Intangible drilling cost preference exception not available when AMTI is negative.

• Author: Baer, Noah S.
• Position: Alternative minimum taxable income

In Chief Counsel Advice (CCA) 201235010, the IRS determined that the intangible drilling cost preference exception may not be used in tax years when the taxpayer has negative alternative minimum taxable income (AMTI).

Background

Sec. 57(a)(2)(E) allows nonintegrated oil companies to exclude part of their intangible drilling cost (IDC) preference when computing AMTI under Sec. 55. However, this exception from the Sec. 57(a)(2) requirement to include the preference may not exceed 40% of the AMTI for the year, as calculated without regard to the IDC preference exception.

Facts

In CCA 201235010, a taxpayer has AMTI of negative $100 before the IDC preference and has an IDC preference of $80, which will increase AMTI to negative $20 if taken into account. The taxpayer is not an integrated oil company and contends that it may use the IDC preference exception and report AMTI of negative $100. The taxpayer does not think that the 40% AMTI reduction limitation should apply when the AMTI is negative and, therefore, the full IDC preference should be used.

Ruling

In the CCA, the IRS determined that a provision intended to reduce AMTI may not be used to create an AMT net operating loss. Congress enacted Sec. 57(02)(E) to enable nonintegrated oil companies to use certain oil and gas incentives that are normally subject to the AMT. A taxpayer with AMTI of $0 or negative AMTI...