Robert J. Merlo - Page 4

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               On December 21, 2000, petitioner exercised an option to                
          purchase 46,125 shares of Exodus common stock at 20 cents per               
          share, for a total exercise price of $9,225.  The price of the              
          optioned stock on the NASDAQ on December 21, 2000, was $23.3125             
          per share, for a total fair market value of $1,075,289 on the               
          date of exercise.  Petitioner was not a dealer in securities but            
          instead was acting as an investor when he exercised the ISOs.               
               Exodus filed for bankruptcy on September 26, 2001.  In a               
          press release dated November 21, 2001, Exodus announced that the            
          company’s common stock had no value.  Petitioner’s shares of                
          Exodus stock were worthless as a result of Exodus’s bankruptcy.             
               Petitioner timely filed a Federal income tax return for                
          2000.  On the return, petitioner reported $248,585 in wages, $432           
          in taxable interest, $11,311 in dividends, and $319,614 in                  
          capital gain, for total income of $579,942.  Petitioner claimed             
          itemized deductions of $31,213 and reported taxable income of               
          $548,729 and regular tax liability of $134,455.  Petitioner also            
          reported alternative minimum tax (AMT) liability of $116,973, for           
          a total tax of $251,428.                                                    
               Attached to petitioner’s 2000 tax return was Form 6251,                
          Alternative Minimum Tax--Individuals.  On line 10, petitioner               
          reported excess AMTI over regular tax income of $452,025 as a               
          result of his exercise of the Exodus ISOs.  Instead of using the            
          spread between the exercise price and the fair market value of              






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