Are you sure about transferable stock in ISO AMT calculation?
July 25, 2001
Subject: Re: What constitutes “transferable” stock in ISO AMT calculation?
Date: Tue, 16 Jan 2001
in your e-mail answer
Subject: What constitutes “transferable” stock in ISO AMT calculation?
Date: 2 Jan 2000
You indicate that a lockup agreement has no influence on AMT amount owed. This seemed to contradictory to IRS publication 525 Employee Compensation. This is a quote from the Incentive Stock option section.
Alternative minimum tax (AMT). For the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable and no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the fair market value of the stock exceeds the option price. However, no adjustment is required if you dispose of the stock in the same year you exercise the option.
See Restricted Property, later, for more information.
Enter this adjustment on line 10 of Form 6251, Alternative Minimum Tax–Individuals. Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment.
Example. The facts are the same as in the previous example. On January 19, 2000, when the stock was selling on the open market for $14 a share, your rights to the stock first became transferable. You include $400 ($1,400 value when your rights first became transferable minus $1,000 purchase price) as an adjustment on line 10 of Form 6251.
The indication there seems to be the stock has to be transferable AND not subject to forfeture. And the AMT amount in the example seems to be calculated from the date the stock is first transferable.
Am I misunderstanding the definition of transferable, or is IRS contradicting itself in different publications?
My situation the stock became vested in March 2000, I excercized when the company was private and “declared” fair market value of $XX. Company IPO’d in August, the lock up expires Jan 30, and today’s price is $X. Trying to follow the IRS example my AMT adjustment would be based on FMV on Jan 30, which contradicts everything I’ve read and heard so far.
Date: 9 Feb 2001
I know this stuff is confusing.
First, understand that you can receive stock when exercising an employee stock option in a private, non-traded company and the transaction is considered “closed” under the tax laws, as long as the shares are vested. The shares could have been privately sold or otherwise transferred before the public offering.
The same rule applies to “lock up” shares. Theoretically, you can make a private sale of the shares. Recently I had a client in lockup sell shares to the company in order to avoid a big AMT liability for 2000.
There is a special exception in the Internal Revenue Code, Section 83(c)(3) for Section 16(b) of the Security Exchange Act of 1934. This is a six-month delay after exercise of an option for certain corporate “insiders.”
Keep in mind the IRS instructions are not binding on the courts or the IRS, and are sometime vague and hard to understand.
In conclusion, it appears you should determine your tax preference as of March, 2000.
For many people, that timing is a better result, because the shares increase in value after the offering. Unfortunately, that didn’t happen for you.