By BRAD SHERMAN “We need to reform the ISO in relation to the AMT” is a phrase that would make most people’s eyes glass over. As a CPA, however, it is a phrase that not only catches my attention, but causes me to act. On a recent trip to Washington, the Valley Industry and Commerce Association brought to my attention the need to change how Incentive Stock Options (ISOs) are figured into calculations of the Alternative Minimum Tax (AMT). After discussing the issue with other business leaders in the San Fernando Valley and examining the costs of such reform, I agreed. That is why I recently introduced the Incentive Stock Option Incentive Act (H.R. 4279). If passed, the Act will repeal the application of the Alternative Minimum Tax to the transfer of stock pursuant to an ISO. This change would make sure that the goal of the AMT, that everyone pays their fair share of taxes, is met, but does not do so at the expense of small companies and entrepreneurs. This is important to the economy of the San Fernando Valley, and is especially important to high-technology entrepreneurs. New businesses often cannot offer much in the way of compensation for the best talent. As an alternative to a traditional salary, some companies offer a mix of salary and stock options. If the company does well and the stock goes up, the employee makes money. Such stocks are called Incentive Stock Options. Under current tax law, those stocks are calculated when figuring the AMT. This means that those who benefit from ISOs are taxed when they are issued which is exactly when the filer does not have the money. People end up getting taxed on money they do not have. If the company does not succeed, that the person may never see the benefits of the ISO. This, in effect, creates a tax on money that not only does not exist, but that may never exist. One clear impact of this current policy is that companies that rely on ISOs as part of a compensation package often have trouble attracting the best managers, scientists and others to join them. In other words, the best and the brightest in business are actually being discouraged from helping build and grow new companies, create jobs and keep our economy expanding. Another impact is that the AMT is not being used for its intended purpose. The AMT was designed to prevent a select group of individuals from taking unfair advantage of tax law. This is clearly not what is going on when it comes to ISOs. Under my proposal, those receiving ISOs would not need to report the full value of them when calculating the AMT. As such, the word “incentive” is much more likely to be an accurate description of the option. Should my bill become law, entrepreneurs will have another way to help their companies succeed. It would also make it easier for those who would rather work for such firms to take the risks inherent in joining small, start-up companies. My legislation has been referred to the Committee on Ways and Means. Unfortunately, the committee leadership and leadership in the House have not scheduled the legislation for hearings. Given that Congress is likely to adjourn before the middle of October, and given the amount of work not yet complete, it is unlikely that my bill will be heard in this Congress. That is often the case with ideas such as the one to reform the way in which ISOs are calculated on the AMT. Unfortunately, legislation most likely to be acted on is often that which can get the most press attention or that can be most easily turned into a ribbon cutting. The most important work done in this most recent Congress, balancing the budget, is an exception. I was a member of the Budget Committee that helped draft and pass our nation’s first balanced budget in decades. This budget had helped fuel the current expansion, is shielding us, in part, from the economic crises overseas, and not only balanced the budget but has created surpluses. We are now able to turn our attention to saving Social Security for this and future generations. In the end, a balanced budget does more for the poor than a dozen new “Great Society” programs. And a balanced budget does more for business than a dozen new promotional programs. A balanced budget gives both foreign and domestic investors the confidence to build new plants, to hire new workers and to take the risk to try and bring a new idea to the market. A balanced budget encourages exactly the kind of activity that will result from changing the calculation of the ISO with respect to the AMT. Brad Sherman is a U.S. Representative and Democrat serving in the San Fernando Valley’s 24th Congressional District.