This previous post here highlighted the pitfalls related to incentive stock options and AMT. Please note this recent Tax Court case–Robert J. Merlo, TC Memo 2005-178–in which a taxpayer sought to stave off the ravages of AMT by arguing that the stock was subject to a substantial risk of forfeiture due to the employer’s policy against insider trading. Holding against the taxpayer, the court stated:
The evidence in the instant case shows that petitioner had no substantial risk of losing the rights to his shares of Exodus stock. There is no evidence that Exodus could have ever compelled petitioner to return his shares after he exercised his ISO; no sellback provision is present; nor is there any evidence that Exodus could have compelled petitioner to forfeit his shares of stock. In consequence of the foregoing, we hold that petitioner’s rights to his shares of Exodus stock were not subject to a substantial risk of forfeiture.
A related issue was discussed in this recent Revenue Ruling 2005-48 in which the IRS answered this question–If an employee exercises a nonstatutory option more than six months after grant, but is subject to restrictions on his ability to sell the stock obtained through exercise of the option under rule 10b-5 under the Securities Exchange Act of 1934 and certain contractual provisions, is the employee required to recognize income under section 83 of the Internal Revenue Code at the time of the exercise of the option? Roth CPA.com discusses the Revenue Ruling here.