How do I plan for AMT net operating loss?
June 5, 2002
Date: Tue, 22 Jan 2002
Question – Has Mike seen the October 2001 article in the Tax Advisor (page 665) about Planning for AMTNOL? I’d like to know what he thinks about it.
I think someone needs to edit the Tax Clinic articles more carefully. The article suggests that an AMT net operating loss can result from selling ISO shares after the year of exercise for a selling price less than the fair market value on the date of exercise. This is in error.
According to Internal Revenue Code Section 56(b)(3), the provisions relating to incentive stock options do not apply when computing the alternative minimum tax. Consequently, incentive stock options are treated the same as non-qualified options for AMT reporting. This is the reason for the AMT “ordinary income” adjustment for AMT reporting. Additional compensation is being reported for the exercise. The additional compensation is added to the tax basis of the stock for AMT reporting. When the stock is sold, the capital gain or loss is recomputed using the AMT basis, resulting in gain or loss adjustments in the year of sale. The instructions for AMT Form 6251 make it clear an “AMT” Schedule D should be separately prepared and included with the tax return.
The capital loss that is computed on an AMT basis is subject to its own $3,000 limitation.
The IRS has been more specific about how to report ISO transactions in the 2001 instructions for Form 6251, Alternative Minimum Tax – Individuals, including emphasizing the application of the $3,000 capital loss limitation for AMT reporting.
Finally, according to Internal Revenue Code Section 172(d)(2), capital losses are only deductible up to the amount of capital gains when computing net operating losses. Excess capital losses are added back to taxable income when computing net operating losses.
The article is especially frightening because the author is discussing an AMT NOL of over $2 million! This type of revelation can result in sleepless nights!
From the taxpayer’s perspective, what do you do when the professional advisor gives incorrect advice or prepares a tax return incorrectly, resulting in penalties? The answer – you can sue the preparer for malpractice. A preparer’s or advisor’s liability can far exceed the fee for the services. This is a benefit of using a professional tax return preparer that a taxpayer can’t get when preparing his or her own income tax returns. (However, I think companies that produce and sell tax return preparation software may be subject to lawsuits for losses suffered when the taxpayer has penalties as a result of relying on the software to produce the correct results in the “interview mode”. See an attorney if this applies to you.)