Potential loss of contribution carryforwards in AMT.

In November 1994, Treasury adopted final regulations under Sec. 55. These seemingly innocuous regulations can have unexpected effects on taxpayers with net operating loss (NOL) and contribution carryovers.

Regs. Sec. 1.55-1(a) requires taxpayers to compute all items for alternative minimum tax (AMT) purposes using regular tax adjusted gross income (AGI) or modified AGI. This regulation, supposedly a simplification, can yield a surprising result for an individual with an NOL carryover to a year in which he makes a charitable contribution.

The easiest way to explain this anomaly is by an example.

Example: Assume individual A has AGI for 1995 of $1,000,000 and no preference items; he has an NOL carryover to 1995 of $2,000,000 for regular tax and none for AMT. In 1995, A makes a cash contribution of $800,000 to a public charity. The NOL reduces A's regular tax AGI to zero. This eliminates the regular tax contribution deduction. Under final Regs. Sec. 1.55-1, A gets no contribution deduction for AMT purposes either, even though his AGI for AMT purposes is $1,000,000.

Under Regs. Sec. 1.170A-10(d), for regular tax purposes, the $500,000 that A could deduct absent the NOL becomes an NOL carryover rather than a contribution carryover. Thus, for 1996, A has an NOL carryover of $1,500,000 and a contribution carryover of $300,000 (subject to the percentage limitations). A has no other NOL carryover for AMT. Thus, it appears that A's only 1996 carryover deduction is the contribution carryover, subject to the limitations that apply for regular tax purposes. If A is in a similar position in 1996, more of the contribution carryover will become conversed to an NOL carryover.

Informal conversations with the IRS National Office indicate that, in this situation, the proper result is that there will be an AMT NOL carryover to 1996 of $500,000. Assuming there are no 1995 preferences, the taxpayer may treat the contribution portion of the $1.5 million NOL carryover as having arisen in 1995. Consequently, in the example, A will have a $500,000 AMT NOL carryover and a $300,000 contribution carryover to 1996. If A had any 1995 preferences, this result would be different.

Prior to the final regulations, the Service issued Letter Ruling (TAM) 9320003. This ruling required taxpayers to separately compute percentage limits based on AMT AGI and compute separate carryovers. The 1994 instructions to Form 6251, Alternative Minimum Tax-Individuals, also require separate computations for AMT purposes. These items have no further effect after the adoption of final regulations.

For year-end planning, taxpayers may want to reduce AMT exposure by making substantial charitable contributions. If there are NOL carryovers to 1995, such contributions may not yield any current year benefit. Practitioners should contact those clients in this situation and advise them of the possible adverse results.