Anthony Kadillak purchased 32,000 shares of stock by exercising an incentive stock option (ISO) granted him by his employer. His 14,667 nonvested shares were held in an escrow account and subject to the employer’s right of repurchase upon termination of Kadillak’s employment, which was “at will.”
Although the fair market value exceeded the option price by over $3 million, Kadillak avoided regular income in 2000 by holding rather than cashing in the shares, as §421(a)(1) defers tax on the spread on an exercise of an ISO. The transaction, however, was subject to the alternative minimum tax (AMT). For AMT purposes, §56(b)(3) exempts ISOs from the tax deferral provision of §421 and subjects them to §83, which imposes a tax on discounted property transfers in connection with the performance of services.
