axpayers pay an additional tax when their alternative minimum tax (AMT) liability exceeds their regular tax liability. In some cases, regular tax deductions and exclusions of income are not allowed for the AMT. Differences between the two tax liabilities also can be due to the acceleration of income or the postponement of deductions for AMT purposes. These timing differences, if related to a specific asset, will cause the asset to have a basis for AMT purposes that differs from that for regular tax purposes.
On December 21, 2000, Robert Merlo purchased stock valued at $1,075,289 for $9,225 under an incentive stock option plan of his employer, Exodus Company. Although the $1,066,064 difference between the fair value and the purchase price of the stock was not currently income for the regular tax, the bargain purchase element did represent AMT income in 2000, resulting in an AMT liability of $286,483. On September 26, 2001, Exodus filed for bankruptcy, making the stock worthless. Because of the different tax treatment of the stock purchase under the two systems, the stock had a basis of $9,225 for regular tax purposes and $1,075,289 for the AMT. Thus, in 2001, the taxpayer had a $9,225 capital loss for regular tax purposes and a $1,075,289 capital loss for the AMT. The taxpayer sought relief before the Tax Court concerning the AMT treatment of the stock options but lost. In that case he also argued that for AMT purposes, he should receive a refund of his 2000 AMT by carrying back his 2001 capital loss to that year without any dollar limitation. The court ruled that the issue should be decided in a separate case, which the Tax Court then considered.
Result. For the IRS. The taxpayer argued that the prohibition against carrying back capital losses to a previous year and the $3,000 deduction limitation on capital losses applied only to the regular tax computation, not the AMT calculation. The Tax Court noted that the Internal Revenue Code does not specifically state how capital losses should be treated for AMT purposes; however, it pointed out that the Treasury regulations related to the AMT say all provisions governing the computation of the regular tax apply to the AMT unless some code section, regulation or other guidance specifically states otherwise. Since no such authority could be found, the court ruled that the AMT capital losses could not be carried back to 2000 and were subject to the $3,000 limitation, the same treatment as for the regular tax.
The taxpayer then argued that the AMT capital loss had created an alternative tax net operating loss (ATNOL), which could be carried back to 2000 and offset against alternative minimum taxable income (AMTI) for that year, creating a refund. Again, the court could not find any code provision that permits the use of a capital loss in the computation of the ATNOL but noted that, for regular tax purposes, the code does not allow the deduction of a capital loss when computing an NOL. Therefore, absent any specific provision permitting its use for the ATNOL, no deduction of the AMT capital loss was permitted and no ATNOL was created.
This case illustrates the sometimes harsh and inequitable consequences of the AMT. In this case, Merlo had to include the bargain purchase element of $1,066,064 in his 2000 AMTI, which increased his AMT basis of the stock by the same amount. However, when the stock became worthless in 2001, creating a large AMT capital loss, that loss could be carried forward only and used only to offset future capital gains. Since the AMT applies only when it is greater than the regular tax, it is unlikely the taxpayer will ever receive any tax benefit due to the AMT capital loss carryforward.
Robert J. Merlo v. Commissioner, 126 TC no. 10.
Prepared by Charles J. Reichert, CPA, professor of accounting, University of Wisconsin, Superior.