The favorable tax treatment associated with
ISOs will generally not be obtained unless the individual exercising the
ISO is an employee of the corporation granting the option or of its parent or subsidiary corporation at all times during the period between the time the option is granted and the day that is three months before the option is exercised.(13) Thus, an employee terminating employment has three months from the date of termination to exercise an
ISO option as such, unless the terms of the option specify that it lapses within a shorter period.
55 imposes the AMT on certain tax preference items, such as
ISOs. For AMT purposes, Sec.
Notice 2001-14 promised future guidance and indicated that the IRS would not assess FICA/FUTA on
ISOs issued before 2003.
83(b) election for AMT purposes on the exercise of an
ISO, practitioners have taken that position for years.
By selling
ISOs with holding losses in 2002, T is able to file a carryback claim and file for a refund of taxes paid in 2000 totaling $606,620.
Although the exercise of an
ISO does not create taxable income, it does create income for AMT purposes.
Consequently, if no deduction is allowable on an
ISO's exercise in computing corporate AMTI, a negative ACE adjustment should be permitted.
The question of whether to issue NQOs or
ISOs requires a look at the tax consequences to both the executive and the company.
Example: In 1990, employee E received 10
ISOs, which allowed him to purchase 10 shares of stock for $2 each.
Although
ISOs were intended to provide a tax benefit to employees, when the post-exercise price declines, optionees can find themselves subject to huge AMT tax liabilities attributable to sometimes worthless stock.
In retrospect, it is easy to see that Mary would have profited if she had sold the stock at its peak, immediately after exercising the
ISOs. Alternatively, she would have avoided the loss of most of her exercise price and all of the AMT tax debt if she had simply never exercised the options.