AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
AMT: 3 accountants & 2 tax attorneys can't agree
Posted by: LAK, September 30, 2015 01:31AM
Fairmark experts:

Iíve succeeded in getting differing opinions from 3 accountants and 2 tax attorneys Ė hoping for some additional analysis here so I can figure out how to proceed with my 2014 taxes (on extension, due 10/15). Iíve read through the forum posts but havenít found Q/A exactly on point Ė appreciate any insight you can provide.

Background: I joined a unicorn tech company in March 2014 and received an equity grant of ISOís that vest over 4 years with a one-year cliff. I early exercised all of the ISOís in September 2014 and DID NOT file and 83(b) election. I passed my one-year cliff in March 2015 and have been vesting an additional 1/48 every month since. I separated from the company in September 2015 and the company has refunded my early exercise for all unvested ISOís.

Situation: My main accountant (who does not specialize in this area of tax) contends that I owe AMT for 2014 on the entire early exercise amount and that I will not be eligible for any kind of recovery in 2015 Ė thus even though Iím being taxed on phantom income, it doesnít matter. This argument has been supported by another account and tax attorney. However, Iíve consulted a different accountant (who does specialize in this area) and he contends that since I did not vest in 2014 there was no taxable event and the AMT doesnít apply even though thatís when I early exercised. He further argues that my 2015 liability will only be based on the vested ISOís and that the forfeited/refunded early exercise will result in a zero gain. This argument has been supported by another tax attorney. The difference in opinion is the difference of $100,000 in tax liability.

1) Which accountant is correct? Or are they both incorrect?
2) I understand that the 83(b) election basically says that the taxpayer won't claim a loss in a situation where termination of employment results in a forfeiture, however since I didnít file an 83(b) Ė whatís the treatment here?
3) Although I doubt this is a unique situation and itís likely I just donít have the right accountants/attorneys in the mix, if it is Ė are there options for getting opinions from the IRS or adjudicating this with them?

Thanks for reviewing!

Re: AMT: 3 accountants & 2 tax attorneys can't agree
Posted by: triad, September 30, 2015 03:12PM
Have you read IRS publication 525 on ISOs?
Did your employer issue you a form 3921?
Have you read instructions for line 14 of form 6251?

Re: AMT: 3 accountants & 2 tax attorneys can't agree
Posted by: MadDog, September 30, 2015 05:54PM
I'll take a stab at this. First, since you said that you early exercised, there are no ISOs. One begins with options that are capable of being ISOs provided the two time periods are satisfied. You did not meet these periods and therefore have nonqualified options only.

Because the shares acquired by exercise of the option are nonvested, and no 83(b) election was made, the section 83 treatment applies only as the shares vest.

The AMT issue is that section 83 applies for AMT purposes but, if the shares are ISO, no regular tax until sale of the shares. So you front load the AMT income.

Because you have no ISOs the front loading of income for AMT does not apply.

So you have regular tax income = AMT income beginning in March. The downside of the 83(b) in your case is that the income is based on the spread between FMV and strike price at vesting, so that if the shares were increasing in value the income is higher (and this is ordinary income, the 83(b) would convert post-election gains to capital gain provided held more than one year from the election effective date).

You have income only for the shares that vest and as they vest. Forfeited shares have no effect on you.

Re: AMT: 3 accountants & 2 tax attorneys can't agree
Posted by: Kaye Thomas, October 6, 2015 11:22AM
Not surprisingly, it is the specialists who are right. You have no AMT income for 2014, and your AMT income for 2015 is based on the shares that vested (and their value when they vested).

Something in this question appears to have thrown our usually reliable MadDog off the scent. Early exercise of an ISO does not disqualify it from ISO treatment. The time period requirement for ISO treatment refers to the amount of time you hold the shares, not the amount of time you hold the option.

Because this is an ISO, we don't have to worry about regular income tax until you sell the shares. Note that to avoid a disqualifying disposition you have to hold the shares until March 2016, two years after the grant date, which is later than the one-year anniversary of your date of exercise.

There's no rule that says you have to pay tax on the entire amount in the year you exercise an ISO. Instead, the rule is that you're treated for AMT purposes as if you exercised a nonqualified option. (This is in section 56(b)(3) of the Internal Revenue Code if your accountant or attorney want to look it up.)

If you exercise a nonqualified option for shares that are not vested, your tax consequences depend on whether you file the section 83b election. You did not file the election, so your tax consequences occur only as the shares vest. Specifically, on each vesting date, you have AMT income equal to (a) the value, as of that vesting date, of the shares that vest, reduced by (b) the amount you paid for those shares when you exercised the option. You will then hold those shares with a basis for AMT purposes equal to the value of the shares on the vesting date, whereas the basis for regular income tax purposes is simply the amount you paid for the shares when you exercised the option.

Note that your holding period for regular income tax purposes begins on the vesting date. For optimal tax results, you need to hold the shares until at least a year and a day after the vesting date.

Kaye Thomas

Re: AMT: 3 accountants & 2 tax attorneys can't agree
Posted by: MadDog, October 6, 2015 04:37PM
True that - I did not read the question carefully. I'll stick by my answer if you disqualified, but nothing in the facts suggest that you did.

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