Academic journal article Journal of Accountancy

Can Capital Losses Be Carried Back for the AMT?

Academic journal article Journal of Accountancy

Can Capital Losses Be Carried Back for the AMT?

Article excerpt

Taxpayers 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. …

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