CB-NOTICE, 2004FED ¶46,443 Alternative minimum tax: Adjustments in computing taxable
income: Restricted property: Nonstatutory stock options: Statutory stock options: Exercise. --,
Notice 2004-28 I.R.B. 2004-16 (March 26, 2004)
[ Code Secs. 56, 83 and 422]
Alternative minimum tax: Adjustments in computing taxable income: Restricted property:
Nonstatutory stock options: Statutory stock options: Exercise. –
The IRS has cautioned taxpayers against promoters who encourage taxpayers to avoid
income tax or alternative minimum tax (AMT) in connection with the exercise of stock options.
The IRS describes particular arguments set forth by taxpayers that will be treated as frivolous,
and may therefore subject a taxpayer to civil and criminal penalties. The IRS explains the two
types of stock options, namely, "nonstatutory stock options" and "statutory stock options."
While gains from the exercise of nonstatutory stock options are subject to ordinary income tax
rates, gains on the exercise of statutory stock options are subject to AMT. The IRS listed
particular frivolous claims set forth in connection with the exercise of such options for the
purpose of claiming refunds of ordinary income tax or AMT may subject the taxpayer to civil
and criminal penalties. Back references: ¶5210.22, ¶6390.82 and ¶19,806.23.
The Internal Revenue Service is aware that certain promoters are advising taxpayers to
take highly questionable, and in most cases meritless, positions, described below, on current
and amended returns regarding income or alternative minimum tax ("AMT") due upon the
exercise of nonstatutory or statutory stock options. This Notice alerts taxpayers that the
Service intends to challenge such positions and will treat them as frivolous in appropriate
cases. However, the Service will consider each position and will not reject or contest it solely
because it is submitted along with a frivolous position. See Treas. Reg. §1.6694-2(c)(2) ("a
`frivolous' position with respect to an item is one