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FULL TAX COURT DENIES AMT NOL ON SALE OF ISO SHARES

August 16, 2007

Apparently seeking to be perfectly clear on an an issue that has provoked seemingly endless litigation, the full Tax Court ruled without dissent that a loss on a sale of shares acquired with incentive stock options is a capital loss in computing alternative minimum tax. Capital losses are limited to capital gains plus $3,000, which makes them much less useful than normal operating losses.

Yesterday's decision involved taxpayers who exercised incentive stock options in Veritas Software Corporation. Through March 2000 they paid $175,841 on the exercise to buy shares worth $5,922,522. In computing their regular tax, this generated no income, but the $5,746,681 excess of the stock's value over its purchase price was taxable income for AMT. As a result, the taxpayers paid over $1.6 million of AMT for 2000.

Their stock fared poorly in the subsequent months, and they unloaded 3/4 of their ISO shares for $2,756,758 less than they were worth when they were acquired. Because the acquisition value was used to compute their prior AMT, they had an AMT loss of that amount.

The taxpayers argued that their $2,756,758 loss should be treated as an ordinary loss, giving them a net operating loss for AMT purposes that could be carried back to reduce their 2000 AMT taxable income. The Tax Court instead ruled the loss a capital loss. Assuming that the taxpayer uses the AMT capital loss carryforwards to the tune of $3,000 per year, they should be about used up in a bit more than 900 years.

The result is unsurprising from a technical standpoint, as that is the obvious reading of the law; in fact, it has been reached from a slightly different angle in last year's reviewed Merlo decision (Merlo was affirmed by the Fifth Circuit last month).

The issuance of a fully-reviewed decision is unusual; this is only the fourth such decision this year. Perhaps the court is attempting to chase similar cases off its docket by making clear that further such efforts by AMT-ISO victims are futile.

Congress passed limited relief for AMT-ISO taxpayers last year.

Cite: Marcus, 129 T.C. No. 4

The TaxProf also has coverage.

Related Tax Update coverage:

MERLO AGES POORLY

YET ANOTHER AMT-ISO VICTIM LOSES IN TAX COURT

TAX COURT TO ISO-AMT VICTIMS: YOU'RE STILL SCREWED

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