The Company expects that the proceeds available for
distribution to the holders of Preferred Shares,
including the full release of the Indemnity Escrow Fund,
will be approximately $0.5816 for each Preferred
Share (the “Estimated Per Share Consideration”).
And in another portion, it says:
before any distribution or payment of merger consideration
is made to holders of
Common Shares, the holders of Preferred Shares are entitled
to receive $2.66 per Preferred Share (the
“Liquidation Preference”).
And
The holders of
Common Shares will not be entitled to receive any merger
consideration in exchange for the cancellation
of their Common Shares because the maximum potential merger
consideration payable to the Stockholders
pursuant to the Merger Agreement is less than the aggregate
amount of the Liquidation Preference.
Does this indicate that the company sold for an amount low enough that not even the investors recouped their original capital (selling shares at $0.5 instead of the $2.66 they were at least worth according to the liquidation preferences, so overall a significant "failure")? Because if that's the case, it seems completely normal to me that common shares were nullified and it's fundamentally different than saying that shares were extinguished for "no reason" (i.e. out of pure corporate greed), like I interpreted GP's comment.
Yes that’s correct, I don’t think anything nefarious happened. The big bummer, though, is I had $0.01 shares and paid AMT at a much higher valuation and expect it to take a few decades to claim back the loss. Was my first time working with ISOs and didn’t know about 83b’s
Yes, that indeed sucks. Out of curiosity, how much AMT credits are you able to recoup each year? I understand it completely depends on your tax situation since it's basically the spread between regular liability and AMT liability, but just to get an idea, is it to the tune of $1k/y, $5k/y, $10k/y?
I, like you, have a good amount of AMT credits from a previous employer, and will just start next year to try to recoup them more seriously (since in the years before I was always affected by AMT even without ISOs, due to California income...).
mmm, as far as I know $3,000/year is the maximum capital loss (from schedule D) that you can claim against your income. But that has nothing to do with your AMT tax credit, which you should have generated the year you exercised ISOs (form 8801).
The AMT tax credit you can use every year should be limited to the difference between your regular income tax and AMT income tax each and every year (if positive). You keep going like this until you extinguish it.
For example, for tax year 2018 I had ~$10,000 of capital loss carryover (from unrelated stock sale), and ~$40,000 of AMT tax credit carryover (from previous ISOs).
When I filed my taxes, I was able to claim $3,000 of those capital losses against my income (thus generating a $7,000 capital loss carryover for 2019) and $5,500 AMT tax credit to offset my final tax liability (thus generating $34,500 of AMT tax credit carryover for 2019). As you can see, I used both the capital loss carryover AND the AMT tax credit, they're two different beasts.
I didn't use any CPA and did all of this by myself (+ TurboTax) since it seemed straightforward (and admittedly I might have studied a bit too much how taxation of stock options works). If you find that I'm horribly wrong, please let me know, but it's not the first time I find a CPA being not informed in this kind of stuff (not saying yours is), which can be costly since, if you don't claim the credit in a timely fashion, is just lost from an IRS point of view (the forms are pretty mechanic and always refer to "last year carryover").
In particular, I don't understand how your company going belly up can generate capital loss for you, since you said you had an exercise price of $0.01 per share, so it seemed to me the money you lost was because of the AMT, hence the $3,000/year limitation is like apple and oranges and definitely not a ceiling of how much you can claim each year on the AMT credit.
Sorry to hear that. On the subject of AMT, one of my accountant friends, on the side, advised to simply not report and not pay the AMT on the phantom gain of exercised options, but instead pay the AMT plus penalty when exercised option stocks actually pay out in the future. Reason being that in case of things not working out, the company is out of business and the stocks worth nothing, no point to look at the phantom gain. In the case of a home run, the large gain should cover the AMT and penalty.
Of course you need to be prepared to pay the AMT and penalty whenever the IRS comes after you.
Wait, I'm not getting the rationale behind this and it seems very dangerous advice.
Whether the company goes out of business or becomes the next Google, your AMT tax liability in the year you exercise the ISOs remains the exact same, it's not that your stocks becoming worthless years later can retroactively change (i.e. diminish) what you should have paid in AMT the year you exercised. In fact, you need to pay it because it will create a different cost basis for your shares for AMT purposes, you do need that calculation on your forms. So, your "no point to look at the phantom gain" is something I don't understand and I suspect the IRS doesn't understand either.
Hence, you're going to have to pay the original AMT liability + the hefty penalty regardless, either way. At that point, why not just paying it the year you legally owe it and then slowly recoup it over the years with AMT credits?
What you're proposing is like saying "I bought and sold TSLA and realized $100k of capital gains, but I'm not going to pay taxes now because there's a chance in 5 years TSLA will go to $0, and so the capital loss will offset the gain I owe this year". It doesn't work that way at all and there's no way you could come out ahead adopting this strategy, and it's the exact same thing when you talk about AMT. Yes, the law is draconian because with ISOs you don't effectively have liquidity, but it's still the damn law and it's clear that ISO exercise is an AMT taxable event.
Without even entering in the debate that consciously not paying taxes that you know are owed is effectively tax fraud and could get the IRS pretty pissed on top of just penalties.
If you leave me the contact of your friend, I'll be happy to reach out and confront him/her directly on the matter.
If I read your document right, it says:
And in another portion, it says: And Does this indicate that the company sold for an amount low enough that not even the investors recouped their original capital (selling shares at $0.5 instead of the $2.66 they were at least worth according to the liquidation preferences, so overall a significant "failure")? Because if that's the case, it seems completely normal to me that common shares were nullified and it's fundamentally different than saying that shares were extinguished for "no reason" (i.e. out of pure corporate greed), like I interpreted GP's comment.If not, this is instead a horror story.