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(2005 rev.). Because of sections 421(a) and 422, regular tax at
ordinary rates that would normally be imposed on compensation is
not imposed on the receipt or exercise of ISOs. See sec. 83(a),
(e)(1). The offset, however, is that ISOs are treated as “tax
preference items” for AMT purposes in section 56(b)(3).
In addition to affecting the time of taxation, the
complexity of statutes applicable to stock options involves
differences between taxation at ordinary income rates and capital
gains rates. See generally Luckman v. Commissioner, supra at
386-387. Accepting petitioners’ position would result in
nullification of a portion of the statutory scheme by
administrative or judicial action. We cannot conclude that
section 7122 gives the Court a license to make adjustments to
complex tax laws on a case-by-case basis. Cf. Rank v. United
States, 345 F.2d 337, 344-345 (5th Cir. 1965) (describing other
circumstances in which “the attention of Congress was once again
focused on this highly complex, if not controversial, question of
employee stock options”). Moreover, we cannot conclude that it
is an abuse of discretion for the Appeals officer to decline to
do so. In this case, we conclude that the Appeals officer
correctly applied the provisions of the regulations and of the
Internal Revenue Manual, specifically those portions cautioning
against granting relief based on inequity where to do so would
undermine congressional intent.
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