John Cole – Individual- Durham, NC
President’s Advisory Panel on Federal Tax Reform

Tuesday May 17, 2005

Advisory Panel Members, 

My name is John Cole, and I am writing to you to share my story of a severe problem related to the Alternative Minimum Tax (AMT) and the way it is has been applied to employee stock options. If you will bear with me I would like to begin by providing some personal background information.

I was born in 1958, and grew up in Durham, NC. In 1977 at the age of 19 I moved to the San Francisco Bay Area, and for the next dozen years had a variety of blue collar jobs including home construction, cooking and waiting tables in restaurants, and working for moving companies. In 1989 at the age of 31 I went back to California Community College where I studied Computer Science for two years. When I was 18 I had attended College for 1 year, but had no clear direction and did not do well, which ultimately led to my withdrawing from school and heading West. However, the second time around I was highly motivated and extremely focused, and although I did not earn a degree I took 2-3 classes a semester while working, and maintained a perfect 4.0 average.

I was determined to provide myself with a solid foundation so that I could break into the growing world of hi tech, but being over 30 years of age with no job experience turned out to be a significant drawback: I applied for literally scores of entry level jobs and was consistently turned down, most often without ever having opportunity to interview with anyone.

Nonetheless I persevered and finally in March of 1992 was able to land a job initially paying $10/hour with a small startup software company, and over the next 3 years was able to grow within that outfit to where when I left I was the Senior Systems Engineer, and was the primary Technical Account Manager for many corporate customers which had site licenses for our e-mail package, including several large firms based in New York City, also Motorola and Ford Motor Company. It was the norm during that period to work 70-80 hour weeks, but I loved it: It was a period of tremendous personal growth for me, and coincided exactly with the emergence of the Internet as a public phenomenon.

In January of 1996 I joined another software startup located in Silicon Valley. As was common practice at that time as part of a standard compensation package in addition to a base salary I was issued a modest number of Incentive Stock Options (ISOs) which would vest over a 4 year period. This was a model which allowed employees to feel they had a stake in the company, and again I worked on average well above a standard 40 hours/week, doing my part to help make the company a success.

In May of 1998 the company was acquired by Cisco Systems, and my startup options converted to Cisco options numbering roughly 3,000 total. A drop in the bucket compared to what management was issued, but a very healthy number for a rank-and-file employee like me. And over the next two years the stock split 2-for-1 twice, and 3-for 2 once, for an effective 6X increase, bringing my ISO total to 18,000!

Due to the death of my sister after a long battle with cancer I decided in March of 2000 to leave Cisco and take some time off, stay close to home, and spend time with my mother, who was then 85. It just so happened that my leaving Cisco coincided precisely with the high water mark for the stock market, with the result being that the ISOs I had to “use or lose” within 90 days triggered a huge paper gain which ultimately resulted in over $225,000 in AMT liability. Unfortunately by the time the tax came due in April of 2001 the value of the stock had dropped by roughly 80% from its high point a year earlier, with the result being my tax bill exceeded the value of the stock assets that triggered it! 

I never sold any of the stock, never had any money whatsoever pass through my hands, never in any way benefited from owning the stock, yet I was about to be wiped out simply from exercising and holding on to what appeared to be an excellent investment in a very good company with real products used by organizations of every kind worldwide!

I filed my year 2000 Federal return with an installment plan, but it was rejected due to the large amount of the tax liability. I called the IRS and attempted to expedite processing of my case, but was told I was “in the queue and would just have to wait to be contacted by someone in IRS Collections”. For the next year while waiting for that contact on my own initiative as a sign of good faith I made monthly payments which ultimately totaled over $67,000 toward my pending tax bill! Finally in late June 2002 I was contacted by a local Revenue Officer who was unwilling or unable to discuss anything other than collection of my assets, so I engaged a former IRS Collections Officer practicing as an “Enrolled Agent” and submitted an Offer In Compromise (OIC) in July 2002.

Cisco, Nortel and other large employers in the RTP area of North Carolina had not only stopped hiring, they had laid off thousands of workers, flooding the local job market with highly qualified job seekers.  The tech job market had completely dried up, and not for lack of trying I had been unable to secure work. Save for a failed attempt to establish myself as an independent consultant which resulted in only a single paying job I remained largely unemployed for over 2 years and my tax bill (which had grown due to penalties and interest) exceeded my net worth by roughly 150%, yet my OIC was rejected at the field level due to an insistence that I could pay it off in total!

I was actually told in a letter from the IRS Offer Specialist handling my case that “Mr. Cole has the ability to pay the taxes outstanding in full and should withdraw his offer from consideration. …no offer amount is sufficient, and no offer would be accepted”.  The Asset/Equity and Income/Expense tables the Offer Specialist used to justify that claim contained several computational errors, but the most egregious was that my “ability to pay” was substantiated by the Offer Specialist counting my remaining Cisco stock asset both as a source of ongoing monthly income, (to the tune of over $5,000/month), as well as a lump sum asset. In other words, the stock was counted twice, with ongoing income from it assumed after it was liquidated!!

My representative pointed out this flawed logic to the Offer Specialist, but to no avail: The OIC was rejected at the field level. I appealed, and after another 13 months the IRS Appeals office finally accepted my OIC, but only after adjusting it to a dollar amount that reflected my net worth at that time, with terms of 50% of the settlement amount to be paid within 30 days, another 25% within 120 days, and the final 25% within 240 days. I was able to make the first (50%) and second (25%) payments, but I have not been able to find more gainful employment, and at this point am unsure exactly how I’m going to make the final 25% payment, which is due mid August, 2005.

I filed and paid all my state and federal taxes for the last ten years, and have no outstanding tax issues other than these problems associated with ISO transactions from the year 2000. I was finally able to find full time employment in August 2003, yet ironically back at Cisco, working in a group which has been outsourced to a vendor which pays less than a 1/3 what I was making when I was previously a direct Cisco employee. I am grateful to have the job, yet the income barely pays my basic living expenses, and now on top of dealing with the final OIC payment I’m also trapped in a cycle of credit card debt, with high interest rates and monthly service charges. I have been trying to build on being back in the tech workplace and find more gainful employment, but to date have been unable to do so. I guess I’m one of the few lucky ones who have been able to secure an OIC settlement, but at this point it doesn’t feel that way; I just don’t know how I’m going to make ends meet going forward.

The payments I made proactively toward my year 2000 tax bill and the OIC settlement amount total up to about $180,000. Ironically, I have an AMT Credit available which can offset regular income tax for years to come, yet the IRS would not consider that credit as an asset to be considered as part of an OIC settlement, and due to the relatively small yearly income I make now I can’t take significant advantage of that credit. The one thing that could help me stay afloat would be to return some or all of that AMT credit sooner. I implore you to consider that avenue of relief.

Thank you for taking the time to consider my case, and of those in similar situations.

Sincerely,

John Cole
Durham, NC