Chi Wai - Page 4

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          The aforementioned ISO spread represents the differential between           
          the exercise price and the fair market value of the underlying              
          stock as of the date an option is exercised.                                
               The above-described gain, although excludable from                     
          petitioner’s year 2000 taxable income pursuant to section 421(a),           
          was includable in her alternative minimum taxable income (AMTI)             
          pursuant to section 56(b)(3).  Petitioner did not sell any of the           
          shares in 2000 and properly reported the $2,726,988 gain on her             
          return for that year.                                                       
               The value of petitioner’s PMCS stock purchased under the               
          ISOs fell dramatically after the ISOs were exercised in 2000 but            
          before the stock was sold in 2001, so that the actual selling               
          price over petitioner’s exercise price under the ISOs produced              
          for regular tax purposes a gain that was only a small fraction of           
          the AMT gain required to be reported on petitioner’s 2000 Federal           
          income tax return, and a tax that was also substantially less               
          than the $786,547 tax which petitioner reported on her 2000                 
          return.  Cf. Merlo v. Commissioner, 126 T.C. 205, 209-210 (2006).           
               On December 20, 2001, petitioner submitted a Form 656, Offer           
          in Compromise (OIC), which stated as the reasons Doubt as to                
          Liability, Doubt as to Collectibility, and Effective Tax                    
          Administration.  The amount of the offer was left blank, to which           
          respondent’s “offer unit” inserted $1 to permit the Internal                
          Revenue Service (IRS) to begin review of the OIC.  Petitioner’s             






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