[Congressional Record Volume 147, Number 174 (Friday, December 14, 2001)]
[Senate]
[Pages S13304-S13305]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself and Mr. Kerry):
  S. 1831. A bill to provide alternative minimum tax relief with 
respect to incentive stock options exercised during 2000; to the 
Committee on Finance.
  Mr. GRASSLEY. Mr. President, today Senator Kerry and I introduced 
bipartisan legislation that will provide some relief to those workers 
who are facing a massive tax bill on the phantom income they have from 
incentive stock options.
  Because it is important that my colleagues understand the unfairness 
of this matter, let me provide a very brief background.
  Incentive stock options ISO, are an option given by an employer to an 
employee to purchase stock at a certain price. An individual does not 
recognize any income on the grant of the option or exercise thereof if 
the individual holds the shares for more than 2 years after grant and 1 
year after exercise. If the holding period requirements are satisfied, 
the employee is taxed on the excess of the sale price over the exercise 
price on his disposition of the shares.
  The reason these employees have such a significant tax bill is due to 
the workings of the Tax Code's answer to Rube Goldberg, the Alternative 
Minimum Tax, AMT. The employee's nonrecognition of income discussed 
above does not apply for AMT purposes. For AMT purposes, the code 
requires the recognition of the excess for the stock's fair market 
value on the date of exercise over the option price when the stock is 
substantially vested. Thus, while an employee does not have a tax 
liability of ordinary income for exercising his ISO the employee may be 
subject to AMT when he exercises his ISO.
  While in years past, this may not have been too great a problem in a 
time when share prices are increasing and individuals have the money to 
pay the AMT. It is a very different story when shares are declining. 
The individual is then facing the AMT charges based on the exercise 
value but often has no funds to pay the AMT since the stock that was 
the source of the AMT has declined in value since it was exercised.
  It is true that if the individual had sold the stock in the same year 
he exercised his ISO he would have potentially reduced his AMT 
liability significantly. However, the code sends a mixed signal to the 
individual telling him that he must hold the stock for one year after 
exercise if he wants to avoid taxation at ordinary income on the value 
at the point of exercise.
  The above are the facts of the tax code, but they do not reflect the 
very real disaster this has done to many people across the country. The 
story of one company in Cedar Rapids, IA, McLeod USA, puts a real face 
on how this tax has destroyed families. I have received letters from 
dozens of honest hard-working people of this company telling me how 
they are making a good salary in Iowa, say $50,000 or $70,000, and were 
also given these ISOs as an additional incentive to work for McLeod. 
Now, because of the AMT rules and the declining market, these families 
are facing tax bills of tens of thousands, if not over a hundred 
thousand dollars. It is wiping out a lifetime of savings and hardwork, 
all to pay a tax bill on phantom income, income they never received, 
never enjoyed and never had. It is outrageous and it is just plain 
wrong.

[[Page S13305]]

  The bill that Senator Kerry and I have introduced will provide 
significant relief from the AMT tax bill for workers. It allows 
employees to determine the value of their stock options on April 15, 
2001, (as opposed to the exercise date), which will reflect the 
downturn of the market. This will go far in minimizing the AMT hit that 
employees face. In addition, the relief is targeted to assist low-
income and middle-income families.
  I hope my colleagues will join myself and Senator Kerry to put an end 
to this tax disaster.
  I ask unanimous consent the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1831

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. ALTERNATIVE MINIMUM TAX RELIEF WITH RESPECT TO 
                   INCENTIVE STOCK OPTIONS EXERCISED DURING 2000.

       (a) In General.--In the case of an incentive stock option 
     (as defined in section 422 of the Internal Revenue Code of 
     1986) exercised during calendar year 2000, the amount taken 
     into account under section 56(b)(3) of such Code by reason of 
     such exercise shall not exceed the amount that would have 
     been taken into account if, on the date of such exercise, the 
     fair market value of the stock acquired pursuant to such 
     option had been its fair market value as of April 15, 2001 
     (or, if such stock is sold or exchanged on or before such 
     date, the amount realized on such sale or exchange).
       (b) Limitation.--
       (1) In general.--If the adjusted gross income of a taxpayer 
     for the taxable year in which an exercise described in 
     paragraph (1) occurs exceeds the threshold amount, the amount 
     otherwise not taken into account under paragraph (1) shall be 
     reduced by the amount which bears the same ratio to such 
     amount as the taxpayer's adjusted gross income in excess of 
     the threshold amount bears to the phaseout amount.
       (2) Threshold amount.--For purposes of this subsection, the 
     threshold amount is equal to--
       (A) $106,000 in the case of a taxpayer described in section 
     1(a) of such Code,
       (B) $84,270 in the case of a taxpayer described in section 
     1(b) of such Code, and
       (C) $53,000 in the case of a taxpayer described in section 
     1(c) or 1(d) of such Code.
       (3) Phaseout amount.--For purposes of this subsection, the 
     phaseout amount is equal to--
       (A) $230,000 in the case of a taxpayer described in section 
     1(a) of such Code,
       (B) $172,500 in the case of a taxpayer described in section 
     1(b) of such Code, and
       (C) $115,000 in the case of a taxpayer described in section 
     1(c) or 1(d) of such Code.
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