Allen v. Comm'r of Internal Revenue
| Decision Date | 04 January 2002 |
| Docket Number | 1290–00,1291–00,No. 1287–00,1292–00,1293–00,1618–00.,1289–00,1288–00,1287–00 |
| Citation | 118 T.C. No. 1,118 T.C. 1 |
| Parties | Charles C. ALLEN, III and Barbara N. Allen, et al.1, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayers petitioned for redetermination of IRS's asserted deficiencies. The Tax Court, Laro, J., held that amount by which wages were reduced by targeted jobs credit (TJC) paid by subchapter S Corporation could not be used by its shareholders as a deduction in calculating individual shareholders' alternative minimum taxable income (AMTI).
Decision for respondent. Ps are the shareholders of F, a subch. S corporation. During its 1994 and 1995 taxable years, F incurred wages that qualified for the targeted jobs credit (TJC) under secs. 38 and 51, I.R.C. F claimed TJCs of $456,264 and $259,434 for the respective years and reported to Ps their proportionate shares of the credits. F reduced its deduction of wages by the amount of the TJCs, pursuant to sec. 280C(a), I.R.C., and reported to Ps their proportionate shares of its resulting net income (F's resulting net income). Ps computed their regular tax liability by including F's resulting net income in their taxable income. Ps were not subject to the alternative minimum tax but had to compute their alternative minimum taxable income (AMTI) in order to ascertain for purposes of sec. 38(c)(1)(A), I.R.C ., the tentative minimum tax ceiling on the amount of the TJCs that could be applied against their regular tax liability. Ps computed their AMTI by deducting their proportionate shares of F's full wage expense (i.e., the wage expense unreduced by the TJC). R determined that Ps' AMTI had to be computed using F's resulting net income and that the tentative minimum tax ceiling limited Ps' application of the TJC against their regular income tax liabilities.Held: Because sec. 280C(a), I.R.C., requires that a wage deduction must be reduced by the amount of the TJC, and pt. VI, subch. A, ch. 1, subtit. A (secs. 55 through 59, I.R.C.) does not allow for an adjustment of that reduction for purposes of the alternative minimum tax regime, the portion of F's wages equal to the TJC is not deductible in calculating Ps' AMTI.Robert H. Kapp and John S. Stanton, for petitioners.
David R. Ferguson, for respondent.
This case was submitted to the Court without trial. See Rule 122. 2 Petitioners petitioned the Court to redetermine respondent's determination of the following deficiencies in their Federal income taxes for 1994 and 1995:
+----------------------------------------------------------+
¦Petitioners ¦1994 ¦1995 ¦
+----------------------------------------------------------¦
¦ ¦
+----------------------------------------------------------¦
¦Charles C. Allen III and Barbara N. Allen ¦$21,321¦$12,107¦
+------------------------------------------+-------+-------¦
¦Charles C. Allen, Jr. ¦21,324 ¦12,015 ¦
+------------------------------------------+-------+-------¦
¦John R. Allen and Estate of Sally F. Allen¦21,395 ¦- ¦
+------------------------------------------+-------+-------¦
¦John R. and Judith M. Allen ¦- ¦12,108 ¦
+------------------------------------------+-------+-------¦
¦John R. Allen, Jr., and Susan S. Allen ¦21,394 ¦12,107 ¦
+------------------------------------------+-------+-------¦
¦Warren L. Allen ¦6,388 ¦1,970 ¦
+------------------------------------------+-------+-------¦
¦Warren L. Allen, Jr. ¦36,197 ¦20,582 ¦
+------------------------------------------+-------+-------¦
¦Amantha S. Allen ¦36,197 ¦20,582 ¦
+----------------------------------------------------------+
Following concessions in docket numbers 1291–00 and 1292–00, we must decide whether the wage-expense-limitation of section 280C(a) enters into the calculation of alternative minimum taxable income (AMTI). As relevant herein, section 280C(a) limits a taxpayer's wage expense to the amount of the expense that exceeds the amount of a targeted jobs credit (TJC) determined under section 51(a). We hold that section 280C(a) enters into the calculation of a taxpayer's AMTI.
All facts were stipulated and are so found. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. During the subject years, each petitioner,3 with the exception of Warren L. Allen and Charles C. Allen, Jr., filed a joint Federal income tax return with his wife. Charles C. Allen III was the husband of Barbara N. Allen. John R. Allen was the husband of Sally F. Allen during 1994, and he was the husband of Judith M. Allen during 1995. John R. Allen, Jr., was the husband of Susan S. Allen. Warren L. Allen, Jr., was the husband of Amantha S. Allen. Each petitioner and his wife (with the exception of Sally F. Allen) resided in Delaware when the petitions were filed. Sally F. Allen was deceased at that time, and the executor of her estate was (and is) John R. Allen, Jr.
Allen Family Foods, Inc. (Foods), is an S corporation that was incorporated under Delaware law. Its business is the slaughtering, converting, and processing of chickens into ready-to-cook whole chickens and chicken parts for sale primarily to retailers. It computes its income and expenses using an accrual method of accounting and on the basis of a fiscal year ending on the Saturday nearest April 30th. It filed a Form 1120S, U.S. Income Tax Return for an S Corporation, for its fiscal years ended in 1994 and 1995 (its 1994 and 1995 taxable years, respectively).
Petitioners are descendants of Charles C. Allen, the founder of the family poultry business, and they owned all of Foods' outstanding stock during its 1994 and 1995 taxable years. The number of the shares that they each owned and the percentage of their respective ownership interests were as follows:
+-----------------------------------------------------+
¦Shareholder ¦No. of Shares¦Percent¦ ¦
+-----------------------------------------------------¦
¦ ¦
+-----------------------------------------------------¦
¦Charles C. Allen, Jr.¦50 ¦16.67 ¦ ¦
+---------------------+-------------+-------+---------¦
¦Charles C. Allen III ¦50 ¦16.67 ¦ ¦
+---------------------+-------------+-------+---------¦
¦Warren L. Allen ¦15 ¦5.00 ¦ ¦
+---------------------+-------------+-------+---------¦
¦Warren L. Allen, Jr. ¦85 ¦28.33 ¦ ¦
+---------------------+-------------+-------+---------¦
¦John R. Allen ¦50 ¦16.67 ¦ ¦
+---------------------+-------------+-------+---------¦
¦John R. Allen, Jr. ¦50 ¦16.67 ¦ ¦
+---------------------+-------------+-------+---------¦
¦Total ¦300 ¦100.00 ¦(rounded)¦
+-----------------------------------------------------+
During its 1994 and 1995 taxable years, Foods incurred wages which qualified for the TJC. Foods claimed TJCs of $456,264 and $259,434 on its 1994 and 1995 Federal income tax returns, respectively, and reported to each petitioner on his Schedules K–1, Shareholder's Share of Income, Credits, Deductions, etc., his proportionate shares of those credits. The Schedules K–1 reported the proportionate shares as follows:
+-------------------------------------+
¦Shareholder ¦1994 ¦1995 ¦
+-------------------------------------¦
¦ ¦
+-------------------------------------¦
¦Charles C. Allen, Jr.¦$76,044¦$43,239¦
+---------------------+-------+-------¦
¦Charles C. Allen, III¦76,044 ¦43,239 ¦
+---------------------+-------+-------¦
¦Warren L. Allen ¦22,813 ¦12,972 ¦
+---------------------+-------+-------¦
¦Warren L. Allen, Jr. ¦129,275¦73,506 ¦
+---------------------+-------+-------¦
¦John R. Allen ¦76,044 ¦43,239 ¦
+---------------------+-------+-------¦
¦John R. Allen, Jr. ¦76,044 ¦43,239 ¦
+---------------------+-------+-------¦
¦Total ¦456,264¦259,434¦
+-------------------------------------+
For Federal income tax purposes, Foods reduced its deduction of wages by the amount of the TJC as required by section 280C(a) and reported to each petitioner on his Schedules K–1 his proportionate share of the resulting net income (Foods' resulting net income). Each petitioner computed his regular income tax liability for 1994 and 1995 by including in his taxable income his proportionate share of Foods' resulting net income.
Petitioners were not subject to alternative minimum tax but were required to compute their AMTI in order to ascertain for purposes of section 38(c)(1)(A) the tentative minimum tax (TMT) ceiling on the amount of a TJC that may be applied against regular tax liability. For purposes of computing his AMTI for 1994 and 1995, each petitioner claimed deductions for his proportionate share of Foods' full wage expense (i.e., the wage expense unreduced by the TJC). Each petitioner calculated this full wage expense by reference to a negative adjustment equal to the TJC shown on his Schedules K–1. Each petitioner reported the same adjustment on his 1994 and 1995 Forms 6251, Alternative Minimum Tax—Individuals, which were attached to his Federal income tax returns for the respective years.
Each petitioner claimed on his personal income tax returns his proportionate share of the TJC and applied the TJC without limitation by his TMT. The deficiencies at hand are the result of the Commissioner's recalculating petitioners' AMTI for purposes of ascertaining the TMT ceiling. In those recalculations, the Commissioner did not allow each petitioner to deduct as wages the portion of the claimed wages that was equal to his proportionate share of Foods' TJCs. Respondent determined as a result of these...
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