Subject: ISO AMT Comment: Submission of HANS LACHMAN To: President’s Advisory Panel on Federal Tax Reform From: Hans Lachman Individual Submission Contact information (email):hans510@us.ccnet.us Date: March 18, 2005 Subject: Retroactive Relief for Past Victims of “AMT/ISO Problem” Thank you for the opportunity to voice my concerns regarding tax reform. The main point of this submission is to call attention to the “AMT/ISO problem” (alternative minimum tax treatment of “phantom gains” on incentive stock options), and to make a specific request for retroactive relief for those affected in the past by this severely unfair and inequitable tax burden. While the AMT system in general is widely regarded as problematic, and deserves attention and consideration of reform, this specific “AMT/ISO problem” is an especially severe problem for those affected, and therefore requires special attention. The reason is, while the typical effect of AMT may be to increase one’s tax liability by a few percentage points (say, 25% of income instead of 20%), the “AMT/ISO problem” has, for numerous taxpayers, caused a tax liability of 200% or more of their annual income, ostensibly as a pre-payment of tax on anticipated future capital gains. In theory, the AMT payment is recoverable in future years as “AMT credits” when the anticipated capital gains, or other similar amounts, are realized as actual income; in reality, if that income is never realized, the “excess” tax paid as AMT may not be recoverable as “AMT credits” within the lifetime of the taxpayer. The question is, is it fair to assess an income tax on income that will never be received, effectively imposing a tax rate of 200% or more when compared with actual income? I think reasonable persons would agree that the answer is “no.” What follows is my own story, and a specific request for remedy. Originally from Cincinnati, Ohio, I graduated in 1985 with a degree in engineering from Case Western Reserve University, and then began a career in Silicon Valley. I was fortunate to work with many creative and talented people. In 1996, I joined Netscape to work as an engineer and technical trainer. In 2001, I exercised incentive stock options and held the shares, due to my belief in the company. I paid an AMT of over $180,000, around twice my annual income, by liquidating a substantial portion of my savings. By 2004, I had sold off all of the stock, but my actual gains were far lower than the “phantom gains” I had paid tax on. Now, I find that I have a six-figure AMT credit balance that is probably not recoverable in my lifetime. Needless to say, this is very disappointing. Whereas I fully accept responsibility for any gains or losses in the stock that I held, I am at a loss to understand why many years worth of my hard-earned savings must be permanently forfeited to pay an outrageously high tax involving “phantom gains.” Therefore, I respectfully request relief from this unusual and unfair tax burden, in the form of being allowed pay capital gains tax on my actual gains, while receiving a full refund of any tax on “phantom gains.” The net fiscal impact of providing this relief is theoretically zero, because, as I understand, a refund of AMT credits takes a liability off of the government's books. I think everyone, including the government, should be happy with people paying taxes on their actual gains. I certainly would be happy to do so. Thank you for your attention to this matter. Hans Lachman Mountain View, California |