Rita and Arthur Miller used to believe that honesty, hard work and filing taxes on time would keep you on society's good side.
They believed this until about 2001, when, in the parallel universe known as the alternative minimum tax, the government began seeking more than $100,000 in tax on income that the couple never received.
Six years later, the amount has doubled, and the couple will probably have to liquidate their retirement savings and maybe sell their townhouse to pay the bill. In a little-noted epilogue to the dot-com boom of the 1990s, the Millers are among thousands of families that the Internal Revenue Service says owe tax on phantom stock-market riches.
Maybe more than anything else, their situation demonstrates the brutal unfairness of the alternative minimum tax, which Congress is considering reforming because it now hits far beyond the super-rich it originally targeted.
Remember all the paper profits you lost when the Nasdaq crashed? Don't feel too bad. The Millers not only lost their dot-com quicksilver; thanks to the AMT they owe tax on it, too.
"Our hearts couldn't take it any longer," Rita Miller, 59, says of the moment two years ago when they caved in and agreed to pay the tax. "We said, 'That's it. We'll cash whatever. We'll turn in our retirement. Just end this nightmare.' "
The nightmare, however, continues. The IRS doesn't just want the $117,000 the Millers are supposed to owe on income that never existed. It wants more than $200,000, including interest and penalties, and it has rejected every settlement offer they have made.
Art and Rita Miller never figured they would even make hundreds of thousands of dollars, let alone owe that much in taxes. They had never owned a share of stock or a mutual fund. They didn't even have much of a savings account.
But they earned enough to move out of Philadelphia, where they married when she was 18 and he 20, and raised three boys in New Jersey. Jobs took them to Buffalo and Albany, N.Y., and then, in 1997, Catonsville, when she signed up as an administrative assistant with a Linthicum branch of VeriSign Inc., a Web security company.
Without knowing it, she had walked into a money factory.
Like every other young Internet company in the 1990s, VeriSign distributed stock options in dump trucks to even low-level employees. After VeriSign shares rose 750 percent in 1999, the Millers began to realize they might become rich. Arthur Miller, 61, calculated the couple could someday be worth $3.8 million if the stock didn't tank.
They knew they were over their heads. So they hired a financial adviser and a lawyer, and the advice was unequivocal: Exercise the options as soon as possible, but hang onto the shares, because they would get tax advantages that way, and who knows how high they'd go, anyway?
It was a doubly terrible idea.
The Millers scheduled option exercises on their calendar, like haircuts. Each time an option became exercisable, they called the broker, had him sell just enough shares at the market price to cover the exercise cost, and saw their paper worth go higher and higher - mostly in VeriSign stock.
Options' value depends on the difference between their exercise price and a stock's market price. Rita Miller was getting thousands of options with exercise prices of $4 and $6 a share, and VeriSign's stock was heading toward $250.
Under the regular tax code, for the kind of "incentive" stock options that she held, that value would not have been taxed until the VeriSign shares were sold. But under the wacky AMT rules, holding shares after the end of the calendar year triggered a large tax based on the difference between the exercise and market prices at the time of exercise.
(Incentive options are different from the "nonqualified" options most employees get.)
Arthur Miller says their tax lawyer had no clue about this. But VeriSign tried to educate employees, and sometime in early 2001, the couple realized they were going to have a very large tax bill.
Problem was, they no longer had the wherewithal to pay.
Like every other Internet stock, VeriSign was crashing and taking the Millers' paper wealth with it. By March 2001 VeriSign had plunged back to $40, en route to $6, but the tax bills stayed stratospheric.
The AMT system allowed people like the Millers to recoup excess stock-option liability by taking credits against tax owed in future years - but only up to $3,000 a year.
The Millers couldn't pay the whole AMT without selling their house or cashing their retirement annuities and incurring big penalties. And even if they had, she says, "we were going to be 97 and 99 when we got all our credits back, and I doubt I would have lived that long."
Thus the ordeal began.
"I know, personally, dozens of people who have lost their homes" over AMT stock-option taxes, says Tim Carlson, president of the Coalition for Tax Fairness, a lobbying group organized to seek relief for people like the Millers. There have been at least two suicides, a coalition spokesman says.
Victims of honesty
One of the many ironies, Carlson added, is that VeriSign and other companies didn't disclose incentive-option exercises to the IRS, so the agency wouldn't have even known about them if recipients hadn't reported them.
"The people that are affected by it are your hardworking, salt-of-the-earth Americans who always pay their tax and who are impeccably honest," he says.
In 2002, the Millers lost their jobs. VeriSign had hit tough times, and so had International Business Machines Corp., which employed Arthur Miller. Worse, Arthur Miller says he lost a potential new job because the employer thought he was a tax cheat. They had no income, and the IRS wanted a six-figure check.
They had salvaged some of their dot-com wealth, cashing VeriSign shares and buying annuities tied to the stock market. The annuities, too, had dived in value, but they were still worth $200,000. Even so, redeeming them to pay tax would have involved huge early-withdrawal fees and separate tax penalties.
The IRS attached liens to all their assets. Letters came and went. Interest and penalties mounted.
The Millers didn't dispute they owed the tax, even though the income on which it was based never materialized. But they didn't think they should pay penalties and interest, which brought the bill to more than $200,000. Couldn't they compromise?
No, the IRS said.
What the couple really wanted was to see a human at the agency. If they could just explain the crazy situation face to face, they figured, a reasonable person would see the light.
They counted the days to their meeting with the IRS officer, in 2005.
"She was wonderful," Rita Miller recalled. "She was really sweet. We told her, 'We'll cash in our retirement and pay the just debt that's due' " - something like $130,000 at the time. " 'But we want you to waive the penalty and interest. It's not fair. We'll pay the debt and let's end this nightmare.'
"She got up and hugged me. She said, 'I'd like to see if I can work a miracle for you.' That's the word that came out of her mouth. Of course she had to take it to her superiors."
No, the superiors said.
The IRS declined to discuss either the Millers' case or the incentive-option AMT trap in general. But in a recent memo filed on their case in U.S. Tax Court, the agency essentially says that the law is the law and the Millers should sell whatever assets are necessary to pay their tax, penalties and interest in full.
"By your own admission, you have sufficient resources to pay these outstanding liabilities, but feel that you should not be required to do so," the agency wrote them. "The IRS will not accept any offer from you under these circumstances."
The Millers are especially exasperated because the IRS owes them almost as a much money as they owe the agency. The credits they're due for AMT tax liabilities on VeriSign stock that later collapsed are $115,000; the principal balance of their delinquent tax is $117,000. Why not just call it a wash?
No, the IRS said. Pay the tax and penalties now, it said, and take the credits year by year, in thimblefuls, over the next three decades.
Congress, under much pressure - including correspondence by Rita Miller with the House Ways and Means Committee - has finally gotten into the act. Last year it accelerated the credit schedule for people who paid AMT tax on incentive-option exercises but never realized the income. Such taxpayers can now recoup their excess tax in five years.
But that change doesn't much help the Millers, who can't pay all the tax in the first place. She has found a new job, but he is still unemployed. And it doesn't affect penalties and interest the IRS assesses on delinquents.
Now that Congress has acted, Coalition for Tax Fairness President Carlson hopes the IRS will relent and start settling cases such as the Millers' in a reasonable manner.
"Stop the madness," he says. "Stop the collection process. And don't charge interest and penalties on amounts people weren't able to pay because the law wasn't working properly. Let's let people get on with their lives. ... We want to give the IRS a chance to do the right thing."
But the IRS had a chance to do the right thing for five years, and didn't. Congress ought to free victims such as the Millers from paying any interest or penalty on their back taxes. And then it ought to throw the entire AMT into the garbage.