Breakell v. Comm'r of Internal Revenue
| Decision Date | 05 September 1991 |
| Docket Number | Docket No. 12292-90. |
| Parties | WALTER J. BREAKELL, III AND DOROTHY BREAKELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps had a negative adjusted gross income and paid no regular income tax. Included in the computation of adjusted gross income were preference item deductions, represented by a dividend exclusion and the capital gain deduction under sec. 1202, I.R.C. Ps computed their alternative minimum tax by utilizing the negative adjusted gross income and also by reducing the amount of their preference items by the amount of those items from which they derived no tax benefit in respect of their regular income tax. Held, the tax benefit adjustment under sec. 55(h), I.R.C., does not permit Ps to obtain a reduction of their preference items to the extent that the amount thereof has been taken into account in their negative adjusted gross income. John H. Lavelle, for the petitioner.
Elizabeth P. Flores, for the respondent.
Respondent determined a deficiency of $34,346 in petitioners' 1986 Federal income tax together with an addition to tax of $83 under section 6653(a)(1)(A) 1 and 50 percent of the interest payable under section 6653(a)(1)(B). After concessions by the parties, the sole issue for decision is the extent to which petitioners understated their tax preference items and therefore their alternative minimum tax.
All of the facts have been stipulated and are found accordingly.
At the time they filed their petition, petitioners resided in Bradenton, Florida. They filed a timely joint Federal income tax return for the taxable year 1986.
+------------------------------------------------------------+
¦Income ¦ ¦
+--------------------------------------------------+---------¦
¦Interest ¦$26,817 ¦
+--------------------------------------------------+---------¦
¦Dividends ($131 less $112 exclusion) ¦19 ¦
+--------------------------------------------------+---------¦
¦Capital gain ($712,557 less sec. 1202 deduction of¦ ¦
+--------------------------------------------------+---------¦
¦$427,534) ¦285,023 ¦
+--------------------------------------------------+---------¦
¦Net rental income ¦38,753 ¦
+--------------------------------------------------+---------¦
¦Net operating loss carryover ¦(509,507)¦
+--------------------------------------------------+---------¦
¦Adjusted gross income ¦(158,895)¦
+--------------------------------------------------+---------¦
¦Deductions ¦(2,367) ¦
+--------------------------------------------------+---------¦
¦Exemptions ¦(2,160) ¦
+--------------------------------------------------+---------¦
¦Adjusted gross income plus exemptions and ¦ ¦
+--------------------------------------------------+---------¦
¦deductions ¦(163,422)¦
+------------------------------------------------------------+
On that return, petitioners computed their alternative minimum tax as follows:
+-------------------------------------------------------+
¦Adjusted gross income ($158,895 less $15,683¦ ¦
+--------------------------------------------+----------¦
¦alternative minimum tax net operating loss ¦ ¦
+--------------------------------------------+----------¦
¦adjustment) ¦$(143,212)¦
+--------------------------------------------+----------¦
¦Plus tax preference items— ¦ ¦
+--------------------------------------------+----------¦
¦Dividend exclusion ¦112 ¦
+--------------------------------------------+----------¦
¦Sec. 1202 deduction ($427,534 less $163,422)¦264,112 ¦
+--------------------------------------------+----------¦
¦Alternative minimum taxable income ¦121,012 ¦
+--------------------------------------------+----------¦
¦Minus married filing joint return exemption ¦(40,000) ¦
+--------------------------------------------+----------¦
¦ ¦81,012 ¦
+--------------------------------------------+----------¦
¦Alternative minimum tax (at 20 percent) ¦16,202 ¦
+-------------------------------------------------------+
Respondent has recomputed petitioners' alternative minimum tax as follows:
+-----------------------------------------------------------+
¦Adjusted gross income line 32 From 1040 ¦$(158,895)¦
+------------------------------------------------+----------¦
¦AMT NOL adjustment ¦15,683 ¦
+------------------------------------------------+----------¦
¦ ¦(143,212) ¦
+------------------------------------------------+----------¦
¦Plus tax preference items— ¦ ¦
+------------------------------------------------+----------¦
¦Dividend exclusion ¦112 ¦
+------------------------------------------------+----------¦
¦Sec. 1202 deduction ¦427,534 ¦
+------------------------------------------------+----------¦
¦Alternative minimum taxable income ¦284,434 ¦
+------------------------------------------------+----------¦
¦Minus the married filing joint return exemption ¦(40,000) ¦
+------------------------------------------------+----------¦
¦ ¦244,434 ¦
+------------------------------------------------+----------¦
¦Alternative minimum tax (20 percent of $244,434)¦48,887 ¦
+-----------------------------------------------------------+
It is obvious from the foregoing that the only difference between the parties is the proper figure to be used in respect of the section 1202 deduction for purposes of the alternative minimum tax. Petitioners claim that it should be the gross amount of that deduction, namely, $427,534 less the amount from which no tax benefit was derived as shown on their 1986 return, namely $163,422. Petitioners assert that, unless their figure is accepted, they will lose part of both their section 1202 deduction and their net operating loss deduction of $509,507, which was not eligible to be carried over to a subsequent taxable year.
Respondent does not dispute petitioners had $163,422 loss of tax benefits in respect of their section 1202 deduction for purposes of their regular income tax but claims chat petitioners' position results in a double tax benefit in that the section 1202 deduction has been taken into account in producing the $163,422 figure shown on the return and that to the extent that this is so, petitioners should be subjected to the alternative minimum tax. Respondent insists that petitioners' computation of alternative minimum taxable income counts the section 1202 deduction twice. With a minor adjustment, we agree with respondent.
The alternative minimum tax provisions are set forth in sections 55 through 58 and the particular provision involved herein is section 58(h) which, as applicable to the taxable year 1986, 2 reads as follows:
(h) Regulations to...
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