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imposed on the gain from exercise of the ISO results in payment
of tax on income the taxpayer may never actually receive.10
In an attempt to avoid these harsh results petitioner
asserts: (1) The capital loss limitations under sections 1211(b)
and 1212(b) do not apply to the computation of AMTI; (2) he is
entitled to carry back capital losses as an ATNOL to reduce his
AMTI in the years at issue; and (3) he is not liable for
accuracy-related penalties under section 6662 for the tax years
at issue.
B. Section 1211
Generally, losses generated by the sale or exchange of
capital assets are allowed only to the extent allowed in sections
1211 and 1212. Sec. 165(f). Section 1211(b) requires a
noncorporate taxpayer to first offset capital losses against
capital gains. If aggregate capital losses exceed aggregate
capital gains, up to $3,000 of the excess may be deducted against
ordinary income. Sec. 1211(b). If a noncorporate taxpayer has
capital losses exceeding the limitations of section 1211(b), the
10 This became an acute problem in 2001 after the market
crash of the stock of so-called dot.com companies. Many
employees exercised ISOs in 1999 and 2000 at a time when the
underlying stock had substantially appreciated. Also, many
employees intentionally waited the 1-year holding period before
selling the stock in order to recognize capital gain, as opposed
to ordinary income, on the stock’s appreciation for regular tax
purposes. In 2001, after the stock crash, the employees found
their stock’s value had substantially decreased, leaving the
employees with substantial AMT capital losses.
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