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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