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Subject:   ESOAA Option Alert #4
Date:   Wed, 20 Feb 2002
From:   Peter

When ISO is stock is sold in a disqualifying disposition after the year of exercise and the stock has declined in value, will the employee be able to eliminate or reduce the regular tax in the year of sale using the minimum tax credit in the year of exercise?

Answer

Date:   27 February 2002

Hello Peter,

For AMT reporting, the basis of the stock is increased by the AMT adjustment for the year of exercise. If the stock has declined in value, the sale of the stock in a subsequent year will result in an AMT capital loss, which is limited to the amount capital gains plus $3,000. Because of the limitation of the AMT capital loss, the employee may not be able to use some or all of the minimum tax credit to reduce his or her regular tax in the year of sale.

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.