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Congress again does nothing to fix unjust tax law

The Baltimore Sun

The trick with congressmen isn't merely stopping them from passing bad legislation. It's getting them to fix the terrible laws they've already enacted.

For years, thousands of victims of a bizarre booby trap in the tax code have been pleading for help from Congress and the Internal Revenue Service. Their situation is so pitiful -- and the law so contrary to decency and common sense -- that Genghis Khan would have granted relief and apologized. Congress won't do either.

After months of hearings, meetings and patient pleading, the legislature failed to assist people who owe taxes on phantom stock option income from the 1990s technology boom. On Dec. 19 it approved a temporary "patch" to limit the reach of the alternative minimum tax. But it neglected to address the AMT's most brutal feature -- ruinous taxes on people of moderate means for income they never received.

Some in Washington seemed to get it. The House version of the patch canceled all taxes and penalties on so-called "incentive" stock options under the AMT, but the ultimately-adopted Senate version did not.

"We were counting on it, praying on it, the whole bit," says Arthur Miller of Catonsville, who, with his wife, Rita, owes more than $200,000 in taxes and penalties on phantom income. "We were hoping we could bring this thing to a close with the year 2007."

Instead, they'll spend 2008 much as they've spent the last five years: adding IRS dunning letters to a thick file, talking to lawyers and hoping the agency doesn't seize their house.

The ISO-AMT rules are impossible to understand, but if you don't obey them, the penalties are government harassment and often bankruptcy.

As I wrote last March, Rita Miller received regular stock options as an administrative assistant in the Linthicum office of VeriSign in the 1990s.

The Web security company was doing well, the stock was heading toward $250, and the Millers realized they badly needed advice. Financial pros told them to exercise the options but hang onto the stock.

That would have been fine under normal tax rules. But under the AMT, they later learned, exercising incentive options triggered income tax, even though they never sold the shares.

Passed in 1969, the AMT was originally aimed at the very rich who avoided tax with loopholes. But because it was never indexed to inflation, it has increasingly whacked people such as the Millers.

After the tech bubble popped and VeriSign went back down to $5, they lost most of their potential profits along with the wherewithal to pay the tax. The IRS says they owe $117,000 in principal, plus a roughly equal amount in interest and penalties. It insists they sell their home and cash in their retirement accounts, which will mean still more penalties.

Nobody knows how many Marylanders and Americans are in a similar spot. But the Coalition for Tax Fairness, a grass-roots group organized to seek a remedy, figures ISO-AMT victims number in the thousands.

Because stock options often went to lower-level employees, many families owe three and four times their annual income, says Tim Carlson, the coalition's president. Dozens have lost their homes. At least two people have killed themselves.

Why is this so hard to figure out?

Congress tried to end the incentive stock option nightmare once, by speeding future credits for people who had managed to pay the tax. But that didn't help those such as the Millers who haven't paid. Rep. Chris Van Hollen from Montgomery County pushed hard for a clean slate for everybody, but Congress didn't go along.

"I'm a little puzzled about it myself," says Carlson, who also owed tax on income from incentive stock options that was never realized. "It is a complex issue, but there are so many issues swirling around in Congress you have to get time to sit down with the key players -- maybe spend an hour with them -- and that's hard to do."

Well, if Congress can't understand its own law without being lectured for an hour, maybe it should be careful about what it passes.

Hope is cheap. Carlson and Arthur Miller said they're optimistic Washington will end the madness this year, possibly as part of another tax bill. President Bush has nominated Douglas Shulman, vice chairman of the Financial Industry Regulatory Authority, to be the next IRS commissioner. Carlson wants Shulman to stop all enforcement action against people such as the Millers until Congress makes up its mind.

Shulman is not saying anything publicly until he's confirmed, his spokesman said, and he didn't call me back.

Meanwhile, Congress seems more concerned about giving constituents Capitol flags than fixing its worst mistakes. Could be another long year for the Millers.

jay.hancock@baltsun.com

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