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Parallel AMT calculations for investments in S corporations.

The legislative history of the Tax Reform Act of 1986 (TRA) indicates that Congress intended that the alternative minimum tax (AMT) would be a taxing system separate from, but operating parallel to, the regular tax. Under this concept, a taxpayer is required to compute taxable income and tax liability each year under both the AMT and the regular tax. In certain cases, Congress explicitly specified how regular tax principles are to be applied in calculating a taxpayer's AMT income (AMTI). For example, Sec. 59(h) provides that the basis limitations on losses contained in Secs. 704(d) and 1366(d), along with the at-risk rules of Sec. 465, are to be applied for purposes of determining AMTI, taking into account the adjustments and preferences enumerated in Secs. 56, 57 and 58. Similarly, Sec. 58(b)provides that, in computing AMTI, the passive loss rules of Sec. 469 will apply; however, in applying such rules, AMT adjustments and preferences must be taken into account. Finally, Sec. 56(a)(7) states that the adjusted basis of any property subject to an alternative method of basis recovery for AMT purposes will be determined by taking into account those depreciation, depletion and amortization deductions allowable in computing AMTI. The TRA Blue Book makes it clear that these are not the only areas in which regular tax principles are to be taken into account in computing AMTI. For example, the Blue Book specifies that, in computing AMTI, the limitations on capital losses contained in Sec. 1211 are to be applied by reference to AMT asset basis. The clear implication 0f both the statute and the legislative history is that, absent statutory guidance to the contrary, regular tax principles should govern the calculation of AMT.

One set of regular tax principles that may be applied in a parallel fashion in computing AMT is found in subchapter S. The principal implication of applying such rules in a parallel fashion is that an S shareholder will have two potentially different bases in his S stock--one for regular tax purposes and another for the AMT. This can, in turn, lead to differing regular tax and AMT computations in a number of situations, including the basis limitation on S losses and the tax consequences of distributions.

Sec. 1366[d] provides that an S shareholder may not deduct losses in excess of the sum of stock and debt basis as computed under Sec. 1367. In general, basis will reflect the shareholder's initial investment, adjusted for income and losses flowing through to the shareholder and for returns of capital or repayments of indebtedness. Any losses in excess of basis may be carried forward indefinitely. Example 1, above at right, illustrates how the maintenance of parallel regular tax and AMT bases in a shareholder's interest may affect the computation of deductible S losses.

Note that the adjustments do not necessarily correspond to the AMT adjustments on Schedule K1, due to the differing impact of the Sec. 13661d1 basis limitation. In addition, note that if ABCD were to repay the indebtedness to A at the end of 1992, A would be required to report a gain of $25,000 for regular tax purposes, since his regular tax basis in the note has been reduced to zero. For AMT purposes, however, there would be no taxable gain, since A's AMT basis equals $25,000; consequently, A should be allowed to take into account a $25,000 negative adjustment in computing AMTI.

Sec. 1368(b)provides that a distribution by an S corporation with no accumulated earnings and profits (AE&P) does not give rise to taxable income to the distributee shareholder, except to the extent that it exceeds the basis of such shareholder's stock. If the S corporation has AE&P, the tax consequences to the shareholder are generally determined by applying the following set of rules.

1. The distribution is nontaxable to the extent of the distributee's share of the corporation's accumulated adjustments account

2. Any distribution in excess of the amount taken into account in (l)is treated as a dividend to the extent of AE&P.

3, Any amount in excess of(1) and (2) constitutes a nontaxable return of capital to the extent of the shareholder's stock basis (reduced by amounts taken into account in (1)).).

4. Any additional amount results in capital gain to the recipient shareholder (Sec. 1368(c)}. Again, the application of these rules may lead to differing results, as illustrated by Example 2 on page 667.

Note that while Example 2 deals with an S corporation with AE&P, differing regular tax and AMT stock bases can result in differing tax treatments of S distributions even in the absence of AE&P. For example, in Example 2, if there had been no E&P and the amount of the distribution had been $140,000, there would be $15,000 ($140,000 - $125,000) of reportable capital gain for regular tax purposes; however, no gain would be recognized for AMT purposes, since the distribution did not exceed A's AMT basis in her N stock.

The examples illustrate the necessity of keeping two sets of basis records for a taxpayer's investment in an S corporation, so that the necessary parallel calculations may be properly performed. Only through such computations is it possible to determine the correct adjustments to be made to regular taxable income in order to arrive at AMTI.

From Stephen 1. White, CPA, Teaching and Research Fellow, and lames W. Pratt, CPA, Professor of Accountancy and Taxation, Department of Accountancy and Taxation, University of Houston (not affiliated with DFK), Houston, Tex.
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Title Annotation:alternative minimum tax
Author:Pratt, James W.
Publication:The Tax Adviser
Date:Oct 1, 1992
Words:934
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