Kadillak

I. FACTS & PROCEEDINGS BELOW

In April 2000, Kadillak purchased 32,000 shares of stock by exercising an ISO that had been granted to him by his employer, Ariba Technologies, Inc. Of those 32,000 shares, 17,333 were vested, and 14,667 were nonvested. The non- vested shares were subject to a vesting schedule based on length of employment. While nonvested, the shares were clas- sified as “Restricted,” held in an escrow account, and subject to Ariba’s right of repurchase at the option price upon the ter- mination of Kadillak’s employment, which was “at will” and could be terminated by either party, at any time, and for any reason, with or without cause.

Although the fair market value exceeded Kadillak’s option price by well over $3 million, by holding the shares rather than cashing in he avoided realizing any regular income on the transaction in 2000 because the spread on the exercise of an ISO is tax deferred under I.R.C. § 421(a)(1). Nonetheless, the transaction was not entirely non-taxable. It was subject to the Alternative Minimum Tax (“AMT”), which is imposed “separate from and in addition to the regular income tax” with the purpose of ensuring “that high-income taxpayers…