Potential tax savings opportunity created by invalidation of AMT book income adjustment regulations.

Taxpayers that had items deducted for book purposes before 1987 that were not deductible for tax purposes until after the corporate alternative minimum tax (AMT) became effective may benefit from a recent case. In CSX Corp., DC Va., 6/25/96, Regs. Sec. 1.56-1(d) was ruled invalid.

In 1985, CSX incurred a $954 million restructuring charge for book purposes. For tax purposes, the restructuring charge was not accrued until 1987, at which time $109 million was accrued and deducted; the remainder was accrued in later years. Two other items were also deducted for book purposes prior to 1987, with the tax deductions arising after 1986.

AMT Book Income Adjustment

When Congress enacted the corporate AMT rules in 1986, it included an adjustment based on 50% of the difference between adjusted net book income and alternative minimum taxable income; it also included a provision to account for omissions and duplications in book income. Specifically, Sec. 56(f)(2)(J) provided that, by regulation, the IRS was to provide a mechanism so that net book income, for AMT purposes, "shall be properly adjusted to prevent the omission or duplication of any item." (Emphasis added.) In response, the Service promulgated Regs. Sec. 1.56-1(d), which stated that adjusted net book income was to be computed by making certain enumerated adjustments. It further provided that no adjustment could be made to net book income except as provided in the regulation.

The specific issue addressed by the court in CSX was whether the restructuring charge was an "omission" from CSX's 1987 book income within the meaning of Sec. 56(f)(2)(J). If so, the omitted amounts would reduce (CSX's net book income in 1987 (the year of the tax deduction), thereby reducing its AMT liability for that year. Focusing on the plain language of the law, the court found that the word "omission" was unambiguous, the language of the statute clear. CSX took the full restructuring charge for book purposes in 1985, but did not recognize it for tax purposes until it accrued, at least in part, in 1987. Because the amount deducted in 1987 had not been previously recognized for tax purposes, the court determined that it had been "omitted" from the tax calculation of net book income.

The court was also troubled by the fact that in its regulatory list of acceptable omissions and duplications, the IRS listed only duplications. This, along with the Service's limitation of adjustments to those specifically listed, effectively wrote the word "omission" out of Sec. 56(f)(2)(J).

Implications

Although the case comes eight years after most returns involving this determination would have been filed, the decision could still be beneficial to some taxpayers. First, certain AMT taxpayers with book/tax timing differences of the type described in the case do have their 1987 tax years open. Certain affected entities may still have their 1987 tax years under examination, in which case the decision may prove to be a significant bargaining chip. Even though appeal of the case by the IRS to the Fourth Circuit is likely, the district court's strong opinion certainly casts doubt on the merits of the Service's position.