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regulations and in the Internal Revenue Manual are not
unreasonable.
Unlike the examples set forth under section 301.7122-1(c),
Proced. & Admin. Regs., petitioners do not claim illness or a
medical condition or disability; they do not have income that is
exhausted providing for the care of dependents; and they have
sufficient income to meet “basic living expenses”. Petitioners’
hardship argument is essentially that the tax liability is
disproportionate to the value that they received from the ISOs
and that they have already been forced to change their lifestyle
unreasonably. Although we sympathize with their situation, this
type of hardship is not unique.
Petitioners argue that the AMT imposed on their exercise of
ISOs is a “prepayment” of tax on value that they never received.
Under the statutory scheme, however, the tax imposed at the time
of exercise of ISOs is a deferred tax on a form of compensation
that petitioners received at an earlier time. See Commissioner
v. LoBue, 351 U.S. 243 (1956). As explained in Luckman v.
Commissioner, 418 F.2d 381, 384 (7th Cir. 1969), revg. and
remanding on other grounds 50 T.C. 619 (1968), stock options
“represent a form of compensation paid to employees in connection
with successful present and future business performance. They
constitute a particularly rewarding form of bonus.” See
generally 1 Mertens, Law of Federal Income Taxation, sec. 601
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