares worth $10 million or so.

Unlike many AMT ISO victims, he sold some of his shares - $2.4 million worth, which went a long way towards covering the AMT due. That was wise, becasue whild ISO exercise doesn't trigger regular tax, the amount that the stock value exceeds the exercise price is considered taxable income in computing AMT. Like so many telecom stocks, MGC (later Mpower) stock collapesed and the company eventually went through Chapter 11. Mr. Montgomery had a $2.4 million tax bill for stock that ended up worthless.

When it came time to pay his AMT. Mr. Montgomery asserted a number of arguments against having to pay AMT. He said the company had made a mistake and disqualified his ISOs. The Tax Court disagreed. He said that he had a "risk of forfeiture" because of securities law rules that kept him from being taxable on his stock. His disposition of $2.4 million of stock hurt this argument. His other arguments were the same one shot down in the recent Merlo and Spitz cases.

The Moral? Again: if you exercise ISOs, figure out whether you can pay the AMT if the company goes under before the one-year capital gain period expires. If you can't, it may be better to sell some shares to make sure you can pay your taxes and forego the capital gain benefits.

Cite: Montgomery, 127 T.C. No. 3.

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