AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
Exercised ISO Options and company splits
Posted by: puzzled, March 10, 2016 04:11AM
I exercised some ISO options back in 2008 and held a majority of the stock, using the rest to pay off the options and taxes. I treated the portion sold (at exercise) to pay the options and taxes as a disqualifying disposition.

My puzzlement is how to treat new stock that was awarded from those ISO exercised options several years later. In 2012 my company was split into 2 companies with 2 shares of the original stock yielding an additional new share of the new company stock. I still have the shares of stock from the exercise, however the value and cost basis has presumably changed since the exercise, due to the fact that I now also have half as many shares of the new company stock that can also be traced back to the stock awarded from that exercise in 2008

I recently sold the shares of the newer company stock that I think should be treated as a sale of ISO exercised stock, but do not understand how to assign exercise price, FMV, and AMT adjustments for a stock that didn't exist at the time of the exercise in 2008.

Re: Exercised ISO Options and company splits
Posted by: Kaye Thomas, March 10, 2016 03:47PM
When a company splits into two companies, the transaction can be taxable or tax-free depending on various technicalities. Normally it's structured to be tax-free, and in this case there is an allocation of basis between the two resulting categories of shares. The company should provide information about how that allocation is made, and if you lost track of that information it should be available on the company's investor relations website. Assuming this was a tax-free transaction, you're correct that the resulting shares are properly treated as ISO stock.

The shares you acquired when you exercised the ISO had dual basis. For purposes of regular income tax, their basis was the amount you paid for the shares, and for purposes of alternative minimum tax (AMT) their basis includes the amount reported as AMT income for the exercise of the option. For example, if you exercised the option for $4 when the stock value was $10, you have a basis of $4 for regular income tax purposes, but on the AMT side you reported $6 of income when you exercised the option so your basis is $10. If you later sell the shares for $12, you report gain of $8 for regular income tax but only $2 for AMT. Normally this results in a negative adjustment on your AMT form that allows you to claim AMT credit offsetting at least some of the regular income tax you would otherwise pay on sale of the shares.

But now, due to the division of the company into two companies, we need to allocate basis between the two categories of shares. Let's suppose the allocation is 70% to Company A shares and 30% to Company B shares. You would apply those percentages to both regular income tax basis and AMT basis for your shares. To figure your regular income tax basis in shares, first find your total regular tax basis in all shares, which would be the exercise price of all the shares you held at the time the company split. Then 70% of that amount would be your total regular tax basis for Company A shares, and you divide by the number of Company A shares to get the basis per share. Similarly, 30% of that number is your total regular tax basis for Company B shares. Then you have to do the same calculation for AMT basis. For all these shares, the result should be the same ratio of regular tax basis to AMT basis.

Kaye Thomas
Fairmark.com

Re: Exercised ISO Options and company splits
Posted by: puzzled, March 10, 2016 05:50PM
thanks that helps.

While I understand what you are saying about AMT, my TurboTax is telling me I don't have to pay AMT this year, thus no adjustment. Can that be right?




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