Journal of a Sabbatical

The IRS

July 31, 1997

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Just shoot me now and get the pain over with. I got a letter from the IRS today. They claim I owe $30,825.85 in 1996 taxes plus a penalty for filing late. Hmm. I didn't file late. Anyway, I called my accountant and left a message on her machine. Now I have to sit and worry til she calls back. I feel mostly despair. I want to curl up on my bed and cry. According to the cryptic letter from the IRS, I am not eligible to claim credit for the Alternative Minimum Tax I paid when I exercised my Incentive Stock Options when I left Cosmodemonic. Bad enough that between the time I exercised and the time I sold the stock price dropped 15 points so I had to pay tax on income I never received, now they tell me I have to pay taxes again on the same stock. Here's how it works: You get an ISO at say $3.00 per share. The day you exercise your option -that is, you buy the stock - it is trading at say $15 per share. You now owe taxes on $12 per share even though you haven't sold the stock. This is your Alternative Minimum Tax. OK. So you need money to pay the tax. You sell the stock. But the market has dropped or your company gone south. You get say $5.00 per share. You now owe taxes on $2.00 more per share. So you earn $2.00 per share but you pay taxes on $17 per share. Like I said, shoot me now. When I first paid the Alternative Minimum Tax, my therapist who used to be a stockbroker kept telling me I was wrong about the AMT - that I couldn't possibly be taxed twice. When my accountant did my taxes that year, she said "don't worry you get credit for the AMT against your tax liability when you sell the stock". The IRS says, and I quote "Your credits are limited by the Alternative Minimum Tax Law. You aren't liable for this tax, but the Alternative Minimum Tax Computation on Form 6251 limits your credits." In other words, my accountant was wrong. My therapist was wrong. I pay tax on (price on date of exercise - option price) + (price I sell it at - option price)   Exactly what are Incentive Stock Options supposed to "incent" one to do? Move to a Caribbean tax haven? Change my name and fingerprints and vanish? So my accountant hasn't called back and it is now after 6:00PM, so I can safely assume she won't call today. I have to live with this tonight. I sure hope she's in the office tomorrow.

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