Category: Individuals, Sales & Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer (TP) is an individual owning a minority interest in an S corporation (CORP). TP has held the stock of CORP for a number of years during which significant amounts of AMT adjustments were passed through to TP by CORP. TP has frequently been subject to the alternative minimum tax during the period of ownership of CORP stock. TP now plans to dispose of CORP stock at a substantial gain. It is anticipated that TP will not be subject to AMT in the year of disposition of the stock. TP is aware that AMT adjustments give rise to a separate AMT basis in CORP stock for purposes of computing the alternative minimum tax; however, since TP does not anticipate being subject to AMT in the year of disposition, the separate basis calculation does not mitigate the loss of tax benefits resulting from having paid AMT in prior years based on CORP's income as adjusted by AMT adjustments, while being taxed in the year of disposition based on the regular tax basis of CORP stock. You have requested that we research whether there is support in the tax literature to suggest that the tax benefit rule can be used to lower the gain on the sale of CORP stock to reflect the fact that no tax benefit (or a lesser tax benefit) was derived from previous regular tax adjustments to CORP's basis by virtue of TP's having been subject to AMT. Research uncovered support indicating that an adjustment to gain based on the tax benefit rule would be inappropriate. Prior to our present alternative minimum tax system, there was a statutory mechanism, Internal Revenue Code (IRC) Section 58(h), which permitted regulations to be issued to apply tax benefit rule adjustments in the context of the add-on minimum tax which was in effect in various forms between 1970 and 1982. While the Tax Equity and Fiscal Responsibility Act of 1982 repealed the add-on minimum tax, Section 58(h) survived in only slightly altered form as Section 59(g). In the case of Wieser v U.S., 92-1 USTC ¶50,169 (9CA 1992), aff'g 90-2 USTC ¶50,480, the Ninth Circuit affirmed the lower court's ruling that as a matter of law, the taxpayer was not entitled to use the tax benefit rule to mitigate perceived inequities in the operation of the AMT. The taxpayer argued that Sections 58(h)/59(g) can be construed to permit tax benefit rule adjustments in the AMT context. In finding against the taxpayer, the court cited the committee reports under Section 701 of the 1986 Tax Act (at p. II-262) which provide as follows: "Since the regular and minimum taxes generally are computed separately, relief from the minimum tax under the tax benefit rule is not appropriate solely by reason of the fact that a taxpayer has received no benefit under the regular tax with respect to a particular item." Accordingly, it appears that there is a significant body of authority--both case law in our own Ninth Circuit and strong evidence of legislative intent from the committee reports under the 1986 Tax Act--against the proposition that a tax benefit rule adjustment might be permissible in any context involving AMT. It should be noted that regulations have recently been finalized under the authority of Section 59(g) (Reg. Sec. 1.58-9), and such regulations deal solely with the issue of credits for which the tax has been lost as a result of the AMT. Research also uncovered commentary both in the cases cited above and from various commentators that the AMT has its own built-in tax benefit rule in the form of the minimum tax credit of IRC Sec. 53. Absent the availability of a tax benefit rule adjustment, query whether the minimum tax credit might provide at least partial relief of TP's problem. |
