Subject: Question#1 ISO-AMT Alternative Min. Tax Comment: Statement to : The President’s Advisory Panel on Federal Tax Reform 1440 New York Ave. NW Suite 2100 Washington, DC 20220 comments@taxreformpanel.gov From : Jeffrey Chou Individual 991 DeSoto Lane Foster City, CA 94404 (650) 207-3940 March 17, 2005 Chou Family Testimony The President’s Advisory Panel on Federal Tax Reform To the Honorable Members of the Advisory Panel Thank you for giving me the opportunity to write to you concerning tax reform. Specifically, I would like to address the Alternative Minimum Tax. My name is Jeffrey Chou, and I have a wife and 2 daughters – one is 4 years old, and the other is 1 year old. We currently face an AMT bill, from exercising Incentive Stock Options, which is greater than all our assets. In 1996, I left a secure, stable job at a large company to help start a communications company as an engineer. My compensation consisted of an annual salary of $80,000 and Incentive Stock Options. Cisco Systems eventually acquired us. It was a happy time for my family, thinking that my hard work in helping to build a company would finally pay off. In 2000, we decided to exercise my stock options, and were advised to hold the stock for 1 year. We did not and do not live extravagant life styles. We live in a 3 bedroom townhouse – I drive a 1997 Toyota, and my wife drives a 1998 SUV. We have good credit and have always paid our taxes in full and on time. In April 2001, following my exercise of the Incentive Stock Options, we faced federal and state taxes of $2.4M, more than 6,000% of our normal income tax and more than everything we owned. We also faced an ethical and moral dilemma. As we sought professional help to deal with this tax liability, several CPAs advised us not to comply with the law – to simply omit reporting the exercise and the tax. We discovered that the AMT on exercising stock options is a self-reported tax. Many of my friends and colleagues took this approach, did not report their exercise of stock options, and to this day, live happy lives. However, we decided to “do the right thing” and comply. We had faith that our country, in return, would also “do the right thing” and not ruin its honest tax payers. Since then, the IRS has sent us threatening letters, placed a lien on our names, attempted to levy our accounts, and actually visited our house demanding payment. The IRS rejected our Offer In Compromise and we appealed. The appeals officer admitted to us that our offer was in good faith and was reasonable, but that he still could not accept it. Today, we are in IRS collections. I do know that those who did not report are certainly glad they didn’t. And I also know that among the many honest people I have met over the last 3 years whose situation is similar to mine, few or none, if faced with the same choice, would comply again. Why volunteer for a 100% guarantee of ruin, when you can win the audit roulette 99.9% of the time? My friends, if caught, will simply claim ignorance of the law. I am told it will be hard to prove that they were not ignorant of the law given how many tax experts are unaware of the consequences of the interaction of the AMT with Incentive Stock Options. You may ask “Why didn’t you sell?” We are not sophisticated investors. I am an engineer; and my wife is a stay-at-home mom. We listened to advice that told us to hold for 1 year. At the time, I had no knowledge of diversification or hedging strategies. I worked 12 hour days trying to build products and meet schedules. At night, I returned home to help my wife with our new born daughter. That was my life. In addition, our CEO, all throughout 2000, even as late as December, kept touting Cisco’s optimistic future, saying “we will be the most powerful company in history”, “we are growing 30 to 50% every year”, and “we are breaking away from our competitors.” At the time, he was never wrong before, so I felt no sense of danger for my job, for my company, or for the stock. I had faith in my company and its leaders. I sincerely ask Congress to help those in my situation. We are all honest tax payers who want to do what is right for the country. Most of us are hard working Americans who helped build a company and who wanted to remain part of that company instead of “cashing in.” We also want to pay our fair share of taxes – but please tax us like any other investor – tax us when we realize our gains, not on what we might have gained. I believe things happen for a reason. If I can be a small part in helping to correct this injustice, the faith I have in this great country is justified. This is the highest priority of my life. Please do not hesitate to contact me any time for any reason. Thank-you. Jeffrey Chou (650) 207-3940 |