Tax court limits availability of AMT tax benefit rule.
Author | Goldberg, Michael J. |
In Breakell, 97 TC No. 18 (1991), the Tax Court held against a taxpayer who claimed that his capital gain deduction gave him no tax benefit. The taxpayer argued that, because he had negative adjusted gross income (AGI), the capital gain should not be treated as a tax preference item. Although capital gains are not a tax preference item under current law, this case presents a good opportunity to review the principles of the tax benefit rule under the alternative minimum tax (AMT) system.
The tax benefit rule originally appeared in 1976 in Sec. 58(h), but was transplanted (with a minor language change) in 1986 to Sec. 59(g). It states that the IRS is to issue regulations under which "differently treated items shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer's regular tax for the taxable year for which item is taken into account or for any other taxable year." In the 15 years since the enactment of the tax benefit rule, regulations interpreting its applicability to deductions have not been issued. (Temporary regulations describing the applicability of the tax benefit rule to tax credits were issued in 1989, but the regulations, by their terms, are only applicable to years beginning before 1987.) Thus, the tax benefit rule is not governed by any hard and fast rules, and is one of the few areas of tax law in which logic and equity are the key factors.
The Breakell court hinted at the frustration the judiciary has faced in dealing with the tax benefit rule in the absence of regulations, stating that it had to interpret the rule "the best we can" using a commonsense approach. The facts in Breakell are summarized in the following chart.
Ordinary income $ 65,000 Long-term capital gain 713,000 778,000 NOL carryforward deduction 509,000 269,000 Capital...
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