1

Prepayment tax of 28% due upon exercise on difference between amount paid (strike price) and current market value on exercise date.

Prepayment becomes AMT “credits” with complicated rules on offsetting tax owed on future gains or returning credits on future losses.

Sale before one-year holding period results in “disqualifying disposition” and gain for regular tax purposes, but if that sale occurs during the calendar year following the year of exercise, then there are significant tax consequences for both regular and AMT purposes.

PROBLEMS: Employees have incentive under the regular tax law to hold stock for at least one year after exercise, but if the stock loses value

between the exercise and the capital gains date, the AMT prepayment tax becomes disproportional and can be disastrous for the taxpayer if the stock drops significantly.

Complicated rules on how prepayment AMT credits apply to actual gain and loss realized in the future, resulting in AMT prepayments becoming long-term (sometimes lifetime) interest-free loans of significant tax overpayments to the government.

Disconnect between AMT calendar year trigger and the capital gains 365-day holding period trigger creates unnecessary complication of AMT credits even if there is a disqualifying disposition.

Failure to synchronize prepayment rate with capital gains rate creates unnecessary “credit” generation even if the stock value at sale is the same as the stock value upon exercise (becomes even more severe when stock loses value).

Current Law - Application of AMT provisions to Incentive Stock Options

ISO GRANTDATE

EXERCISECAPITAL GAINSTRIGGER DATE

Year 2

Sale in this periodcreates complicatedmismatch betweendisqualifying dispositionand AMT tax

SALE

Complicated rules, no“true-up,” despite fixedand realized gain/loss

Year 3 Year 4Year 1

No independentreporting to IRS

28% prepayment taxowed this year

Interest-free loancontinues for years

2

Prepayment tax of current capital gains rate is due concurrent with the capital gains rate trigger date on the difference between amount paid (strike price) and market value on capital gains rate trigger date.

Prepayment becomes AMT “credit” with straightforward rules on offsetting tax owed on future gains or returning credits on future losses.

Sale before one-year holding period results in “disqualifying disposition” and gain for regular tax purposes; synchronizing of valuation and due date of prepayment tax with the capital gains rate and trigger date eliminates complicated calculations.

SOLUTIONS: Restores incentive to hold stock for one year after exercise; AMT prepayment tax is proportional even if stock changes

value between exercise and capital gains rate trigger dates; goals of both ISO and AMT provisions aligned. Revenue generated through corporate reporting to taxpayer and IRS. Reporting both educates and provides separate

checks and balances to ensure increase to full compliance. Synchronizing the prepayment rate with the capital gains rate (rather than fixing it to a certain percentage) fixes the

current illogic of having the prepayment rate based on anticipated future gain different from the rate due when the gain is actually realized; final true-up at sale creates logical and fair resolution point.

Restores fairness to system for people with overpayment credits or outstanding tax liabilities due to severely disproportional taxes levied on unrealized gain, by refunding credits/abating liabilities in next 3 filings (1/3 each filing). This solution also resolves ongoing offers in compromise, and lawsuits in District and Tax Court, all of which are wasting significant government resources in attempts to collect disproportional and unfair prepayment taxes.

Proposed Bill - Application of AMT provisions to Incentive Stock Options

Sales in this period are properlydisqualifying dispositions forboth AMT & regular tax purposes

ISO GRANTDATE

EXERCISECAPITAL GAINSTRIGGER DATE

Year 2

Capital gainsprepayment tax owed

Corporate reportingto taxpayer and IRS

SALE

Straight-forward rules“true-up” prepaymentwith actual amount owed

Year 3 Year 4Year 1