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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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