A ruling by the Tax Court has underscored the way in which the alternative minimum tax penalizes holders of incentive stock options when the stock loses value after the option is exercised. Ronald Speltz thought that his employer was doing him a favor by issuing him ISOs to augment his salary, which was less than $100,000 a year. Instead, the ISOs triggered a tax nightmare when he exercised them before the tech bubble burst, leaving him with nearly worthless stock but with an unexpected tax bill of nearly $225,000. Although Speltz and his wife borrowed $134,000 to help pay state and federal taxes, and offered the cash value of his life insurance policy as a compromise for the remainder, the Internal Revenue Service rejected his offer. The Tax Court agreed. Even though the offer-in-compromise provisions include a compromise to promote effective tax administration -- explained by the regs to cover situations "where collection in full could be achieved but would cause economic hardship" -- the court found that the Speltz's had sufficient income to meet "basic living expenses" and therefore didn't qualify. The court said that it sympathized with the situation, but it is up to Congress, not the courts or the IRS, to come up with a solution.

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