[Congressional Record Volume 150, Number 20 (Tuesday, February 24, 2004)]
[Extensions of Remarks]
[Page E194]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 INTRODUCTION OF A BILL TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO 
ALLOW A CREDIT AGAINST THE ALTERNATIVE MINIMUM TAX WHERE STOCK ACQUIRED 
  PURSUANT TO AN INCENTIVE STOCK OPTION IS SOLD OR EXCHANGED AT A LOSS

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                            HON. JIM GERLACH

                            of pennsylvania

                    in the house of representatives

                       Tuesday, February 24, 2004

  Mr. GERLACH. Mr. Speaker, I am pleased to rise today to ask for my 
colleagues' support on a bill I recently introduced. The bill will 
remedy a great injustice inflicted upon numerous taxpayers as a result 
of the operation of the Alternative Minimum Tax, AMT, system on the 
sale of shares of stock acquired by the exercise of incentive stock 
options, ISOs.
  Many companies offer ISOs to reward the innovation and loyalty of 
their employees. Instead of being a reward, however, this generosity 
can result in an exorbitant tax burden on the employee. To illustrate, 
imagine an employee chooses to exercise his or her ISO to purchase 
1,000 shares at $10 each when the fair market value of those shares is 
$100 per share. On paper, the employee just made $90,000. At the end of 
the tax year, the AMT forces the employee to pay a tax on the $90,000 
gain of more than $25,000, based on a taxpayer earning $75,000 per year 
and supporting a family of four.
  ISOs often require an employee to hold shares for a certain period of 
time. In my illustration, the employee is finally able to sell his 
shares a year later when, as has been the case many times over during 
the recent years, the unpredictability of the market forces the stock 
price down to $40 per share. The employee gains $30 per share for a 
total gain of $30,000. The employee, however, already paid taxes on a 
$90,000 gain. The tax liability on a $30,000 gain is just over $9,000--
approximately $16,000 less than what was paid in the year the ISOs were 
exercised. Due to the complicated nature of the AMT tax system, it 
could take the employee up to 11 years to recover that additional money 
paid to IRS on a liability that he did not really owe. That is money 
that our economy badly needs to be reinvested.
  My bill will rectify this injustice in our tax system by amending the 
Internal Revenue Code to allow an immediate refundable credit in the 
tax year a taxpayer sells his or her shares, when that sale is made at 
a fair market value which is less than the fair market value used to 
determine the tax in the year the ISO was exercised. This refundable 
credit will merely be a return of money that the individual taxpayer 
paid into the general revenue but which he or she did not actually owe.
  I ask all Members to join me in this effort to rectify this 
unbearable and unjustified tax burden from many middle-income families.

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