Can I eliminate AMT by donating my incentive stock options to charity?

May 10, 2000

Subject:   Donation of privately held stock from an ISO
Date:   Sun, 19 Dec 1999
From:   Jim

I exercised stock options in my company for $0.50 in February because they were due to expire. The company is not publicly traded, so I exercised the options hoping that one day it would be and I could profit from the transaction. The tax code says that the difference between the fair market value and the exercise price is subject to the AMT calculation.

The company states that the fair market value was $6.00 at the date I exercised the option. When the AMT calculation decided to count my “profit” I got nailed with over $12,000 in additional Federal Tax.

My tax guide says that the 1993 Tax Act changed the law so that unrealized gains from shares donated to a charitable organization are not included in the AMT calculation. By my calculations, if I donated about 2/3 of the options I could eliminate the AMT. This would be compatible with my future plans, since I plan to donate a substantial amount of stock if and when we do go public. Am I correct in assuming that I can do this, or is there a problem because I haven’t held the stock for 1-year? If I donate the shares, can I deduct the $0.50 per share that I paid as a charitable contribution? What forms would I need to fill out?

Related question: if I donate shares that I have held for over 1-year, I understand that I can deduct the fair market value of the stock while not realizing the income gained. What will the IRS accept as the fair market value of a privately held stock? Can I just use the company’s stated fair market value ($6.00) to make the donation and enter this amount as the average price on Form 8283?

Answer

Date:   9 Jan 2000

Hello Jim,

I think you are confusing different rules relating to AMT.

There was a separate preference for appreciated property donated to a charity, which was repealed in 1993.

If you donate your shares to a charity before meeting the holding period requirements, the transfer is treated as a disposition, resulting in ordinary income.

Also, when you donate shares that are not publicly traded, you need to get a professional appraisal – an expensive proposition. Special reporting requirements apply that you can find in the instructions for Schedule A.

When you make a gift of your shares, you eliminate the potential of getting a tax credit for the AMT that you paid for in 1999.

These are very complex issues. You should seek professional tax advice.

Good luck!

Mike Gray

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

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