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If a taxpayer makes a disqualifying disposition in the same
year the ISO is exercised and the amount realized is less than
the FMV at the exercise date, the regular tax rules of section
422(c)(2) apply for AMT purposes. Thus, the amount the taxpayer
includes as AMTI will not exceed the amount realized over the
adjusted basis. Secs. 56(b)(3), 422(c)(2).
3. The AMT and Its Impact on the Basis of ISO Stock
For regular tax purposes, the taxpayer’s basis in stock
acquired by exercising an ISO is the exercise price. Secs.
421(a), 1012. However, for AMT purposes, a taxpayer’s basis in
stock acquired by exercising an ISO is the FMV of the stock at
the date of exercise. Secs. 56(b)(3), 83(a), 1012. Thus, when
stock is sold in a tax year subsequent to the year in which the
ISO was exercised, the amount of gain (or loss) recognized for
AMT purposes will vary from the amount of gain (or loss)
recognized for regular tax purposes.
This anomaly may create inequitable results when a taxpayer
(such as petitioner) finds himself holding stock that has
decreased in value in the year after a year in which he
recognized large amounts of AMT. In this situation, the AMT
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Last modified: May 25, 2011