The Speltzes Hit The New York Times

The Tax Update Blog notes that the New York Times (free registration required) has run the story of Ronald Speltz of Ely who got hit with a big AMT bill when he exercised (but didn't cash in) company ISOs in 2000 for McLeodUSA. Money quote section for me:

McLeodUSA, Mr. Speltz said, simply told employees to consult their own tax advisers. He said he consulted a financial planner he reached through a local bank. "Based on what they said and what other people had told me, the best way to maximize your gain was to exercise and hold for one year," he said in a telephone interview.

By the end of 2000, McLeodUSA shares were down to around $14, compared with around $25 when the option was exercised. A sale at any time during 2000 would have left the family with a comfortable profit and eliminated the alternative minimum tax issue, but they did not sell.

In April 2001, when they filed their tax return, the share price was under $10 and a sale would have produced enough cash to pay their taxes with little left over. They did not sell. Instead, they paid Iowa state taxes, and part of what they owed the I.R.S., with a bank loan. They have now defaulted on that loan, and the bank is garnishing Mr. Speltz's wages.

"The whole hope was that it would get back to where it was," Mr. Speltz said, adding that he had believed Wall Street forecasts that the stock market was sure to recover. He said he had heard of the alternative minimum tax, "but I don't think we ever understood."

To the I.R.S., and to Judge Mary Ann Cohen of the tax court, the facts are simple. The Speltzes owe tax that they have not paid and they earn enough to be able to pay it in the future, so they do not qualify for a hardship reduction in taxes.

"Petitioners' hardship argument is essentially that the tax liability is disproportionate to the value that they received from the I.S.O.'s (incentive stock options) and that they already have been forced to change their lifestyle unreasonably," the judge wrote last week, adding that the alternative minimum tax they owe is not "a prepayment of tax on value they never received," as the Speltzes argued, but a tax on compensation they did receive.

The tax court judge noted that Mr. Speltz earned about $90,000 from McLeodUSA in 2004, and that I.R.S. calculations showed that a family of five could live on much less.

Mr. Speltz dismissed those calculations as "a joke," saying they assumed housing costs of $1,016 a month, less than half his mortgage payment. He called the house "a nice house, not a palace," with four bedrooms and little furniture.

It was easy to look up Mr Speltz's address, of course. I won't be providing links because that's not important. Do your own digging if you don't believe me. I thought Ely was in Johnson County, but it turns out it's in Linn County. I went to the Linn County Assessor's web site and looked up additional information. Here's what I found:

Land Value: $67,410
Dwelling Value: $366,415
Total Value: $433,825
Total Living Area: 3682 square feet
Acres: 4.43

It's getting hard to work up much sympathy for Mr Speltz. (History here) Yep, he made a really bad decision in 2000 and 2001. Sounds to me like he was speculating, big time. He's certainly been living high on the hog with floating a $2000+ a month mortgage on a $75,000 salary (in 2000). He could have cashed in his ISOs, paid a whopping amount of taxes, and not only have been able to pay off his $433,000 "nice house" but also buy about half of downtown Ely.

Too bad he can't hire Linda Merritt!

Update: Perhaps we should all chip in to buy Mr Speltz a ticket to see Suze Orman in Cedar Rapids later this month.