Taxpayer Precluded From Itemizing Deductions for AMT

Congress enacted the alternative minimum tax (AMT) provisions found in IRC sections 55 to 59 to establish a floor so individuals would pay some tax regardless of the exclusions, deductions and credits otherwise available to them under the regular income tax statutes. The AMT provisions accomplish this goal by eliminating the favorable treatment the regular income tax gives to certain items. The AMT applies only if, and to the extent that, the “tentative minimum tax” exceeds the taxpayer’s “regular tax.”

An election to claim the standard deduction or to itemize deductions is binding for both regular taxable income and alternative minimum taxable income (AMTI). CPAs can help taxpayers weigh the benefit associated with either option by doing parallel tax computations. Once a taxpayer elects to itemize or claim the standard deduction for regular tax purposes, he or she must make section 56(b) adjustments that directly correspond to the deduction(s) claimed for that purpose. The limitation on itemized deductions under section 68 does not apply when computing AMTI. However, to apply the AMT adjustment, the taxpayer must have itemized deductions for regular tax purposes and had them reduced by section 68.

During 1999 Marx was employed by Sun Microsystems Inc. as a programmer. On his timely filed 1999 form 1040, Marx reported more than $1 million in income. Since his adjusted gross income exceeded $126,000, the phaseout amount under section 68, he was required to significantly reduce his otherwise allowable itemized deductions. Marx took the standard deduction for a single individual in lieu of electing the lesser and more limited itemized deductions. Because he claimed the standard deduction, he did not have to file schedule A. However, Marx filed a blank schedule A with his tax return reporting absolutely no information or deductions. He also did not report any AMT on his 1999 return, nor did he include Form 6251, Alternative Minimum Tax—Individuals.

The IRS informed Marx he needed to file form 6251 so it could process his return. Marx completed and filed the form in accordance with a narrow interpretation of section 56 adjustment provisions. In computing his AMT, Marx

Increased AMTI for state and local income taxes paid.

Increased AMTI for tax-exempt interest from private activity bonds.

Decreased AMTI for the amount that would have been allowed as itemized deductions if not for the section 68 limitation.

Marx did not adjust his AMTI for the standard deduction he actually took to compute his regular tax. As a result, he determined he owed no AMT for 1999.

The IRS disallowed Marx’s AMTI adjustments for the itemized deductions he did not use in computing his regular taxable income. With the exception of the standard deduction claimed on form 1040, the IRS ignored all other adjustments and said Marx was subject to the AMT for 1999.

Marx did not dispute that he was subject to the AMT but argued he had no AMT liability. He asserted that, even though he elected to claim the standard deduction for regular tax purposes, he was entitled to use the full value of his itemized deductions when computing the AMT because section 56(b)(1)(F) provides that the section 68 overall limitation on itemized deductions does not apply when determining AMTI.

Result. For the IRS. The court disagreed with Marx’s narrow interpretation of the code. The court said when read as a whole, section 56(b) requires taxpayers to make adjustments for AMT purposes in a manner consistent with decisions they make for regular tax purposes. Taxpayers who claim the standard deduction for regular tax purposes are required to adjust for the standard deduction amount in arriving at AMTI. Further, the court said the code simply does not allow a taxpayer to pick and choose which section 56(b) adjustments apply in an attempt to get favorable AMT treatment. Because Marx claimed the standard deduction in computing taxable income for regular tax purposes, he must use that amount when determining AMTI.

Marx v. Commissioner, TC Summary Opinion 2003-23.