Taxable Talk

The Tax Court looked at two cases involving the Alternative Minimum Tax (AMT) today. In both cases, the taxpayers impacted by the AMT protested that they shouldn’t have been impacted by the AMT because they either didn’t have preference items or that they’re the kind of people who shouldn’t have to pay AMT.

The Tax Court’s response? Tough.

In the first case, the petitioner had just $121,000 of adjusted gross income (AMI), and he ignored the AMT when he completed his tax return. However, the IRS computers found that he owed an additional $4,176 because of AMT. He had no preference items.

However, if you’re “lucky” enough to have a high enough level of AGI (typically over $100,000), and enough itemized deductions (and our lucky taxpayer had over $35,000), you can get hit by the AMT. Petitioners arguments were restricted to the fact that he worked two jobs to support his family and shouldn’t have to pay AMT because Congress didn’t intend for the AMT to impact the nonwealthy working class.

“The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected…Congress enacted the AMT and we have no authority to disregard them.”

In the second case, our taxpayers did have a preference item—a $342,000 capital gain. But the AMT was never intended to cover taxpayers in their situation, or so they said.

Wrong.

“We also remind petitioners that this Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the alternative minimum tax.”

So yet again the Court saw two cases where the AMT was shown to be unfair. The final score? AMT 2, Honest Taxpayers 0.

I wonder if Congress is aware of the storm that will be unleashed next year if they don’t stop the AMT monster….

Cases: Kamara v. Commissioner, T.C. Summary 2007-103 and Moore v. Commissioner, T.C. Summary 2007-104

Like clockwork, about once a month someone challenges in Tax Court the Alternative Minimum Tax. It’s unfair, it’s too complex, it’s just plain old mean…those are just some of the arguments used against the AMT.

There’s jut one problem: The AMT is the law, and the Tax Court has held, time after time, that Congress must change it, not the Tax Court. Would today’s case be any different?

No.

The petitioners today argued, “…that although they know that the Court has no authority to usurp the role of the Congress, they would like the Court nonetheless to relieve them of their Federal income tax obligations so as to ‘make a statement’ that would spawn a thorough and complete legislative review of the alternative minimum tax.”

But they didn’t get that response. Instead, the Court noted, “The Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the alternative minimum tax.” After citing six precedents, the Court tersely rejected the petitioner’s ‘argument.’

Case: Falcone v. Commissioner, T.C. Summary 2006-139

Is the Alternative Minimum Tax Unfair? Of course it is. But do you have to pay it? Certainly. And that’s the crux of today’s Tax Court case.

Our unlucky petitioners earned quite a bit of money, reporting wage income of $323,498. Among their itemized deductions were the following:

• State and local income taxes $39,189
  Real estate taxes 4,935
  Personal property taxes 230

After they submitted their tax return, the IRS notified them that they owed $7,364 of AMT.

The petitioners couldn’t understand why they lost their tax deductions that they legitimately (and correctly) took. (The petitioners live in California, a very high tax state.) Unfortunately, the three tax items listed above are considered “preference items” and are one of the ways you can get thrown into the AMT nightmare.

The Tax Court noted that they were “not unsympathetic” with the petitioners, as the AMT has had some unintended consequences.

“The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected. [Citations omitted.]” Speltz v. Commissioner, 124 T.C. 165, 176 (2005)

But the Court must apply the law as written, and the petitioners owe the AMT.

Case: Schick v. Commissioner, T.C. Summary 2006-67

The Tax Court today decided a case where the petitioner’s complain that the Alternative Minimum Tax (AMT) shouldn’t apply to them because of “equitable grounds.” The petitioners did not have any tax preference items. They aren’t the high income millionaires that the AMT was originally intended for.

But they (and you and I) are stuck with the AMT. And they fell into its’ grasp. As the court notes, “Absent some constitutional defect, we are constrained to apply the law as written.” “The proper place for a consideration of petitioner’s complaint is the halls of Congress, not here.” Hays Corp. v. Commissioner, 40 T.C. 436, 443 (1963), affd. 331 F.2d 422 (7th Cir. 1964).

This isn’t the first such case, and it won’t be the last. The AMT is a convoluted beast destined to grasp more of the middle class each year. In general, everything you do to lower your regular tax raises (or causes you to fall into) your AMT.

Case: Wiese v. Commissioner, TC Summary 2005-91