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Subject:   What constitutes "transferable" stock in ISO AMT calculation?
Date:   2 Jan 2000
From:   Steven

This question is in regard to exercising ISOs.

AMT must be calculated on the exercise of an ISO "when your rights in the aquired stock first become transferable, or when these rights are no longer subject to a substantial risk of forfeiture."

If a 100% vested stock option is exercised in 8/99, but on the back of the stock certificate is a restriction, saying that the shares are subject to a lock-up agreement, and cannot be sold until 1/00, then does AMT need to be calculated in 1999, based on the 8/99 exercise date? Or is it calculated in 2000, based on the expiration of the lock-up agreement?

Thanks.

Answer

Date:   19 Jan 2000

Hello Steven,

According to Internal Revenue Code Section 83(a), the transaction is treated as completed when the rights of the taxpayer become transferable OR not subject to a substantial risk of forfeiture.

There is a special exception at Section 83(c)(3) when a sale of the property at a profit could subject a person to being sued under section 16(b) of the Securities Exchange Act of 1934. When this applies, the stock is considered to be non-transferable AND subject to a substantial risk of forfeiture.

When your stock is vested, the stock is not subject to a substantial risk of forfeiture.

Therefore, unless you are a corporate "insider" subject to Section 16(b) restrictions, your AMT is based on the 8/99 exercise date. The "lock out" does not postpone the tax results of the exercise.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.