Nield and Linda Montgomery - Page 18

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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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Last modified: May 25, 2011