Nield and Linda Montgomery - Page 19

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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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