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Section 83(c) contains special rules related to recognition
of income under section 83(a). Section 83(c)(3) provides that a
taxpayer’s rights in property (stock) are subject to a
substantial risk of forfeiture and are not transferable so long
as the sale of the stock at a profit could subject the taxpayer
to suit under section 16(b) of the Exchange Act.
3. AMT Impact on Basis
As a result of the unique treatment of the exercise of ISOs
under the AMT regime, a taxpayer normally will have two different
bases in the same shares of stock. The taxpayer’s regular tax
basis is the exercise price or cost basis. See sec. 1012.
However, for AMT purposes, section 56(b)(3) provides that the
adjusted basis of any stock acquired by the exercise of an ISO
“shall be determined on the basis of the treatment prescribed by
this paragraph.” In other words, a taxpayer’s adjusted AMT basis
equals the exercise or cost basis in the shares increased by the
amount of income included in AMTI. See secs. 55(b)(2), 56(b)(3),
83(a).
The following example illustrates the general operation of
the ISO basis rules. Assume a taxpayer is granted an ISO giving
him the right to purchase 100 shares of ABC, Inc., common stock
at $1 per share. The taxpayer exercises the ISO at a time when
ABC, Inc. common stock is trading at $10 per share and the
taxpayer’s rights in such shares are freely transferrable. Under
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