Is it still the alternative minimum tax?

Ever since its enactment by the Tax Reform Act of 1986 (TRA '86), there has been dispute over how alternative the corporate alternative minimum tax (AMT) really is. Supporters of a rigorous alternative approach point to language in the Joint Committee on Taxation's General Explanation of the Tax Reform Act of 1986 (JCS-10-87) (Bluebook) that refers to the AMT as a separate and independent tax system; see Bluebook, p. 438. Others point to two recent cases, Allen, III, 118 TC 1 (2002), and Ventas, Inc., 57 Fed. C1. 411 (2003), which reject the Bluebook's approach and cast doubt on the extent to which the AMT system is truly separate and independent. These cases, however, deal with the effect of wage credits on the calculation of alternative minimum taxable income (AMTI); the extent to which the decisions limit other applications of the alternative approach is not clear.

Background

Sec. 55(a) imposes an AMT equal to the excess of tentative minimum tax (TMT) for the tax year over the regular tax for the tax year. Sec. 55(b)(1)(B) defines corporate TMT as 20% of so much of the AMTI for the tax year as exceeds the exemption amount, reduced by the AMT foreign tax credit for the tax year. Sec. 55(b)(2) provides that AMTI is the taxpayer's taxable income for the tax year, determined with the adjustments provided in Secs. 56 and 58 and increased by the tax preference items described in Sec. 57.

A Separate and Independent System

The TRA '86 added the corporate AMT to the Code. The following passage from the Bluebook, p. 438, is traditionally cited for treating the AMT as a separate and parallel tax system:

For most purposes, the tax base for the new alternative minimum tax is determined as though the alternative minimum tax were a separate and independent income tax system. Thus, for example, where a Code provision refers to a "loss" of the taxpayer from an activity, for purposes of the alternative minimum tax the existence of a loss is determined with regard to the items that are includable and deductible for minimum tax, not regular tax purposes. [Footnote omitted.]

In certain instances, the operation of the alternative minimum tax as a separate and independent tax system is set forth expressly in the Code. With respect to the passive loss provision, for example, section 58 provides expressly that, in applying the limitation for minimum tax purposes, all minimum tax adjustments to income and expense are made and regular tax deductions that are items of tax preference are disregarded.

In other instances, however, where no such express statement is made, Congress did not intend to imply that similar adjustments were not necessary. Thus, for example, for minimum tax purposes it was intended that section 1211 (limiting capital losses) be computed using minimum tax basis, that section 263A (requiring the capitalization of certain depreciation deductions to inventory) apply with regard to minimum tax depreciation deductions, and that section 265 (relating to expenses of earning tax-exempt income) apply with regard only to items excludable from alternative minimum taxable income. [Footnote omitted.]

Allen and Ventas

The Tax Court in Alien and the Court of Federal Claims in Ventas, rejected the above Bluebook language as contrary to the statute's plain and unambiguous language.

Allen: The Tax Court in Allen held that an individual had to apply Sec. 280C's wage-expense limit in determining AMTI, despite that fact that the wage credit on which the limit was based could not reduce liability below TMT. The court rejected the idea of the AMT as a parallel system, finding that the direct reference to the term "taxable income" as the starting point for the AMTI calculation in Sec. 55(b)(2) was inconsistent with a truly parallel system.

Ventas, Inc.: The Court of Federal Claims reached a similar conclusion on the application of Sec. 280C's wage-expense limit to the corporate AMT, in Ventas; for a discussion, see Tax Trends, "Jobs Credit Reduces AMT Wage Deduction" TTA, November 2004, p. 719.

Not Necessarily an "Alternative"

Despite the decisions in Allen and Ventas, many opportunities may remain for the use of alternative calculations in determining AMTI. The taxpayers in those cases failed because they could not point to an adjustment that would add back the Sec. 280C wage-expense limit in determining AMTI. Such an adjustment exists for depreciation, the source of many of the differences that must be taken into account in determining a separate and parallel calculation of AMTI.

Included in the Sec. 56 list of required adjustments are provisions for alternative depreciation deductions (See. 56(a)(1)), which are also to be used in calculating adjusted basis (Sec. 56(a)(6)). Similar hales (Sec. 56(g)(4)(A) and (H)) apply to corporations in computing adjusted current earnings (ACE).

Alternative basis: These adjustments are most commonly encountered when a depreciable asset is sold or otherwise disposed of, resulting in a different measure of gain or loss for regular tax, AMT and ACE purposes. However, the use of alternative basis derived from depreciation differences appears in a number of places, and can lead to negative adjustments that may not be specifically enumerated in the Code.

For example, Sec. 311(b) requires that a corporation distributing appreciated property to its shareholders with respect to its stock recognize gain as if it had sold the property for its fair market value (FMV). Typically, the adjusted bases of depreciable assets are less for regular tax than for AMT purposes; thus, there are situations in which the Sec. 311(b) gain required to be recognized for regular tax purposes will exceed that required to be recognized for AMT. In some cases, the FMV of the distributed assets may exceed their regular tax basis (requiring Sec. 311(b) gain recognition for regular tax purposes), but be less than their AMT basis, resulting in a negative adjustment for the Sec. 311(b) gain. Sec. 56(a)(6)'s language makes such a result appropriate, despite the absence of a provision allowing a negative adjustment to reduce the regular tax measure of a Sec. 311(b) gain.

Losses: Sec. 311(b) does not allow for loss recognition when the FMV of assets distributed is less than the sum of their adjusted bases. An interesting question is whether this caps the negative adjustment discussed above at the amount that eliminates the Sec. 311(b) gain, or whether a Sec. 311(b) AMT loss would be allowed if the AMT adjusted basis of the assets exceeds their FMV. If the AMT is viewed as a separate system that follows the regular tax rules (using AMT measures and values), the answer would appear to be no. This approach would require a separate calculation of the amount to be included under Sec. 311(b) for AMT purposes and would disallow it if negative. The answer seems less clear if the AMT is viewed as rigidly tied to regular taxable income, with adjustments allowed only if specifically authorized. Because a Sec. 311(b) gain has been determined for regular tax purposes, and Sec. 56(a)(6) mandates recalculation of that gain using AMT bases, a stronger case may exist for allowing a negative adjustment that results in a Sec. 31 l(b) loss for AMT purposes.

Business Credits

Also noteworthy is that both Allen and Ventas dealt with the Sec. 280C wage-expense limit and the Sec. 38 targeted jobs credit. In each case, the courts could have reached the same result without rejecting the Bluebook language.

Sec. 55 requires that AMT (i.e., the excess of TMT over regular tax) be computed and added to the taxpayer's liability before consideration of general business credits, such as the targeted jobs credit. At that point, there is no longer a separate measure of AMT and regular tax, just corporate income tax (which general business credits reduce). The amount of credits that may be used in a tax year are limited by reference to both the regular tax and AMT systems, but that is not the same as requiring a separate measure of the targeted jobs credit for regular tax and AMT. Sec. 39--which describes the carryback and carryforward of unused credits--applies without regard to whether the inability to use the credit occurred as a result of a limit with reference to the regular tax or AMT systems.

Conclusion

The decisions in Allen and Ventas limit, but do not eliminate, opportunities for taxpayers to use alternative calculations to limit their AMT exposure.

FROM MEL SCHWARZ, J.D., CPA, WASHINGTON, DC