Posted: May 05, 2005 By: Ross Ashley

Subject: ISO AMT

Comment: Submission to the President's Advisory Council on Federal Tax Reform.

Submitted by Ross Ashley as an individual.
rashley@katto.com

3/17/05

Submission by Ross Ashley

I worked as a software engineer for a once high-flying software company, i2
Technologies. I joined them as employee number 200 back in 1996. We were defining a new niche for large manufacturers known as Supply Chain Optimization. I was not an executive or even a mid level manager. I was simply a hard working individual
contributer. I made several significant contributions to our products and later helped our customers solve special problems. I enjoyed the work and took pride in it and in the companies success. I was granted incentive stock options every year from 96 through 2003 and our stock price rose along with others during the tech bubble. I2 employed 7800 people at it's peak. In 2000 I exercised options with a market value at that time of about $450k. The exercise of those options resulted in a tax liability that I didn't fully understand at the time. I understand it pretty well now though. The AMT tax that I incurred was about $150k. By the end of the year, the value of the stock that I owned by virtue of the options I exercised was about $75k, or about half the value of the AMT tax I
owed. I2 Technologies now trades at about 45 cents per share. If I still owned that stock I could sell it for about $2000.

Congress passed laws encouraging individuals to buy and hold stock rather than trading the stock on a short term basis when they reduced the capital gains tax rate. I am not a stock trader. I am a software engineer and a good one. When I exercised the stock options I intended to hold those shares and that's exactly what I did. When more of my options vested I planned to exercise them and hold them also. I had no inside knowledge of the
impending collapse of the tech industry. As far as I knew, our products were world class and our solutions were saving our customers real money.

In early 2001, I thought that we were experiencing a market correction and that i2 was a great company. Soon the market would see that i2 saved it's customers money and it would reward the company with a higher stock price. So I didn't sell the shares in early 2001 even though the value of those shares was then less than half of the tax liability.

Later that year, I submitted an Offer In Compromise of about half the value of my IRA, which at the time was about $40k. It was rejected.

Today I am living with my wife's family, on disability, with virtually no savings other than a very modest IRA which today is worth about $20k. My tax liability has increased through penalties and interest to about $200k. The appeal of my first Offer In Compromise was rejected in May 2003 since at that time, although confined to a wheelchair, I was still employed even though I explained that since my condition, Freidriech's Ataxia, was progressive and incurable, it was not likely that I would be able to work for more than 9-12 more months. I finally had to quit work in March of 2004,about 10 months after my appeal. Freidriech's Ataxia is a neurological disorder that affects the way nerves connect to and control all muscles in the body. In most patients, including me, one of the symptoms is Nystagmus, which is a rapid horizontal oscillation of the pupils. After an hour or so of reading or looking at a computer monitor, the words
get blurry and if I push it, I will get a headache. As a software engineer, who normally worked 10 or more hours a day, all of which was behind a monitor, I simply couldn't do it anymore. I quit working when my 40 hour tasks took 70 or more hours to complete. I didn't envision the end of my career happening like this but it has. The only way that I can provide for my family is to live to the ripe old age of 65, drawing monthly disability checks.

The tax liability that I have is ridiculous and unfair. The fact is, if the AMT threshold of $40k, which was established in the late 1960's, had been adjusted for inflation, the unintended victims of this short sighted tax law would still be unaware of what AMT means.

In my case, the tax liability has hung over my head now for 4 years. I have submitted another Offer In Compromise, this one significantly smaller than the one that was rejected almost 2 years ago. I no longer own a home and my savings has dwindled. I thought originally that the IRS was much more interested in working out solutions with individuals that allowed those families to get the tax problems behind them without crippling them financially for the rest of their lives. The appeals agent at the IRS that
heard my first Offer told me that although she sympathized with my situation, her hands were tied by the Service and she could not accept my Offer. I am optimistic that the IRS
will respond differently to this Offer, but I was optimistic the first time too. If the AMT tax was simply applied in the manner it was intended when it was established, even during the tech bubble, the average worker who had been rewarded by her company for excellent work would not face financial ruin at the hands of the IRS. After all, I didn't benefit from owning that stock. Why should I owe any tax on it? Why should I owe so much more than I am worth? Why doesn't the IRS allow it's appeals agents to make decisions that are good for the treasury and good for the individual taxpayer?

I hope that this commission will do the right thing. Just increasing the AMT threshold to allow for inflation since the late 60's would make that threshold well over $1M, relieving thousands of middle income Americans who shouldn't be in this position to begin with.