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The alternative minimum tax.

Ever since Congress enacted the alternative minimum tax (AMT) system in the Tax Reform Act of 1986 (TRA), taxpayers have become painfully aware that planning for the AMT is crucial. This planning has not always been easy, since Congress and the IRS have continuously added, redefined and even tried to simplify the AMT. This article will discuss AMT current developments, including recent proposed and final regulations, court cases and the impact of the Revenue Reconciliation Act of 1993 (RRA). It will also discuss several IRS letter rulings related to the AMT. While letter rulings apply only to the taxpayer who requested them, they often provide valuable insight into the Service's interpretation of the law, and tax practitioners can cite them as substantial authority.(1) (1)Regs. Sec. 1.6662-4(d)(3)(iii).

RRA AMT Changes

* AMT rate changes

While the RRA left the corporate AMT rate at 20%, it changed the individual rate from a flat 24% tax to a progressive tax, beginning in 1993. Individual taxpayers must now calculate their 1993 AMT at a 26% rate for the first $175,000 of alternative minimum taxable income (AMTI) above the AMT exemption, and at a 28% rate for amounts over that.(2) (2)RRA Section 13203(a) amending Sec. 55(b)(1).

Because the maximum rates for AMT and capital gains for individuals are the same, taxpayers with large amounts of capital gains and relatively little ordinary income in 1993 may be surprised to find themselves having to pay AMT. This new rate parity accentuates the effect of other preferences and adjustments. For example, a single payer with $400,000 of long-term capital gain income and $53,500 of ordinary income after a deduction of $40,000 for state income taxes and other itemized deductions will owe over $10,000 in AMT ($124, 107 regular tax versus $134,680 AMT).

* New trust rates

The RRA dramatically increased the regular tax rates for trusts and estates. Trusts now face a regular tax rate of 36% for taxable income over $5,500 and 39.6% for taxable income over $7,500.(3) Taxpayers who in the past have used trusts as a vehicle to spread AMT adjustments and preferences among several taxpaying entities may find this strategy significantly less beneficial. (3)RRA Section 13201(a) adding Sec. 1(e).

* AMT exemption amount changes

While the RRA kept the corporate AMT exemption amount at $40,000, beginning in 1993 the individual exemption amounts have been increased to $45,000 for married taxpayers filing jointly and to $33,750 for single taxpayers.(4) These exemption benefits are phased out at certain levels of AMTI. For example, married taxpayers filing jointly lose some of their AMT exemption between $150,000 and $330,000; once these taxpayers reach $330,000 of AMTI, the AMT exemption is totally phased out. (4)RRA Section 13203(b) amending Sec. 55(d)(1) and (2).

* No retroactive tax hike reprieve

Congress took some of the pain out of the new higher regular tax rates for individuals, but those who have a higher 1993 AMT liability will not be so lucky. Taxpayers may elect to pay the amount of their 1993 tax increase due to the new higher regular tax brackets in three equal interest-free installments, but they may not delay any increases attributable to higher AMT rates.(5) (5)RRA Conference Committee Report, Act Section 13201(d).

Example 1: H has a 1993 regular tax liability of $220,000, an AMT tax liability of $160,000, and would have had a $140,000 regular tax liability under the old rates. H will be able to spread $60,000 ($220,000 - $160,000) of her $80,000 regular tax increase over three years. Three $20,000 payments would be due on April 15 of 1994, 1995 and 1996.

* Repeal of charitable contribution perference

The RRA repealed the AMT preference for charitable contributions of appreciated property. This relief applies to contributions of tangible personal property made after June 30, 1992 and to contributions of all property made after Dec. 31, 1992. Property contributed in past years retains the treatment applicable to the contribution in the year contributed.(6) Thus, a charitable contribution carryover related to real property or stock donated during 1992, which would be deductible in 1993 or a future year, will still be subject to the AMT preference.

(6)RRA Section 13171(a) repealing Sec. 57(a)(6) and Section 13171(b) adding Sec. 56(g)(4)(J).

* AMT investment interest expense

Beginning in 1993, the RRA has limited a tax planning tool for individual taxpayers who might otherwise include net long-term capital gains from the disposition of investment property in their investment interest expense limitation calculation.(7) Taxpayers may make a special election to include these gains in their limitation calculation, but each dollar they include must be excluded from the 28% maximum AMT rate and taxed at ordinary income rates. Thus, while some high-income taxpayers may no longer want to sell appreciated stock or property to free up investment interest expense deductions for regular tax purposes, Congress did not address whether such capital gains could be included in a taxpayer's net investment income calculation for AMT purposes. Since no special maximum capital gains rate for AMT exists, capital gains do not receive favorable treatment in the parallel AMT calculations. Thus, taxpayers should be able to include these capital gains in their AMT investment interest expense calculation without necessarily making the election for regular tax.(8) This may allow the taxpayer a larger Sec. 163(d) deduction for AMT than for regular tax. In effect, the taxpayer would make an election under Sec. 163(d)(4)(B) for AMT, but not for regular tax.(9)

(7)Sec. 163(d)(4)(B), amended by RRA Section 13206(d).

(8)Temp. Regs. Sec. 1.163(d)-1T, issued on 12/23/93, simply states that the capital gains affected by the election to include amounts in investment income "are not eligible for the maximum capital gains rate of 28%."

(9)Elections are made on the Form 4952, Investment Interest Expense Deduction, and can apparently be made by filing two forms, one for regular tax and one for AMT.

* Impact of itemized deduction changes on AMT

Beginning in 1994, when individuals lose the "below the line" deductibility of club dues, certain lobbying expenses and 50% of meals and entertainment deductions, their regular taxable incomes will be closer to their AMTI.(10) Also, since certain tax preparation fees,(11) moving expenses and a portion of self-employed health insurance will be deductible "above the line," a taxpayer will no longer need to make an AMT adjustment, thus decreasing the individual's exposure to the AMT. The RRA also permanently adopted the limitation on itemized deductions for certain high-income taxpayers; these taxpayers must continue to reduce their AMTI to reflect this regular tax adjustment.(12)

(10)RRA Section 13209 amending Sec. 274(n)(1) (meals); Section 13210 amending Sec. 274(a) (dues); and Section 13222(a) amending Sec. 162(e) (lobbying).

(11)Rev. Rul. 92-29, 1992-1 CB 20, allows some tax preparation fees for individuals related to Schedules C, E and F to be deducted for AGI.

(12)RRA Section 13205 deleting Sec. 151(d)(3)(E).

* Asset expensing election

For taxpayers who choose to elect Sec. 179, the RRA raised the cap from $10,000 to $17,500. Since the Sec. 179 expensing election may also be taken for AMT and adjusted current earnings (ACE) purposes, this should reduce the AMT exposure for small businesses with some capital expenditures (less than $217,500) and taxable income for the year. Small businesses that run into a regular taxable income limitation may get a larger Sec. 179 deduction for AMT if their AMTI derived from the active conduct of a trade or business is higher.

* Repeal of ACE depreciation adjustment for new tangible personal property

The RRA also simplified the ACE depreciation computation by eliminating a set of calculations for tangible personal property placed in service after Dec. 31, 1993.(13) For these assets, the 150% declining-balance method allowable for AMT is allowed for ACE depreciation. Unfortunately, taxpayers with pre-1994 assets subject to the old ACE depreciation rules must continue to calculate an ACE adjustment.

(13)RRA Section 13115(a) amending Sec. 56(g)(4)(A)(i).

* New real property depreciation life

Taxpayers who depreciate nonresidential real property may have less exposure to the AMT in 1993 and future years. The RRA provides that, generally, such property placed into service on or after May 13, 1993 is depreciable over 39 years for regular tax purposes.(14) Since the recovery period is 40 years for AMT and ACE depreciation and all three systems use the straight-line method, a taxpayer's adjustment should be lower--although only by virtue of a decreased regular tax deduction. (Note that the regular tax life for residential real property was not changed by the RRA, and remains at 27.5 years.)

(14)RRA Section 13151(a) amending Sec. 168(c)(1); and Section 13151(b).

* New credit allowable against AMT

The RRA created an emplowerment zone employment credit. Beginning in 1994, employers may take a 20% credit on a portion of certain qualified wages of employees who reside in one of nine (to be designated) "empowerment zones."(15) This credit will be allowed to offset 25% of a taxpayer's AMT liability.(16)

(15)Sec. 1396, added by RRA Section 13301(a).

(16)Sec. 38(c)(2), added by RRA Section 13302(c).

* Cancellation of indebtedness income

Taxpayers who are allowed to exclude discharge of indebtedness from their taxable income must, as a quid pro quo, reduce certain tax attributes. For tax years beginning after Dec. 31, 1993, the RRA added the minimum tax credit (MTC) to the list of applicable attributes that must be reduced, and placed the MTC behind the general business credit (GBC) in the reduction pecking order.(17) Taxpayers must reduce their MTC in the same manner as the GBC, by 33 1/3 cents for each dollar of income excluded.

(17)Sec. 108(b)(2)(C), added by RRA Section 13226(b)(1).

Example 2: X Corporation is insolvent to the extent of $1,100,000. Bank Y forgives a $1,000,000 debt owed to it by X in 1994. X had a $400,000 net operating loss (NOL), $150,000 in GBC and $500,000 in MTC before the debt discharge. X would first reduce its NOL to zero, then reduce its GBC to zero, and finally reduce its MTC by $50,000. X can carry forward its remaining $450,000 MTC to 1995.

* Intangible amortization for ACE

The RRA enacted new Sec. 197, which allows taxpayers to amortize some types of intangibles, including goodwill, over a period of 15 years.(18) However, under Sec. 56(g)(4)(C), taxpayers may not deduct items for ACE purposes that do not reduce earnings and profits (E&P). While it is unclear whether taxpayers can deduct goodwill for E&P purposes, taxpayers should be allowed to deduct Sec. 197 amortization of intangibles for ACE purposes, since Sec. 197(f)(7) treats the deduction as allowable under Sec. 167, which is deductible for E&P.

(18)Sec. 197, added by RRA Section 13261(a).

* New capital gains exclusion of qualified small business stock

Beginning in 1998, taxpayers can start to benefit from a 50% capital gain exclusion from the sale of certain qualified small business stock.(19) Tax practitioners can help their clients plan for such transactions by noting that one-half of the excluded gain (or 25% of the total eligible gain) must be included in AMTI, and that this additional amount will be treated as an exclusion item for AMT. Exclusion items are permanent tax increases since they do not create an MTC.

(19)Sec. 1202(a), added by RRA Section 13113(a).

Other AMT Current Developments

* Charitable contribution deduction opportunity

Taxpayers whose charitable contribution deductions are limited by a percentage of their adjusted gross income (AGI) (or taxable income for C corporations) may get an additional tax benefit by using the rationale in IRS Letter Ruling (TAM) 9320003.(20) The IRS allowed an individual taxpayer to separately compute his AMT charitable contribution deduction in the AMT "parallel world" by using the applicable percentage of his AMT AGI. The taxpayer was allowed to amend a prior year return and generate a larger AMT charitable contribution, because his AMT AGI was larger than his regular tax AGI. Consequently, he had different regular tax and AMT charitable contribution deduction carryforwards. Similarly, the taxpayer was allowed to separately calculate AMTI oil and gas percentage depletion deductions under Sec. 613A(d)(1).

(20)IRS Letter Ruling (TAM) 9320003 (2/1/93).

Using the letter ruling's rationale, taxpayers may calculate other limitations differently for AMT than for regular tax. For example, a corporation may compute the Sec. 246(b) taxable income limitation for its dividends received deduction by using AMTI instead of taxable income. Similarly, an individual may include passive activity bond interest in his net investment income for the Sec. 163(d) investment interest expense deduction, and taxpayers may compute the Sec. 179 taxable income limitation using AMTI for the AMT deduction. Unfortunately, the same logic would dictate that a casualty loss deduction would generally be lower for AMT, since 10% of AMT AGI would be disallowed under Sec. 165(h)(2).(21) Taxpayers would likely not be required to adjust their medical expense deductions on the basis of this ruling's logic, since Sec. 56(b)(1)(B) already creates an AMT adjustment by statute.

(21)The Form 6251, Alternative Minimum Tax--Individuals, instructions now feature a worksheet for individual taxpayers to calculate their AMT AGI. However, Prop. Regs. Sec. 1.55-1(b) (release date, Mar. 17,1994) states that noncorporate taxpayers are to use their regular-tax AGI to compute their AGI-limited deductions for AMT beginning in 1994. Notice 94-28, IRB 1994-14, allows individual taxpayers to use either AGI basis to calculate their AGI-limited deductions for AMT in 1993.

* Key-person life insurance preference

IRS Letter Ruling 9309021(22) has sanctioned one possible method for C corporations to plan and avoid the ACE ramifications associated with receiving key-person life insurance proceeds on an insured executive's death. Following this ruling, a C corporation can sell its life insurance policies at their reserve value to a partnership, the partners of which are the corporate shareholders/employees covered by the policies. The partnership can be formed for the sole purpose of buying and holding the portfolio of policies in order to facilitate stock cross-purchase agreements for its partners on the death of a shareholder/partner; it need not engage in any other activity, such as owning or renting real estate or business equipment.

(22)IRS Letter Ruling 9309021 (12/3/92).

Ordinarily, a taxpayer may not be able to exclude the insurance proceeds from taxable income under the so-called "transfer for value" rules. However, taxpayers in this scenario avoid this pitfall because the policies are sold to a partnership in which the insured is a partner.(23)

(23)Sec. 101(a)(2)(B).

When a partner/shareholder dies, the partnership receives the life insurance proceeds. AMT is not affected; while the key-person life insurance inclusion is an ACE adjustment,(24) ACE does not apply to partnerships with only individual partners. After the partnership credits the proceeds to the remaining partners' capital accounts, the partners can withdraw the proceeds and contribute them to the corporation as a capital contribution. They would get a step-up in their stock basis, and the corporation could use the funds to redeem the deceased shareholder's stock (possibly receiving Sec. 303 treatment). Corporations not availing themselves of this (or some other planning technique) could pay a 15% Federal AMT on the key-person life insurance proceeds, in addition to any state AMT liabilities.

(24)Sec. 56(g)(4)(B)(ii)(I).

* Oil and gas depletion

On Jan. 25, 1993, in Hill,(25) the Supreme Court clarified the calculation of the AMT preference item for depletion. While the case involved an independent oil and gas producer, its interpretation of the law also applies to integrated oil companies. Note, however, that the Energy Policy Act of 1992 (EPA) repealed this preference for independent producers beginning in 1993.(26)

(25)William F. Hill, 113 Sup. Ct. 941 (1993)(71 AFTR2d 93-578, 93-1 USTC [paragraph]50,037), rev'g 945 F2d 1529 (Fed. Cir. 1991)(68 AFTR2d 91-5564, 91-2 USTC [paragraph]50,475), aff'g 21 Cl. Ct. 713 (1990)(66 AFTR2d 90-5799, 90-2 USTC [paragraph]50,560).

(26)EPA Section 1915(a)(2) amending Sec. 56(g)(4)(F)(ii).

The issue considered was whether taxpayers can include tangible property costs in their "adjusted basis" when calculating percentage depletion preferences (i.e., percentage depletion in excess of adjusted basis). The Court held that taxpayers may not include the unrecovered costs of depreciable tangible items related to an oil and gas interest in their adjusted basis used for this calculation. Because the nature of the preference is based on "excess" depletion, depletable property must be considered separately from any depreciable property (e.g., machinery, tools or pipes). Including such costs in "adjusted basis" would have essentially sheltered depletion preferences by counting the same cost multiple times; a $20,000 machine depreciated $4,000 each year would increase the adjusted basis by $20,000 in year 1, $16,000 in year 2, etc.

* Depletion and IDC simplification

As mentioned, the EPA affected independent oil and gas producers with its repeal of some unfavorable AMT preferences.(27) Noncorporate producers can now enjoy deductions for percentage depletion in excess of their oil and gas interests' adjusted bases without adding these amounts to their AMT calculation. The EPA has also allowed this treatment for preference carryovers, the deductibility of which may have been limited by a taxable income limitation in a prior year.(28) Corporate taxpayers that have calculated "cost depletion" for their ACE calculations in the past are now relieved of making this adjustment for 1993,(29) and can apparently use percentage depletion for ACE purposes for pre-1993 property going forward.

(27)Generally, these are for tax years beginning after Dec. 31, 1992, and apply only to taxpayers that are not integrated oil companies.

(28)Percentage depletion here is that allowable under Sec. 613A(c). Any amounts not deductible in a prior year (1992 or before) are considered to be "current year" deductions in 1993 under Sec. 613A(d)(1).

(29)Sec. 56(g)(4)(F)(ii).

Noncorporate independent producers also benefit from the EPA's changes to the intangible drilling costs (IDC) preference. These taxpayers can deduct IDC without an AMT preference, as long as the benefit does not exceed 30% of their 1993 AMTI determined without the "pre-EPA 92" preference amount(30) or any NOL deduction.(31) The EPA also provided good news for corporate taxpayers with IDC costs: IDC costs paid or incurred in 1993 on are not subject to the ACE preference, but pre-1993 costs continue to be recoverable over 60 months.(32)

(30)But since the EPA repealed Sec. 56(h) (Act Section 1915(c)), no such 120-month amortization period reduction of this preference amount is allowed here.

(31)Sec. 57(a)(2)(E), added by EPA Section 1915(b)(1); 40% is the applicable percent of allowable AMTI benefit for 1994 and future years.

(32)Sec. 312(n)(2)(A).

* Agricultural deferred sales contracts

In a January 1993 informal Request for Technical Assistance, the IRS Assistant Chief Counsel evaluated the ACE treatment of a fixed price deferred payment sales contract for agricultural commodities. The issue was whether a farm corporation must treat the contract as an installment sale of inventory, and therefore add back any deferred gain for AMTI purpoes in the year of sale.(33) If, alternatively, the taxpayer could account for the contract under the cash method of accounting, no AMT adjustment would be required. Not surprisingly, the Service stated that the contract was an installment sale.

(33)Sec. 56(a)(6)

The Assistant Chief Counsel concluded that when a farmer grows and sells crops, the crops qualify as property that could be sold on the installment basis. Thus, when farmers defer the income associated with such a deferred sales contract, they may not do so for AMT purposes. When such contracts involve a fixed price, farmers who report taxable income on either the accrual or the cash basis must include the amount of the contract in AMTI in the year of sale (except in the rare case when the value cannot be determined).

This conclusion seems to mix up the concepts of an elective installment treatment or an overall cash method of accounting. Under the Service's reasoning, accrual-basis farmers would have to elect out of the installment method in order to use their regular accrual method of accounting for crop sales. At the same time, in Rev. Rul. 58-162,(34) the Service had concluded that farmers could defer the income related to this type of contract for one year under the cash-basis method of accounting, and not because of the installment method provisions. This position was reaffirmed in 1976 and 1979, with the IRS noting that this treatment was based on farmers' "normal business practice" and that it reflected a "long-standing" IRS position.(35)

(34)Rev. Rul. 58-162, 1958-1 CB 234.

(35)GCMs 36849 (1976) and 38034 (1979).

* Simplified AMT UNICAP calculation

Under the final ACE regulations, new taxpayers may use their "regular tax" inventory amounts (for purposes of uniform capitalization (UNICAP), LIFO reserve adjustments, etc.) for AMT and ACE, provided that they use the same "regular tax" cost of goods sold (COGS) amount for AMT and ACE.(36) By using this provision, the taxpayer would likely trade simplicity for a higher AMT taxable base. For example, when a taxpayer capitalizes depreciation amounts to its ending inventory under the UNICAP rules, it will generally capitalize a smaller amount by using the less-accelerated depreciation amounts allowable under the AMT and ACE rules. The COGS is therefore increased, and the taxpayer gets larger deductions for AMT and ACE for the UNICAP and LIFO reserve adjustments than if this regulation's new simplified rule were used.

Because the Service recognizes the onerous nature of computing three inventory calculations, it will allow the simplified method; a similar election allows taxpayers to use their AMT inventory amounts for ACE.(37) However, since the application dates for prospective or retroactive elections have all passed, existing taxpayers may now only adopt this simplified method by applying for a change in accounting method.(38)

(36)Regs. Sec. 1.56(g)-1(r)(2)(i).

(37)Regs. Sec. 1.56(g)-1(r)(5).

(38)Regs. Sec. 1.56(g)-1(r)(3)(v).

* LIFO ACE adjustment

Final ACE regulations require taxpayers to continue to calculate their LIFO inventory recapture amounts for ACE purposes, but (unlike proposed regulations) do not require a "base period" comparison. Before these regulations were issued

on Dec. 18, 1992, taxpayers included the positive or negative fluctuations between a fictional FIFO value of their inventory and the actual value of their LIFO inventory in their ACE calculation (called the "LIFO reserve"). The proposed regulations stipulated that a negative ACE adjustment would not be allowed if it caused the LIFO reserve to fall below a 1990 base period amount. The final regulations, however, allow positive and negative ACE adjustments for the LIFO reserve without this base period comparison.(39) To prevent perceived abuses, a negative LIFO adjustment will be limited when it occurs in a Sec. 351 or 721 exchange.(40) While the effective date of these new rules is tax years beginning after Dec. 18, 1992, taxpayers may choose to apply them to all years beginning after 1989,(41) opening the door for potential refund claims for taxpayers who relied on the less favorable provision in the proposed regulations.

(39)Regs. Sec. 1.56(g)-1(f)(3)(i).

(40)Regs. Sec. 1.56(g)-1(f)(3)(iv).

(41)Regs. Sec. 1.56(g)-1(f)(3)(vi).

* Passive activity disposition concerns

Taxpayers who dispose of their tax shelter interests should take note of any adjusted basis or suspended loss differences between regular tax and AMT. Losses allowed under the TRA phase-out rules (i.e., the 65%, 40%, 20% and 10% calculations) were not applicable to AMT, so suspended passive activity losses may be significantly larger for AMT than for regular tax purposes. On the other hand, such losses should have been reduced by any preferences and adjustments, such as excess depreciation or percentage depletion, etc., in the years they were incurred. When a greater loss is triggered for AMT than for regular tax on the disposition of a tax shelter, taxpayers should be aware of the potential impact on their MTC carryforward. It is possible for the sale of a taxpayer's interest to actually reduce the MTC carryforward to future years.

Example 3: M sells her tax shelter in 1993. Her taxable income totals $150,000. The sale triggers an AMT suspended passive loss carryforward of $100,000, which is not available for regular tax. M's other timing and permanent differences are $300,000 and $200,000, respectively. She computes a "with and without" calculation for her timing differences in order to ascertain her MTC carryover. "Without" timing differences, M's AMT is $94,500; "with" timing differences, it is $150,500, thus yielding a $56,000 MTC carryover. Absent the suspended loss carryforward, M's MTC would have been $84,000 ($300,000 x 28%).

* Alternative depreciation methods

The AMT has subjected taxpayers to many headaches in the depreciation area. Taxpayers often spend extra money and resources to comply with the calculations of AMT and ACE depreciation and to track separate asset bases throughout the assets' lives, not to mention the potential additional costs of the tax itself.

Since these adjustments only apply to accelerated cost recovery system (ACRS) and modified ACRS (MACRS) property, some taxpayers avoid these adjustments by choosing another type of depreciation method for regular tax purposes. In IRS Letter Ruling 9015014,(42) for example, a taxpayer was allowed to use its industry's commonly accepted depreciation method for heavy construction equipment--a method based on actual hours used. The Service stated that the taxpayer's depreciation method could not result in a depreciation deduction that exceeded the otherwise allowable double-declining amount, and the taxpayer had to include a salvage value in its calculation. Similarly, in IRS Letter Ruling 9323007,(43) a taxpayer who owned video games was allowed to use the income forecast method of depreciation because of the nature of the assets and the method's common use in the industry. The good news was that each taxpayer could avoid the AMT and ACE depreciation adjustments, and essentially receive a larger AMT depreciation deduction than would otherwise be allowable, because the property was not depreciated using MACRS.

(42)IRS Letter Ruling 9015014 (1/9/90).

(43)IRS Letter Ruling 9323007 (3/8/93).

Other taxpayers could potentially avoid the AMT and ACE depreciation bite by using a non-MACRS method of depreciation that is not expressed in terms of years (such as units-of-production, operating days, miles driven, etc.). Taxpayers should beware, however, that the use of such methods must be properly elected for the first tax year for which depreciation on the property is allowable,(44) and the method must be supportable and generally recognized in the taxpayer's industry.

(44)Generally, the method must be elected on the tax return itself and filed by the due date of the return, including extensions. Elections for prior years' assets would constitute a change in an accounting method and thus would require IRS approval.

* Sec. 382 and AMT interplay

IRS Notice 87-79(45) allows a taxpayer to allocate its taxable income or loss between periods before and after a Sec. 382 ownership change. A taxpayer may choose to allocate based on a "closing of the books" basis rather than a ratable allocation basis. In Letter Rulings 9401011(46) and 9329024,(47) the IRS discussed the appropriate treatment of AMTI and ACE allocations. Basically, taxpayers may apply the closing of the books procedure to AMT and ACE as well as regular tax. They must also apply the 90% AMT NOL limitation independently of the Sec. 382 limitation. The Service did not provide taxpayers with any guidance to indicate whether they might be permitted to use the ratable allocation method for regular tax, but the closing of the books method for AMT. This approach could help taxpayers, for example, who receive life insurance proceeds in the "pre-change period." They could minimize their tax liability by using the closing of the books method for AMT purposes, and make use of more AMT NOL than if they had used the allocation method.

(45)IRS Notice 87-79, 1987-2 CB 387.

(46)IRS Letter Ruling 9401011 (10/6/93).

(47)IRS Letter Ruling 9329024 (4/28/93).

* Consolidated AMT issues

The Service promulgated proposed consolidated AMT regulations (under Sec. 1502) in December 1992. These regulations suggest that the separate return limitation year (SRLY) rules do not apply to prior year separate return positive ACE amounts, and the Treasury is studying whether AMT NOLs and MTCs are SRLY-limited attributes. The regulations also state that taxpayers may net individual companies' positive and negative current year ACE amounts together.(48)

(48)Prop. Regs. Sec. 1.1501-55.
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Author:Slivinsky, Barry
Publication:The Tax Adviser
Date:Jun 1, 1994
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