ATNOLs and charitable contribution carryovers: which takes precedence?

AuthorKondraschow, Jeff
PositionAlternative minimum tax net operating losses

Due to the most recent economic downturn, many corporate taxpayers accumulated significant carryovers of net operating losses (NOLs), alternative minimum tax (AMT) net operating losses (ATNOLs), and charitable deductions. As these corporations recover and generate taxable income, the use of these carryover items is becoming more prevalent, and one of the issues arising is the interplay of the 10% limit on charitable deductions and the 90% limit on ATNOLs.

General Overview of the Law

The issue involves primarily three Code sections and their corresponding regulations: Sec. 170 (charitable contributions), Sec. 172 (NOL deduction), and Secs. 55 and 56 (AMT).

Sec. 170(b)(2)(A) generally limits the amount of a corporation's charitable deduction to no more than 10% of the corporation's taxable income. Furthermore, Sec. 170(b)(2)(C) states that taxable income for this purpose is computed without regard to the charitable deduction itself, NOL carrybacks, capital loss carrybacks, and the Sec. 199 deduction. Sec. 170(d)(2) provides for a carryover period of five tax years for charitable deductions a corporation makes in a tax year that exceed the 10% limit. In determining which charitable contributions are deductible in a given tax year, current-year contributions take priority over carryover contributions. The 10% limit on charitable deductions also applies in computing a corporation's alternative minimum taxable income (AMTI).

Secs. 172(c) and (d) define an NOL as the excess of allowable deductions over gross income, with specified modifications. Pursuant to Sec. 172(b)(2) and the regulations thereunder, the amount of the NOL that is absorbed in a carryover year equals the taxable income for that year determined with certain modifications (modified taxable income). Modified taxable income is determined without taking into account the NOL, and deductions that are limited to a percentage of taxable income are recomputed without regard to the NOL.

Sec. 56(d)(2)(A) generally requires a taxpayer to compute its ATNOL in the same manner as its NOL, with appropriate modifications for AMT adjustments and preference items. Sec. 56(d)(1)(A) limits the amount of ATNOL that may be deducted to the lesser of the ATNOL or 90% of AMTI computed without regard to the ATNOL deduction or the Sec. 199 deduction.

Ambiguous Ordering Rules

Based on the Code provisions cited above, a corporation's 90% limit on its ATNOL deduction must be based on income that includes the...

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