Capital loss limits apply to AMTI.

P exercised incentive stock options on Dec. 21, 2000, acquiring 46,125 shares of E stock. He had to include $1,066,064--the spread between the exercise price and the stock's fair market value on the exercise date--in his alternative minimum taxable income (AMTI) in 2000. In 2001, E filed for bankruptcy, and P's stock became worthless. As a result, he realized a capital loss for AMT purposes of $1,075,289 in 2001.

P argues that he can use his 2001 capital losses to reduce his 2000 AMTI, because the capital loss limits of Secs. 1211 and 1212 do not apply for purposes of the alternative minimum tax (AMT).

Capital Losses under Regular Tax and AMT

If securities that are capital assets (as defined by Sec. 1221) become worthless during a tax year, the losses are capital losses, as if a sale or exchange of the securities occurred on the last day of that tax year. Under Sec. 1211(b), noncorporate taxpayers can recognize capital losses to the extent of capital gains plus $3,000. Sec. 1212(b) allows noncorporate taxpayers to carry forward unrecognized capital losses to subsequent tax years, but it does not allow them to carry back unrecognized capital losses to prior tax years.

P seeks to carry back his 2001 AMT capital loss of $1,075,289 to reduce his 2000 AMTI, contending that the capital loss limits of Secs. 1211 and 1212 do not apply to his AMT capital loss for purposes of calculating his AMTI.

The Code does not explicitly address capital losses for AMT purposes, and the court has never before addressed whether the Secs. 1211 and 1212 capital loss limits apply for purposes of calculating AMTI. However, Regs. Sec. 1.55-1(a) states:

Except as otherwise provided by statute, regulations, or other published guidance issued by the Commissioner, all Internal Revenue Code provisions that apply in determining the regular taxable income of a taxpayer also apply in determining the alternative minimum taxable income of the taxpayer.

No statute, regulation or other published guidance purports to change the treatment of capital losses for AMT purposes. Thus, the capital loss limits of Secs. 1211 and 1212 apply in calculating a taxpayer's AMTI; see Allen, 118 TC 1, at 8 (holding that Sec. 280C(a)'s wage-expense limit applies to the calculation of AMTI when nothing in the sections relating to the wage-expense limit or in the AMT indicates otherwise). Accordingly, the taxpayer could not carry back his 2001 AMT capital loss to reduce his 2000 AMTI.

NOLs and AMTNOLs

P also argues that the AMT capital loss entitles him to an alternative minimum tax net operating loss (AMTNOL) deduction under Sec. 56. Generally, a taxpayer can carry back a net operating loss (NOL) to the two tax years preceding the loss, and then forward to each of the 20 tax years following the loss.

Sec. 172(c) defines an NOL as "the excess of the deductions allowed by this chapter over the gross income" as modified under Sec. 172(d). For a noncorporate taxpayer, the amount deductible due to capital losses cannot exceed the amount includible due to capital gains; see Sec. 172(d)(2)(A) and P, egs. Sec. 1.172-3(a)(2). The effect of Sec. 172(d)(2)(A) is that net capital losses are excluded from the NOL computation; see Parekh, TC Memo 1998-151.

For AMT purposes, Sec. 56(a)(4) provides that an AMTNOL deduction is allowed in lieu of an NOL deduction under Sec. 172. An AMTNOL deduction is the Sec. 172 NOL deduction. It is computed by taking into consideration all the adjustments to taxable income under Secs. 56 and 58 and all the preference items under Sec. 57 (but only to the extent that such preference items increased the NOL for the year for regular tax purposes). No adjustments under Sec. 56, 57 or 58 modify the exclusion of net capital losses from the NOL computation under Sec. 172(d)(2)(A). Thus, P's net AMT capital loss is excluded for purposes of calculating his AMTNOL deduction. As a result, P's AMT capital loss realized in 2001 does not create an AMTNOL that can be carried back to reduce 2000 AMTI.

Robert J. Merlo, 126 TC No. 10 (4/25/06)