**Phillip Thompson**

**March 18, 2005**

**philthompson@gmail.com**

**Individuals**

Dear Panel,

My name is Phil Thompson, and I am 43 years old. In 1997 I accepted a
position as a software engineer with a software company located in
Roseville, Minnesota.  In addition to salary, I was given a one-time
grant of 3,000 incentive stock options (ISOs) when I started. **This was
the first time I had ever received stock options in my life**. Between
1997 and 2000, the company grew rapidly, and the stock split a few
times, and the increasing stock price ended up making those options very
valuable.  Before the year 2000, I had exercised and sold some of the
options that had vested, mainly to get a down-payment for my first
house.  But in the year 2000, because more than half of my options had
vested, I decided to accelerate exercising many of these options.

Because I knew so little about the tax ramifications of exercising and
holding ISOs, I hired a professional tax advisor that had been
recommended to me by several co-workers (who were in situations similar
to mine). My tax advisor recommended an on-going, well-timed
exercise-and-hold strategy, which would allow me to best benefit from
the tax laws over the next several years. At no time did he warn me of
the risks involved with exercising and holding ISOs, should the stock
price decline dramatically. Up until that point, I had only done
same-day sales of my options, and therefore was not familiar with the
different tax treatments.

During the year 2000, I exercised and held approximately 4500 options,
worth approximately \$470,000 on the purchase date. And for most of the
year 2000, the stock price continued to trade considerably higher than
my purchase price. My trading window for the year closed in mid-December
of 2000, and even in early December the stock price was still above my
purchase price. Of course, the stock price declined dramatically
thereafter. I didn't realize there was a problem until **my tax advisor
told me in March of 2001 that I owed approximately \$165,000 in combined
federal and state tax. I was shocked and amazed, because my gross annual
salary at that time was only about \$85,000.**

After my tax advisor explained that I would not be able to discharge the
AMT tax by selling the shares (**because the AMT is an immediate tax on
potential earnings, not on real money**), I was forced to exercise and
sell even more options in order to cover my tax liability. I was luckier
than most, in that my company's stock price decline was less rapid than
most tech stocks at that time.

**As of this writing in March, 2005, the federal and state governments
still hold over \$108,000 of my money in so-called "AMT credits."**

As a law-abiding, tax-paying citizen that was burned badly by the AMT
treatment of incentive stock options, I have the following comments and
suggestions:

1.  **The AMT treatment of incentive stock options is extremely
    unfair**. In what country in the world are people taxed immediately
    on money they MIGHT make in the future? How was this allowed to ever
    become law? The reality is that law-abiding, tax-paying citizens are
    being forced to give the government long-term, interest free loans.
    And that is wrong no matter how you look at it.

2.  **The AMT is very difficult to understand**. Even with the
    assistance of a professional tax advisor, I encountered a situation
    that could have easily bankrupted me. And I have done a lot of
    reading on the AMT since 2001, and I still don't feel I understand
    the rules much better. Complexity seems to have been designed in to
    the AMT, as each rule seems to have multiple exception clauses. In
    my opinion, any tax rule that requires that you hire an accountant
    is a bad tax rule.

3.  **Current tax laws allow no solution to easily recovering the AMT
    taxes paid on phantom profits**. Even if a citizen like me is able
    to meet the tremendous burden of the AMT, the rules for returning
    the AMT "credits" are designed to make it a very long and arduous
    process, in some cases requiring many decades. Recovery of credit is
    hastened only by dramatically increasing your earnings and/or by
    creating capital gains. And both of those solutions are not
    generally easy to do! **In my personal opinion, speeding up the
    return of the AMT "credits" is the most important part of AMT
    reform**. I could be using that money to pay off my house, and to
    invest in my future.

4.  **The AMT is wrong. So why is the IRS trying to bankrupt citizens
    with it?** When the IRS' National Taxpayer advocate Nina Olson calls
    for repeal of the AMT on an annual basis, why is the IRS still so
    hell-bent to prosecute and bankrupt people who have been caught in
    the AMT trap? Trying to force people to pay taxes on money they
    never earned is akin to trying to get blood from a rock. The IRS
    needs to step back and realize that zealous enforcement of bad laws
    benefits nobody.

**Please fix the AMT and return the credits!**

Thank you for your attention.

Phil Thompson

St. Paul, MN