Statement of Dan Taylor

Thank you for the opportunity to submit this letter to detail the hardships my family has faced as a result of the Alternative Minimum Tax.  My name is Dan Taylor and I am writing on behalf of my wife Vicki and my children Trent and Stephanie.  I write to you today to beseech you to provide a remedy to taxpayers and families who have been financially blindsided by the antiquated tax code that is the Alternative Minimum Tax, especially as it applies to Incentive Stock Options (ISOs).

In January 1998, I was hired by GeoTel Communications in a sales position to sell telecommunications software.  As an incentive to work for this small company, I was granted ISOs as part of my compensation package.  These options would vest over time and I would have the opportunity to receive additional grants for meeting performance goals, which I did.  This was the first position that I held in my career where I received any form of stock option with my only investment experience being through personal IRAs and company sponsored 401Ks, so I would consider myself an unsophisticated investor.  I did not know one type of stock option from another which, would prove to be catastrophic to me and my family later.

In June 1999, GeoTel, with revenues of approximately $40 Million, was purchased by Cisco Systems for $2 Billion, or 50 times sales. I received a bit more than one share of Cisco stock for every share of GeoTel that I was holding an option on, so this made my accruing options very valuable.  In June 2000, I left Cisco Systems to pursue other interests and was required to exercise the options and purchase Cisco stock or lose all the options at no value.  I used some options granted while I was a Cisco employee, Non-qualified (NQs), to purchase the ISOs that I originally received from GeoTel.  The NQs were taxed as I bought and sold them as ordinary income and the proceeds from the sale were used to purchase and hold the ISOs.  I purchased 28,000 shares of Cisco stock for $4/share on a day that it was selling in the open market for $62.

All of these transactions were made with the help of a professionally licensed financial consultant.  Every effort was made on the part of my wife and me to handle this financial blessing properly with regard to income taxes.  We were advised that we would be taxed when we sold the ISO-based shares.  The resulting tax would be at the long-term capital gains rate if we held the stock for one year.  We were never advised that we had created a taxable event on the day that I purchased the stock with a tax liability of approximately $500,000 triggered by the AMT as it is applied to the exercise of ISOs.

Through late 2000 and Spring 2001, the value of the stock plummeted.  Vicki and I filed our taxes using the accountant recommended by our financial consultant for the 2000 tax

year.  We were not asked any questions about our stock transactions other than to provide the 1099 for the exercise of the NQ based options.  We were not asked to provide any records for the ISO based options despite the fact that we revealed to the accountant that I had exercised the options in June 2000.

In May 2001, I learned through a colleague from GeoTel that he had paid a tremendous tax bill centered on the exercise of his ISO shares.  We both agreed that our situations were similar enough that I needed to research and confirm that my taxes had been filed properly.  Much to my horror, I learned that Vicki and I had indeed filed our return improperly.  Though we had paid over $125,000 in Federal taxes, we owed an additional $438,000 on W-2 income of approximately $350,000.  The additional tax was generated solely by the AMT associated with the ISO stock purchase.  I had not sold one share of that stock during 2000.  The value of the stock was now less than $125,000. 

We did not have the money to pay the taxes, but I was confident that if we came forward voluntarily that we would be treated fairly and equitably by the Internal Revenue Service.  There was no audit trail, but I wanted my children to see that we should do the right thing even when no one is watching.   I expected the outcome to be painful, but nothing like what we have experienced.

Everyone that we have come in contact with at the IRS has expressed sympathy for our plight, but very quickly made the point that they have no latitude in how the collection process is enforced.  The guidelines are the guidelines.  There are no allowances for anything, only formulas that are something out of the 1950s.  After two and one-half years, we were able to reach an agreement on an Offer in Compromise in October, 2004.  My family and I will pay $372,000 over two years or about $14,500 per month.  This will require us to sell our home, use all of our savings and tax deferred retirement accounts, and my son will have to leave a four year university and attend junior college.

Is this how the tax laws are supposed to work?  Are they to be a snare that catches unsuspecting citizens and devastates them financially?  If financial professionals do not understand how the AMT applies to stock options, how can the average citizen be expected to understand and comply with this law?

Thousands of Americans have been caught in this snare, not just my family.  Only Congress can provide a remedy that will insure that more families will not face similar circumstances. I believe and have faith that you will enact legislation to abolish the

current AMT tax law and replace it with more straightforward tax code that the general public can understand.  I believe and have faith that you will provide a remedy and relief to families such as mine with some type of retroactive abatement of taxes from ISO triggered tax bills.   Why do I believe and have faith that you will do this?  The U.S. Congress has the authority to do so, and it is the right thing to do. Thank you.      

Addenda:

This tax has affected our family in every area of life.  We have been uprooted, literally and figuratively.  We have paid our tax bill, but at great personal cost.  Our savings and retirement funds are gone.  Our credit report reflects the situation, which, in turn has forced us to pay much higher interest rates on the mortgage for our current home.   It has affected us in intangible ways, too.  The feeling of powerlessness in this tax condition has bled into other areas of our lives, including physical and emotional health, and being able to effectively provide for our family, and continues long after the tax has been paid.    

The AMT tax law is far more than leaving a position, the decision to exercise a stock option, or a dollar figure on a tax return.  It affects individuals and families for years.

Anything that would allow us to accelerate the tax credits to the shortest time possible would be greatly appreciated.