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Financial Planning / Tax Strategies


Subject:  ISO and the AMT Date:  1/2/1998  2:56 PM
Author:  curious Number:  1085 of 127753

I think I'm finally getting to the point where I understand this, but need some validation. Following are a couple of cases and my interpretation. Could you let me know if I'm on the right track and, if not, point me the right way?

Case 1: Suppose I exercise options (ISOs) to buy 10,000 shares of XYZ at the granted price of $2.00 per share on May 1, 1997. On that day, the average market price of XYZ (average of high and low prices) is $8.00. As I read the instructions, my AMT gain is $80,000 minus $20,000 or $60,000. Furthermore, my cost basis for the shares is adjusted from $2.00 to $8.00. Is this a correct reading?

Case 2: Complicate Case 1 by assuming the company issuing the options went public on February 1, 1997 and that shareowners were precluded from selling their shares until the end of the lockup period on August 1, 1997. On August 1, 1997, the average market price of XYZ is $16.00. Does the fact that I was subject to the lockup mean that, instead of a $60,000 AMT gain, I've got a $160,000 - $20,000 = $140,000 gain?

Case 3: Suppose that, during 1997, I sell $1,000 shares of XYZ. What is the cost basis? $2 or the average market price of XYZ established above? The information I've seen says that any gain (loss) is treated as ordinary income because of a sale within one year of exercise of the options. In plain English, where does this go? 1040? Schedule D? Other?

Sorry to be so long winded about this, but I've never had to deal with AMT (or, at least, pay it) before and this has proven to be a tough nut to crack.

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