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this example, the taxpayer’s basis for regular tax purposes is
$100--the total exercise price or cost incurred by the taxpayer
to purchase the 100 shares of stock. On the other hand, the
taxpayer’s adjusted basis solely for AMT purposes is $1,000--an
amount that comprises the taxpayer’s $100 cost basis plus the
$900 bargain purchase element of the transaction that is included
in the computation of the taxpayer’s AMT liability.
The anomaly in the ISO basis rules may create inequitable
results when a taxpayer has incurred AMT liability upon the
exercise of an ISO in one taxable year, only to have the shares
of stock decrease in value the following year. In this
situation, the AMT imposed on the bargain purchase element of the
ISO results in a payment of tax on income the taxpayer may never
actually receive.
II. The Parties’ Positions
A. Respondent’s Determinations
Respondent determined that the aggregate fair market value
of the stock with respect to which petitioner held ISOs that were
first exercisable in 1999 and 2000 exceeded the $100,000
limitation imposed under section 422(d). In connection with this
determination, respondent asserts that the aggregate value of
stock that a taxpayer may acquire pursuant to ISOs during a
taxable year is computed for purposes of the $100,000 limitation
of section 422(d) without taking into account any disqualifying
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