Subject: ISO AMT Comment: Testimony for The President's Advisory Panel on Federal Tax Reform Contact information: Karen Hamerquist 170 2nd Avenue Orland, CA 95963 (530) 865 4169 khamerquist@direcway.com The current AMT law and how it is applied to stock options specifically has had a devastating impact on my family and our financial future. In 1998 I was given ISO stock options as part of my compensation package at a small start up company for $2.00/share. My company had a provision that allowed the employee to purchase the options before they were actually vested. I did not have enough cash to purchase my options prior to the company going public and was not comfortable taking out a loan to purchase the options. When my company went public the fair market value of our stock was already $24/share. I purchased my first block of shares the day we went public and incurred the AMT on the delta between my option price and the FMV of the stock on the day I purchased it. The stock priced soared over the next several months, split twice and reached a maximum value of $198/share. I purchased two more years of my options and signed an 83-b form when the stock was trading at around $70/share. The purchase triggered the AMT and for tax year 2000 my AMT income was over $1.5 million dollars. The stock continued to rise until late summer 2000, so I felt confident in my decision to exercise my options at the $70 FMV. Like most high tech stocks, my companies stock started to plummet in the fall of 2000, by December of 2000 the stock had dropped below the $70 mark. I got a phone call from my accountant late in December and they suggested I sell my options before the end of the calendar year in order to avoid the huge AMT liability. Unfortunately, I was not able to sell because I was in a stock trading black out period which lasted through the first week of January 2001. Once the black out period lifted, we started to sell the stock in order to cover our tax exposure. We were forced to sell many shares just a few weeks before we had satisfied the holding periods that would have qualified us for the most favorable taxation, but since the stock was by then trading below $40/share we decided to try to cut our losses. Over the course of the next few months we sold most of our vested options for an average amount of $30-$35 a share. We did not have enough money to pay our 2000 AMT of $700,000, so we hired lawyers to try to work out an offer and compromise with the IRS. To add insult to injury, I was laid off from the company prior to vesting in large amount of the shares I had purchased in 2000. The company repurchased my unvested shares, but of course the tax liability was still mine since the repurchase was not in the same calendar year as the purchase. After the high tech crash, we decided to move away from the bay area and try to live the simple life in the country. I have not been able to find work outside of the house that pays enough to cover our increased living expenses (childcare etc.) so I have not been working and instead I am taking care of my family and the house. My husband has been supporting the family by buying houses, fixing them up and selling them. We certainly can not afford to pay thousands of dollars a month to the IRS. We have been negotiating with the IRS for more than four years now and with interest and penalties now have an unpaid tax bill of over $1.2 million dollars. In December 2004, after numerous threats, the IRS has put liens on all of our property, which has completely shut down my husband’s ability to continue doing what he has been doing to support us for the past 3 years. Since this has nightmare has dragged on for so many years, we became eligible for discharging our tax liability through bankruptcy. Bankruptcy would also affect my husband’s ability to continue doing what he has been for the past few years, but we thought at least it would wipe out the remaining tax liability and allow us to keep our home. Not so, because we have more equity in our home than the $75K homestead allowance, the bankruptcy trustee could decide to sell our home to get the rest of the equity. Okay, now we think worst case scenario our credit is shot, we have no place to live, but at least we have $75K to try to rebuild our lives. Again not so, our attorney advised us that the IRS could take the $75K too. We were also surprised in tax year 2001 to find that we had not held the ESPP stocks that I sold in early 2001 long enough to have them treated under the capital gains rules and instead they were reported as income on my 2001 W2 and we were hit again in 2001 with a $250K tax bill. We sold our house in the bay area to cover the taxes for 2001; we did not want to be perceived as chronic problem tax payers. We are currently in the Offer and Compromise Collection Due Process phase with the IRS and are hopeful but not very optimistic that we will find a workable solution to our problem. The IRS agent working on our case has made it very clear that she will not be considering the fairness of the tax itself in her decision. In order to solve this problem we ultimately will need to change the law through new legislation and have the new law be retroactive. Many of the options of pursuing a solution through the courts require that the liability be paid in full first. We aren’t in a position to pay so we are at the mercy of the IRS agent handling our case and Congress. We are an honest, hard working family and we need a break. We are willing to give the IRS everything we have worked for and built up over our lifetime and only want to be able to keep our home and our good credit rating….is that asking too much? By not addressing this problem our government is forcing many middle class families in to poverty, how is that good for this country? |