Multiple AMT asset bases; significant planning opportunities may result from a variety of basis computations.

• Author: Laverty, Brian L.

Most corporate assets have a unique basis for each distinct tax computation (i.e., for regular income tax, alternative minimum tax (AMT), adjusted current earnings (ACE), and earnings and profits (E&P)). Taxpayers would do well to plan their asset dispositions and take advantage of the many tax planning opportunities that exist as a result of the separate basis computations. These computations can produce significant tax savings or alter the time at which tax refunds and credits are available. However, due to the complexity of the post-1986 corporate AMT, significant tax savings may easily be overlooked. This article will illustrate, with examples, how to achieve those tax savings.

ACE Adjusted Bases

Sec. 56(g)(4)(I), added by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), lacks precision, but appears to require that the adjusted basis of any property for ACE purposes is determined by considering the depreciation computed for ACE purposes. This is a logical approach and a reasonable interpretation.

There is no commentary in the TAMRA committee reports regarding Sec. 56(g)(4)(I), and the final ACE regulations, issued in March 1991, do not address this provision. However, the wording of Sec. 56(g)(4)(I) is reasonably similar to Sec. 56(a)(7), which provides for a distinct AMT basis for most modified accelerated cost recovery system (MACRS) property. This AMT basis (hereinafter referred to as the preadjustment alternative minimum taxable income (AMTI) basis) equals the property's initial depreciable basis plus any capitalized improvements less the depreciation allowed by Sec. 56(a)(1) for preadjustment AMTI purposes.(1) Thus, most MACRS property has one basis for regular income tax purposes, but another basis for preadjustment AMTI purposes. The Senate Report to the Tax Reform Act of 1986 (TRA) explained Sec. 56(a)(7) as follows. For all depreciable property to which minimum tax adjustments apply, adjusted basis is determined for minimum tax purposes with reference to the amount of depreciation allowed for minimum tax purposes under the alternative system [i.e., the alternative depreciation system (ADS)]. Thus, the amount of gain on the disposition of such property will differ for regular and minimum tax purposes.(2) (Emphasis added.)

Given the similar wording of Secs. 56(a)(7) and 56(g)(4)(I), it appears that a distinct ACE basis was intended for most ACRS and MACRS property. Assuming this is true, the ACE basis for these properties equals the property's initial depreciable basis plus any capitalized improvements less the depreciation allowed for ACE purposes.(3) Thus, in computing ACE, a corporate taxpayer selling depreciable property often has one gain or loss adjustment for preadjustment AMTI purposes and a second gain or loss adjustment for ACE purposes. The difference in the respective bases (see Example 1 on page 47) presents a significant opportunity to reduce or eliminate a post-1989 corporate tax liability (regular tax, AMT or both).

Example 1: Determining Adjusted Bases

L Corp., a calendar-year C corporation, placed $5000,000 of class 33.3 assets (Manufacture of Foundry Products) into service in June 1987. For MACRS purposes, these assets are seven-year property with an ADS recovery period of 14 years. The regular income tax and AMT bases of these properties on Jan. 1, 1990 are determined as follows.

Regular AMT tax basis basis Initial basis $500,000 $500,000 Less depreciation for each purpose (1987-1989) 281,350 122,750 Adjusted basis at 1/1/90 $218,650 $377,250 Under Sec. 56(g)(4)(A)(ii), ACE depreciation for this property is determined as follows.

$377,250 (adjusted basis

for AMT purposes at 1/1/90) = $32,804 (annual

11 1/2 years (remaining ACE depreciation) ADS recovery period applicable to the property) As a result of the three depreciation computations, this property has three distinct bases at the end of each post-1989 tax year (December 31 in this case).

Adjusted basis for regular Adjusted basis Adjusted basis Year-end tax purposes for AMT purposes for ACE purposes 1990 $156,200 $336,850 $344,446 1991 111,550 300,750 311,642 1992 66,950 268,550 278,838 1993 22,300 236,950 246,034 1994 0 205,350 213,230 The preadjustment AMTI adjustments required by Sec. 56(a) (including the AMTI basis adjustment of Sec. 56(a)(7)) are allowed without reference to prior-year adjustments and may reduce preadjustment AMTI below taxable income for regular income tax purposes. However, negative ACE adjustments are limited to prior-year positive adjustments by Sec. 56(g)(2).

The possibility of combining large negative adjustments for preadjustment AMTI with those for ACE purposes suggests that...