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Subject:   ISO Swaps / Basis Issues
Date:   Wed, 20 Oct 2004
From:   Eric

Mike,

I am puzzling over your explanation of how tax basis is determined for shares received by exercising an ISO paid for with a swap of company stock. Why do you say the "spread" is taxed as compensation? (From a CPA.)

Eric

Answer

Date:   Wed, 24 Nov 2004

Hello Eric,

Because, according to Internal Revenue Code Section 56(b)(3), the special rules for incentive stock options do not apply for the alternative minimum tax. That means the options are taxed as non-qualified stock options for AMT. From there, just research the regular tax rules for non-qualified stock options.

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.