IP: WISE WORDS Re: Tech Workers' Stock Options Turn Into Tax Nightmares:

[Dave Farber <dave () farber net>]

> Date: Sat, 14 Apr 2001 16:49:23 -0700
> To: farber () cis upenn edu, ip-sub-1 () majordomo pobox com
> From: Lena Diethelm <lena () numbershuffler com>
> Subject: Re: IP: Re: Tech Workers' Stock Options Turn Into Tax
>   Nightmares:
> Cc: lena Diethelm <lena () numbershuffler com>
>
> Dear Dave & IPers,
>
> I am an Enrolled Agent in Palo Alto preparing taxes for numerous Silicon 
> Valley folks.  While there
> is no question that the Alternative Minimum Tax needs overhauling (AMT on 
> exercised options was
> meant to be a trade off for the opportunity for Long Term Capital Gains 
> treatment), I, too, am not
> particularly sympathetic to people who either knowingly or in denial took 
> insane risks by exercising
> options to hold when the Fair Market Value of these stocks were at all 
> time highs and they lacked
> sufficient financial resources to pay back margin loans, pay taxes or 
> otherwise protect themselves
> and their families from financial ruin.
>
> The last 2 weeks of last December were spent re-doing tax projections for 
> numerous clients
> who had exercised to hold at the highs and then found their shares valued 
> at 1/10th or less
> of what they had been.  Even when presented with projections and courses 
> of action that allowed them to protect
> themselves, many obstinately refused to do or ignored the data believing 
> that this low valuation was
> an aberration and that by April their shares would have, of course, go up 
> up up.
>
> While a large amount of the responsiblity for their situations resides 
> with those individuals, they were
> encouraged by essentially predatory practices by brokerages.  These firms, 
> often the captive brokers
> of the companies that employed the options holders and not infrequently 
> the underwriters of their
> IPOs, encouraged employees to exercise and hold, offered them loans to do 
> so, and lead them to
> believe that there was little to no downside to do so.  Whatever caveats 
> might have been expressed
> were done in little tiny print and (rapid speech).  One of the great 
> strategies these brokerages suggested
> was to exercise early in one year so that you could sell to pay your taxes 
> the following year at
> tax time and be able to sell at capital gains tax rates.  After all, they 
> told them, you will be able
> to use AMT Credit when you sell.  What they didn't tell them is that the 
> AMT tax credit comes
> into play if your stock/income has gone UP, not down.  Consequently, there 
> are folks paying
> AMT for the year 2000 who are also going to pay higher taxes on 
> disqualifying dispositions
> because the stocks declined.
>
> Depending upon each taxpayer's situation, there are some possible 
> strategies that may minimize
> AMT liability but they are not without risk and may cost thousands of 
> dollars of professional services.
> Bankruptcy may occur in some cases but that does not discharge tax 
> liabilities/obligations.
>
> The happiest clients I've seen are the ones who set price targets, sold 
> stock, paid the taxes
> and didn't get embroiled in confusing, complicated, high risk schemes
>
> Lena M. Diethelm, EA



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