Sec. 277 and AMT.

• Author: Stump, Mitchell L.
• Position: Alternative minimum tax - Brief Article

A social club or other membership organization, which is not exempt from taxation and is operated primarily to furnish services or goods to members, computes its taxable income under the provisions of Sec. 277. Sec. 277 limits deductions attributable to furnishing services, insurance, goods or other items of value to members for a tax year to the extent of income from members or transactions with members. Excess deductions are treated as a deduction in the succeeding tax years. A question has been raised as to the computation of the tentative alternative minimum taxable income (AMTI) and adjusted current earnings (ACE), given the limitations of Sec. 277.

The IRS recently issued a general information letter reinforcing the theory of three separate tax systems, each standing alone and existing as parallel tax computations. Regular tax, alternative minimum tax (AMT) and ACE must be computed using all of the rules and limitations that apply in computing taxable income, unless otherwise provided.

The Sec. 277 limitation applies to AMTI and ACE, as well as for regular taxable income, except that it must be recomputed using AMT and ACE rules when these amounts differ from regular tax. Example 1: A membership organization, O, subject to Sec. 277, has a loss of $1,000,000 of income from dealing with members. Sec. 277 would limit regular tax deductions from dealing with members by $1,000,000. However, O's AMTI from dealing with members is a $900,000 loss (caused by accelerated depreciation being used for regular tax and not for AMT). Sec. 277 would limit O's AMT deductions from dealing with members to $900,000 the...