Jonathan N. and Kimberly A. Palahnuk - Page 4

                                         -4-                                          
               On March 15, 2000, petitioner exercised petitioner’s ISO and           
          purchased some Metromedia shares at a total cost of $99,949.  On            
          that date, the purchased shares had a total fair market value of            
          $2,185,958.  Petitioner realized no income or loss on the                   
          exercise for purposes of computing petitioners’ 2000 taxable                
          income but realized $2,086,009 of income for purposes of                    
          computing petitioners’ 2000 AMTI.                                           
               In 2001, petitioner sold the Metromedia shares for $248,410            
          and realized a regular tax capital gain of $148,461 (shares’                
          selling price of $248,410, less the shares’ exercise cost of                
          $99,949) and (as rounded) a $1,937,547 AMT capital loss (shares’            
          selling price of $248,410, less the shares’ AMT adjusted basis of           
          $2,185,958).3  Unrelated to any ISO, petitioner during 2001 also            
          realized capital losses totaling $153,625.                                  
               On their 2001 return, petitioners included a $3,000 capital            
          loss in calculating their 2001 taxable income as $561,161 and               
          calculating their regular tax liability as $191,457.  Although              
          petitioners were not subject to the AMT in 2001, they computed              
          their 2001 AMTI to ascertain the amount of the section 53 credit            
          for prior year minimum tax liability that they could claim in               


               3 A statement attached to petitioners’ 2001 return reports             
          that the selling price of the shares totaled $248,972 and that              
          the resulting gain was $149,024 ($248,972 - $99,948).  While                
          petitioners acknowledge in their posttrial brief that the                   
          resulting gain was $148,461, they do not explain this                       
          discrepancy.                                                                





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