Capital loss limits apply to AMTI.

• Author: Merlo, Robert J.
• Position: Alternative minimum taxable income

P exercised incentive stock options on Dec. 21, 2000, acquiring 46,125 shares of E stock. He had to include $1,066,064--the spread between the exercise price and the stock's fair market value on the exercise date--in his alternative minimum taxable income (AMTI) in 2000. In 2001, E filed for bankruptcy, and P's stock became worthless. As a result, he realized a capital loss for AMT purposes of $1,075,289 in 2001.

P argues that he can use his 2001 capital losses to reduce his 2000 AMTI, because the capital loss limits of Secs. 1211 and 1212 do not apply for purposes of the alternative minimum tax (AMT).

Capital Losses under Regular Tax and AMT

If securities that are capital assets (as defined by Sec. 1221) become worthless during a tax year, the losses are capital losses, as if a sale or exchange of the securities occurred on the last day of that tax year. Under Sec. 1211(b), noncorporate taxpayers can recognize capital losses to the extent of capital gains plus $3,000. Sec. 1212(b) allows noncorporate taxpayers to carry forward unrecognized capital losses to subsequent tax years, but it does not allow them to carry back unrecognized capital losses to prior tax years.

P seeks to carry back his 2001 AMT capital loss of $1,075,289 to reduce his 2000 AMTI, contending that the capital loss limits of Secs. 1211 and 1212 do not apply to his AMT capital loss for purposes of calculating his AMTI.

The Code does not explicitly address capital losses for AMT purposes, and the court has never before addressed whether the Secs. 1211 and 1212 capital loss limits apply for purposes of calculating AMTI. However, Regs. Sec. 1.55-1(a) states:

Except as otherwise provided by statute, regulations, or other published guidance issued by the Commissioner, all Internal Revenue Code provisions that apply in determining the regular taxable income of a taxpayer also apply in determining the alternative minimum taxable income of the taxpayer.

No statute, regulation or other published guidance purports to change the treatment of capital losses for AMT purposes. Thus, the capital loss limits of Secs. 1211 and 1212 apply in calculating a taxpayer's AMTI; see Allen, 118 TC 1, at 8 (holding that Sec. 280C(a)'s wage-expense limit applies to the...