The
recent $700 billion rescue package to bolster the financial system also
threw a lifeline to thousands of people who owed taxes on stock options
dating to the technology-stock crash of 2000.

Some individual tax bills exceeded $1 million for shares that later
plunged in value. A five-paragraph section tucked into the bailout bill
effectively erased those taxes, at an estimated cost to the Treasury of
$2.3 billion.

Most of the people affected weren't top executives, but lower-level
workers and middle managers at tech firms in the 1990s. Stock options
give holders the right, but not the obligation, to purchase stock at a
preset price, known as the strike price. For most stock options,
holders must pay income tax on the difference between the strike price
and the share price when the options are exercised, or converted to
shares.

But the options covered by this law worked differently. They allowed
holders who kept the shares for a year after exercising the option to
treat the income as a capital gain, which is taxed at a lower rate than
ordinary income.

But the options also were subject to the alternative minimum tax, a
parallel tax system established in the 1960s that treats as income the
value of options when they are exercised. The sharp run-up, and
subsequent plunge, in tech shares between 1999 and 2001 left many owing
taxes on stock that ultimately held little value. Many of the workers
say they received little, or incorrect, financial advice on how the AMT
would affect them.

Jeff Chou, an engineer at Cisco Systems Inc., exercised 100,000
options, priced at 10 cents each, in March 2000, when Cisco shares were
trading at $64. A year later, Mr. Chou says, his accountant told him he
owed $2.8 million in tax -- more than the shares were then worth, with
Cisco trading around $18.

Mr. Chou paid $600,000 in state taxes and began settlement talks
with the Internal Revenue Service. The case was pending, with Mr. Chou
owing $3.5 million for tax, interest and penalties, when the bailout
bill was signed into law. Mr. Chou says he relied on a financial
adviser who never told him about the AMT, which was enacted to prevent
the wealthiest Americans from using deductions to avoid paying taxes.
"It's been quite a ride," he says.

Mr. Chou helped assemble an advocacy group that spent seven years
lobbying Congress for relief, aided by big tech firms such as Intel
Corp. and high-tech lobbying groups. David McIntosh, a former
Republican congressman from Indiana who lobbied for the group, says
former colleagues in the House initially told him, "I can't believe it
works that way."

The workers ultimately assembled a congressional coalition that
crossed party lines, led by lawmakers from states with large numbers of
people affected by the tax. The provision approved by Congress in
October was shepherded by Reps. Chris Van Hollen, a Maryland Democrat,
and Sam Johnson, a Texas Republican.

Technically, the workers could claim credits under the AMT for
"overpaying" the tax. But the law generally limited the credit to
$3,000 a year, meaning some workers would have to wait hundreds of
years to recover their money. The bailout law allows workers who paid
the AMT to reclaim the money in two years; those who hadn't paid won't
have to pay the tax.

Congress first addressed the issue in 2006 by accelerating the
credits, subject to income limits. But those who were affected and
their supporters said the law didn't fix the problem.

Ron Speltz, a technical-support manager for phone company McLeodUSA,
attended the 2006 bill-signing ceremony at the White House as someone
who would benefit from the law. But Mr. Speltz was facing possible
foreclosure on his Ely, Iowa, home for unpaid taxes in September.

Mr. Speltz exercised options to acquire 32,000 shares of McLeod in
early 2000, when they were valued at about $800,000. A year later he
was told he owed $259,000 in federal and state taxes, about what the
shares were then worth. "It about dropped you to the floor," he says.
McLeod later filed for bankruptcy protection and was acquired by Paetec
Holding Corp. in February.

Mr. Speltz calls the new law, which eliminates his tax debt, "a flat-out miracle."

Write to Scott Thurm at scott.thurm@wsj.com