June 21, 2016 The Tax Lawyer

AMT with No or Trivial Transactional Preferences: The Regular Tax Rate Schedule as an Implied AMT Preference

Vol. 69, No. 3 - Spring 2016

Stanley Veliotis

Abstract

    The minimum tax (the precursor to the AMT) regime was enacted in 1969 to address a concern that a number of very wealthy individuals were paying far less income tax than Congress considered fair. Often these taxpayers benefited from preferential tax law provisions in favor of the taxpayer. Congress specifically identified for disallowance in the AMT regime certain of these deductions, credits, and income exclusions (explicit preferences). Taxpayers enjoying explicit preferences to a certain extent would not be surprised if they were subjected to AMT. However, because the AMT exemption was not indexed for inflation until recently (and because the AMT exemption became subject to phase-out), many taxpayers began to find themselves subject to AMT even if their explicit preferences were not, relatively, as large as they were decades before.

    This Article distinguishes explicit preferences from “transactional preferences,” which are all explicit preferences other than the taxpayer’s standard deduction and own personal exemption. This Article demonstrates the surprising result that AMT can apply, albeit in limited circumstances, even if there are no transactional preferences (i.e., no excluded income, no credits or deductions for expenditures, and no dependency or spousal exemptions). In other words, the identified circumstances reveal a taxpayer subject to several thousand dollars of AMT despite having no transactions other than gross income taxed in the same manner in the regular and AMT regimes. This Article then investigates other examples in which the taxpayer has no explicit preferences, where we see that many taxpayers are precipitously close to entering AMT, such that a trivial amount of transactional or other explicit preferences will throw them into AMT.

    Through extensive textual and mathematical explanation of the causes of these problems, this Article demonstrates that the regular tax rate schedule operates as an implied AMT preference, which clearly was not contemplated by Congress. This Article offers potential solutions to remedy the anomalous (albeit rarely occurring) result of a taxpayer paying AMT with no transactional preferences, as well as the risk of subjecting many other taxpayers to AMT with relatively trivial transactional or other explicit preferences.

Read the full article or download the complete issue.