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Chapter 15 Alternative Minimum Tax
Research Problems
Research Problem 1. Samuel had worked for Pearl, Inc., for 35 years when he was discharged and his position filled by a much younger person. He filed and pursued a suit for age discrimination and received an award of $1.5 million. Under the contingent fee arrangement with his attorney, one-third of the award was paid directly to the attorney, with the balance going to Samuel. Of the $1.5 million received, Samuel included his net $1 million as gross income on his tax return; he neither took as gross income nor deducted the $500,000 paid to the attorney.
The IRS audited Samuel’s return and included the $500,000 contingency fee in gross income. At the same time, Samuel was allowed a miscellaneous itemized deduction (subject to the 2% floor) for the fee paid to the attorney. The IRS adjustment caused a tax deficiency to be assessed for both the regular income tax and the AMT.
Evaluate the results reached.
Research Problem 2. Jolene receives tax-exempt interest of $33,000 on bonds that are classified as private activity bonds. She properly excludes the $33,000 from her gross income for regular income tax purposes. Jolene asks your advice on the treatment of the interest income for AMT purposes. Locate the Code Section that covers this matter, and advise Jolene accordingly.
Research Problem 3. The precursor to the Alternative Minimum Tax enacted by the
Tax Reform Act of 1986 was the minimum tax, which was first devised in 1969. Find a discussion of the rationale for the original minimum tax and details about its creation.
Describe the taxpayer profile that persuaded Congress to enact the 1969 tax.
Summarize your findings in no more than five PowerPoint slides to present to your school’s accounting club.
Research Problem 4. Go to a tax blog and post a comment concerning one of the following items relative to individuals who are subject to the AMT.
a. Interest deductions on vacation homes.
b. Personal and dependency exemptions.
c. Tax preparation fees.
d. Adequacy of the exemption amount.
e. Indexing of AMT rates.
f. Local property tax.
g. Medical expenses.
Research Problem 5. Ascertain whether your state’s income tax has an AMT component.
If your state does not levy an income tax, choose a contiguous state that does.
In an e-mail to your instructor, outline how the state AMT formula differs from that of the Federal. When was the state AMT provision adopted?
Research Problem 6. In no more than four PowerPoint slides, summarize in graphic form the number of individuals who have been subject to the Federal AMT since
1990 and the dollars of AMT that have been collected from them. Present your data
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity in five-year increments. Then extend your graphs to include estimates of the taxpayer coverage and tax collection amounts into the next few tax years:
a. Assuming that Congress does not modify the statutes from how they exist today.
b. Assuming that various AMT amounts are indexed for inflation.
Research Problem 7. Use the Tax Stats function at www.irs.gov to determine how many C corporations incurred an AMT liability for the last tax year with complete data. What percentage of total corporate Federal income tax collections came from the AMT? Comment on your findings in a one-page essay for your instructor.
Roger CPA Review Questions
1. Mary, age 65, reported adjusted gross income of $150,000 for the year. Mary also incurred $20,000 in medical expenses. In computing Mary’s alternative minimum tax, what is the adjustment for Mary’s medical expenses?
a. $3,750
b. $5,000
c. $8,750
d. $11,250
2. When an entity is responsible for paying the alternative minimum tax (AMT) due to adjustments related to the timing of income recognition, such as including the excess of market value over option price upon the exercise of qualified stock options for AMT purposes, but not until the shares are sold for regular tax purposes, how might that excess tax be recovered?
a. File a claim for a refund in the year paid.
b. Carry forward to offset against a future AMT liability only.
c. Carry forward to offset against future AMT or regular tax liabilities.
d. Carry forward to offset against a future regular tax liability only.
3. Which of the following will increase a taxpayer’s alternative minimum taxable income (AMTI)?
Personal
Exemption
Property
Taxes
Medical Expenses over 10% of AGI
a. Yes Yes Yes
b. Yes Yes No
c. No Yes Yes
d. Yes No Yes