Parallel AMT calculations for investments in S corporations.

• Author: White, Stephen J.
• Position: Alternative minimum tax

The legislative history of the Tax Reform Act of 1986 (TRA) indicates that Congress intended that the alternative minimum tax (AMT) would be a taxing system separate from, but operating parallel to, the regular tax. Under this concept, a taxpayer is required to compute taxable income and tax liability each year under both the AMT and the regular tax. In certain cases, Congress explicitly specified how regular tax principles are to be applied in calculating a taxpayer's AMT income (AMTI). For example, Sec. 59(h) provides that the basis limitations on losses contained in Secs. 704(d) and 1366(d), along with the at-risk rules of Sec. 465, are to be applied for purposes of determining AMTI, taking into account the adjustments and preferences enumerated in Secs. 56, 57 and 58. Similarly, Sec. 58(b)provides that, in computing AMTI, the passive loss rules of Sec. 469 will apply; however, in applying such rules, AMT adjustments and preferences must be taken into account. Finally, Sec. 56(a)(7) states that the adjusted basis of any property subject to an alternative method of basis recovery for AMT purposes will be determined by taking into account those depreciation, depletion and amortization deductions allowable in computing AMTI. The TRA Blue Book makes it clear that these are not the only areas in which regular tax principles are to be taken into account in computing AMTI. For example, the Blue Book specifies that, in computing AMTI, the limitations on capital losses contained in Sec. 1211 are to be applied by reference to AMT asset basis. The clear implication 0f both the statute and the legislative history is that, absent statutory guidance to the contrary, regular tax principles should govern the calculation of AMT.

One set of regular tax principles that may be applied in a parallel fashion in computing AMT is found in subchapter S. The principal implication of applying such rules in a parallel fashion is that an S shareholder will have two potentially different bases in his S stock--one for regular tax purposes and another for the AMT. This can, in turn, lead to differing regular tax and AMT computations in a number of situations, including the basis limitation on S losses and the tax consequences of distributions.

Sec. 1366[d] provides that an S shareholder may not deduct losses in excess of the sum of stock and debt basis as computed under Sec. 1367. In general, basis will reflect the shareholder's initial investment, adjusted for income...