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b'The Tax Court looked at the interaction of the $3,000 capital loss limitation and the alternative minimum tax basis adjustment on the sale of shares originally obtained via the exercise of incentive stock options in a prior year.\\xa0 The case in question is Merlo v. Commissioner, 126 TC No. 10.

In the case at hand, a taxpayer had exercised stock options at the end of $2,000 and obtained his stock at a price that was more than $1,000,000 less than the market price at the time.\\xa0 Under the rules for ISOs, that fair market value spread was not taxable for regular income tax purposes, but was taxable for AMT purposes, generating a substantial AMT liability.

However, things did not go well for the stock in 2001 and, by year end, Mr. Merlo\'s stock was worthless.\\xa0 The Tax Court considered whether, when Mr. Merlo disposed of his stock, he could take the full basis differential against alternative minimum taxable income in 2001 and generate an AMT net operating loss to carry back to 2000 to recoup much or all of his AMT liability in that year.\\xa0 Their answer was not the one Mr. Merlo wanted.

The materials can be downloaded at http://edzollars.com/2006-05-06_AMT_Capital_Loss.pdf.

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