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Sec. 277 and AMT.

A social club or other membership organization, which is not exempt from taxation and is operated primarily to furnish services or goods to members, computes its taxable income under the provisions of Sec. 277. Sec. 277 limits deductions attributable to furnishing services, insurance, goods or other items of value to members for a tax year to the extent of income from members or transactions with members. Excess deductions are treated as a deduction in the succeeding tax years. A question has been raised as to the computation of the tentative alternative minimum taxable income (AMTI) and adjusted current earnings (ACE), given the limitations of Sec. 277.

The IRS recently issued a general information letter reinforcing the theory of three separate tax systems, each standing alone and existing as parallel tax computations. Regular tax, alternative minimum tax (AMT) and ACE must be computed using all of the rules and limitations that apply in computing taxable income, unless otherwise provided.

The Sec. 277 limitation applies to AMTI and ACE, as well as for regular taxable income, except that it must be recomputed using AMT and ACE rules when these amounts differ from regular tax. Example 1: A membership organization, O, subject to Sec. 277, has a loss of $1,000,000 of income from dealing with members. Sec. 277 would limit regular tax deductions from dealing with members by $1,000,000. However, O's AMTI from dealing with members is a $900,000 loss (caused by accelerated depreciation being used for regular tax and not for AMT). Sec. 277 would limit O's AMT deductions from dealing with members to $900,000 the amount of its AMTI from dealing with members.

This IRS information letter is beneficial to all Sec. 277 membership organizations, in that an AMT liability will not be incurred until the entire AMTI and/or ACE Sec. 277 deduction limitation carryover is used. Tax returns of these membership organizations will be required to include three separate schedules reflecting the Sec. 277 deduction limitation carryover, one for regular tax, one for AMTI and a third for ACE. Tax planning will become very important if the organization is close to using all of its ACE and AMTI Sec. 277 carryover. Electing tax-exempt status for the first year of an AMT tax liability is one alternative, if the membership organization qualifies.

As shown in Example 2, on page 590, membership organizations subject to Sec. 277 must recompute the limitation for each method and maintain three separate schedules of the Sec. 277 deduction limitation carryforward.
Example 2: Sec. 277 Deduction Limitation Carryover
A typical membership organization's income would be computed in the
following manner.
 Regular AMTI ACE
Member income $1,000,000 $1,000,000 $1,000,000
Member expenses (2,000,000) (1,900,000) (1,800,000)
Sec. 277 limitation 1,000,000 900,000 800,000
Nonmember income 50,000 50,000 50,000
Nonmember expenses (1,000) (1,000) (1,000)
Taxable income $ 49,000 $ 49,000 $ 49,000
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Article Details
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Title Annotation:alternative minimum tax
Author:Stump, Mitchell L.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Sep 1, 1992
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