The Energy Policy Act of 1992 changes the effect of the AMT on most oil and gas producers.

• Author: Rook, Lance W.

Congress's restructuring of the alternative minimum tax (AMT) in 1986 produced many unhappy taxpayers. Perhaps most unhappy were independent oil and gas producers. They quickly discovered that the new AMT effectively denied them the special tax benefits the Code afforded for depletion and intangible drilling costs (IDCs).

Oil and gas groups pressed their case with Congress, arguing that the AMT provisions were inconsistent with a national energy policy intended to reduce U.S. dependence on imported oil. Congress granted some relief in the Revenue Reconciliation Act of 1990 (RRA): It enacted Sec. 56(h), which provided a special AMT adjustment based on energy preferences. This adjustment, which was effective for tax years beginning after Dec. 31, 1990, mitigated the AMT's impact by allowing taxpayers to reduce their alternative minimum taxable income (AMTI) by an alternative tax energy preference deduction. This deduction equaled 75 % of the taxpayer's IDC preference attributable to "qualified exploratory costs" plus 15% of the taxpayer's IDC preference attributable to other costs plus 50% of the taxpayer's "marginal production depletion preference."(1)

The benefits of Sec. 56(h) were subject to a number of limitations: The deduction could not exceed 40% of the taxpayer's AMTI computed without regard to Sec. 56(h); the deduction was subject to phase-out rules that applied if the average price of crude oil exceeded $28 per barrel (adjusted for inflation) and Sec. 56(h) was not available to integrated oil companies.

Despite the RRA changes, the AMT remained a thorn in the side of most oil and gas taxpayers, who, therefore, felt compelled to continue their lobbying efforts until Congress passed the Energy Policy Act of 1992 (EPA).(2) The EPA's AMT provisions are generally effective for tax years beginning after 1992.

The EPA did not totally repeal the depletion and IDC preferences. But for most oil and gas taxpayers, the preferences' teeth have been pulled. Perhaps the best evidence of this is that the government has estimated that these AMT changes will cost it $456 million.

Overview of the AMT

The AMT is generally viewed as a separate tax system based on AMTI, rather than "regular" taxable income. The taxpayer determines AMTI by starting with regular taxable income, and then modifying it for a variety of AMT adjustments and preferences.(3) The result is AMTI. The taxpayer uses this to determine the tentative minimum tax (TMT), which is calculated using a flat 24% rate for individuals, or a flat 20% for corporations. If the taxpayer's TMT exceeds the applicable regular tax, the excess is the AMT, which the taxpayer must pay.(4)

Most taxpayers do not pay any AMT because the AMT rate is generally lower than the regular tax rate and their AMT adjustments and preferences are not significant. Other taxpayers have such large adjustments and preferences that, despite the lower AMT rate, their TMT exceeds their regular tax and they must pay AMT.

Most AMT adjustments apply to both corporate and noncorporate taxpayers. However, there are a number of exceptions, the most significant of which is the adjusted current earnings (ACE) adjustment under Sec. 56(g), applicable only to corporations. While the rationale behind the ACE adjustment is not absolutely clear, it appears to reflect Congress's desire that economically profitable corporations pay some tax, even if they have little or no regular taxable income.

This adjustment relies on a separate tax base (ACE) that uses AMTI before the ACE adjustment (preadjustment AMTI) as its starting point. To compute ACE, the corporation modifies preadjustment AMTI for a number of different items including accelerated depreciation, certain earnings and profits (E&P) items, and several miscellaneous adjustments. Suffice it to say, the computation of ACE is breathtakingly complex, even by AMT standards.

On the brighter side, corporations are entitled to a minimum tax credit (MTC) for all AMT they pay after 1989.(5) Noncorporate taxpayers are entitled to an MTC for AMT attributable to certain AMT adjustments and preferences (these adjustments and preferences are referred to as "deferral preferences"), but not for AMT attributable to others (referred to as "exclusion...