Re: More Brown standoff saga

On Sep 22, 8:12?am, "RICHARD MACDONALD" <rmacdon...@xxxxxxxxxxx>
wrote:
<KEBSCHU...@xxxxxxx> wrote in message

news:1190430986.965400.121570@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

On Sep 20, 11:43?am, "Paul Thomas, CPA"

If a tax overpayment is allowed as a deduction in a year that the
regular tax is paid and the refund of the overpayment in a subsequent
year is excluded from AMTI in a year the AMT is paid, just when is the
either the income used for the overpayment that produced a tax benefit
or the refund of the overpayment taxed directly?

Was the tax payment allowed as a deduction for AMTI
(not regular tax) in the prior years calculation. Yes or no?

Sorry, lil' dickie, your question is irrelevant. Here is why

Let's start with the following paragraph from IRS Publication 525:

"Subject to alternative minimum tax. If you were subject to the
alternative minimum tax in the year of the deduction, you will have to
recompute you tax for the earlier year to determine if the recovery
must be include in your income. This will require a recomputation of
your regular tax as shown in the preceding example and a recomputation
of your minimum tax. If inclusion of the recovery does not change
your total tax, you do not include the recovery in your income.
However, if your total tax increases by any amount, you received a tax
benefit from the deduction and you must include the recovery in your
income up to the amount of the deduction that reduced your tax in the
earlier year."

Notice that the critical factor in determining if there was a tax
benefit related to a deduction of a recovered item is based on an
increase in TOTAL TAX upon recalculation of the prior year's tax with
inclusion of the recovery.

Now it is clear from examination of page 2 of Form 6251 that there can
be a tax benefit when the AMT is paid from a state income tax
overpayment when the regular taxable income on Form 1040 less capital
gains is less than the threshold for the 25 percent regular tax
rate. Thus, there can be a tax benefit from a state income tax
overpayment when the AMT is paid even though there was no reduction in
AMTI as a result of the state income tax overpayment.

Under the secific circumstances described above, section 56(b)(1)(D)
appropriately excludes tax refunds from AMTI and that is all. Under
these circumstances, section 111(a) excludes the refund from gross
income except when calculating the capital gains portion of the
regular tax.

Based on the forms and instructions issued by the buffons at IRS, the
income/refund related to a tax overpayment that produced a tax benefit
in a prior year is taxed "DOUBLE OR NOTHING" depending on the sequence
in the regular tax and the AMT is paid. When the sequence is regular
tax followed by the AMT, neither the income used for the overpayment
that produced the tax benefit nor the refund is taxed directly. When
the sequence is the AMT followed by the regular tax, both the income
used for the tax overpayment that produced the tax benefit and the
refund is tax directly. Those results are not consistent with the
IRC.

Don't feel bad, lil' dickie. You are not the first CPA to confuse a
noose with a tax loohole.

Cheers,

WDK


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