This excerpt taken from the ALL DEF 14A filed Mar 27, 2006.
Use of Common Stock to Pay Option Exercise Price of a Stock Option.
If a Non-Employee Director delivers previously acquired common stock in payment of all or part of the option exercise price of a stock option, the Non-Employee Director will not, as a result of such delivery, recognize taxable income or loss of any appreciation or depreciation in value of the tendered common stock. The Non-Employee Director's tax basis in the tendered stock carries over to any equal number of the option shares received on a share-for-share fair market value basis. The fair market value of the shares received in excess of the tendered shares constitutes compensation taxable to the Non-Employee Director as ordinary income. Allstate may be entitled to a tax deduction equal to the compensation income recognized by the Non-Employee Director, and at the same time such income is recognized.