13
The Alternative Minimum Tax and Tax Credits
Solutions to Tax Research Problems
13-51 According to Ltr. Rul. 8349023 (8-31-83), the answer is yes, P will be allowed to
take the credit on her return in the year she places the office building into service.
In the letter ruling, it was held that a partnership that rehabilitated an old
commercial building, and was entitled to an investment tax credit based on
rehabilitation expenses incurred, may forgo claiming such credit and instead
allow it to be claimed by the buyers of the building on the basis of their pro rata
interest in the property as a further inducement to the purchase. This treatment
will be allowed only if the partnership does not claim the allowable credit and
does not place the building into service before the sale of the office units to the
prospective buyers.
13-52 The Court, in E. W. Zoltan, 79 TC 490, permitted the taxpayer to claim the credit
for the portion of the costs incurred in sending her son on a week-long school
field trip during a period when school was not in session. However, because a
substantial purpose of the trip was educational, an allocation was required
between qualifying and non-qualifying expenses, and the transportation issue was
clarified.
The cost of transportation of a qualifying individual to a place where care is
provided outside the household is not considered to be incurred for the
individual’s care [Reg. § 1.44A-1(c)(3)]. The Court held, however, that the
expenses incurred for the transportation of the taxpayer’s son to Washington are
not disqualified by this language. The cost of transportation from her home to the
place of departure of the bus to Washington is the type of expense that this
language excludes. The care of her son commenced at that point. The
transportation by bus to Washington began after her son was placed under the
care of the supervisors of the expedition. This transportation was inseparably tied
to that care, and does not fit within the disallowance provisions of Reg. § 1.44A-
1(c)(4).
On the other hand, the Court held that a substantial portion of the expense
incurred by the taxpayer to send her son to Washington constituted an educational
expense of the type subject to allocation pursuant to Reg. §§ 1.44A-1 (c)(3)(ii)
and 1.44A-1(c)(5). Since neither the taxpayer nor the IRS made the allocation to
educational expenses, the Court made one utilizing the Cohan rule, which requires
an allocation that bears heavily against the taxpayer.
To summarize, when the characterization of an expense is challenged under §
44A(c)(2)(A)(ii), the issue is resolved by reference to the specific facts at hand;
the Court must ascertain the taxpayer’s motive. If the disputed expense was
incurred with the dominant purpose of permitting the taxpayer to be gainfully
employed and to ensure the child’s well-being and protection while the taxpayer is
so employed, it qualifies as employment-related despite the existence of other
incidental benefits. A parent is not prohibited from choosing child care that
carries incidental benefits, so long as the primary reason for the decision is the
desire to ensure the protection and well-being of the child. In Zoltan, the Court
made a factual finding, with respect to the Washington trip, that the taxpayer’s
primary concern was the care of her child. However, the expenses attributable to
educational services must be carved out of the otherwise qualifying expense, since
these services were substantial and were not incidental to, or inseparably a part of,
the care-related services. [Also see Warner v. Commissioner, 69 TC 995, 997
(1978), Brown v. Commissioner, 73 TC 156 (1979), and Perry v. Commissioner,
92 TC No. 28 (1989).] In Perry the taxpayer was not entitled to a child care credit
for airfare expenses incurred to send the children to a care provider in another
city. The airline cabin attendants were not under the direction of the care
providers who met the children at the airport located in the other city. Under these
facts, the transportation expenses were held not to be employment-related
expenses.
13-53 The issue in this problem is whether or not a charitable contribution will be
allowed for the AMT system even though the charitable contribution is not
allowed for the regular tax system.
T’s regular tax liability is determined as follows:
Salary $ 50,000
Schedule C (loss) (60,000)
AGI ($ 10,000)
Qualified housing interest (18,000)
Taxes (6,000)
Charitable contributions* 0
Exemptions in 2011 (7,400)
Taxable income (loss) ($ 41,400)
*Subject to the 50% of AGI limitation, therefore no charitable
contribution deduction is allowed for the current year.
T’s AMT is computed as follows:
Taxable income (loss) ($ 41,400)
Add back:
Exemptions in 2011 7,400
Regular tax itemized deductions 24,000
Tax preference items (incentive stock option) 90,000
$ 80,000
Subtract allowable ATIDS:
Qualified housing interest (18,000)
Charitable contribution* 0
AMTI $ 62,000
Subtract AMT exemption (74,450)
AMT base $ 0
AMT rate × 26%
Tentative AMT $ 0
Reg. tax (0)
AMT $ 0
*Reg. § 1.55-1(b) states that in determining the alternative minimum
taxable income of a taxpayer other than a corporation, any references to
the taxpayer’s AGI in determining the amount of items of income,
exclusion, or deduction must be treated as references to the taxpayer’s AGI
as determined for regular tax purposes.
See Final Regulation § 1.55-1 (a). Under the regulation no charitable contribution
deduction will be allowed in the AMT system. Therefore, in 2011 T will not have
to pay an AMT.
13-54 The policy underlying the Child Care Credit is to allow the taxpayer a subsidy
with respect to child care expenses incurred in order to be gainfully employed.
In the case of a taxpayer that is not married at the close of the taxable year, the
employment related expenses are limited to the taxpayer’s earned income. [§
21(d)(1)(A).] Earned income is defined in Reg. § 1.44A-2(b)(2) as wages,
salaries, tips, other employer compensation, and earnings from self employment.
While there are special rules that allow a full time student to have deemed earned
income for the purpose of this section, these rules appear to apply only to married
taxpayers. [§ 21 (d)(2).]
In Rev. Rul. 73-597, 1973-2 C.B. 69, it was decided that gratuitous services
done by the taxpayer for charitable organizations were not gainful employment.
Similarly, in Rev. Rul. 56-169, 1956-1 C.B. 135, it was decided that enrollment in
educational courses did not qualify as gainful employment.
Since K’s income consists of alimony payments, child support payments,
dividend income, and insubstantial payments from a charitable organization
related to volunteer services, she does not have any earned income and no deemed
earned income for the taxable year.
Therefore, it does not appear that she will be entitled to a child care credit in
the current year.
Arguably, K could take the position that she earned the $15 a week and would
be entitled to a Child Care Credit based on the total amount received from the
library.
13
The Alternative Minimum Tax and Tax Credits
Test Bank
True or False
________ 1. The AMT applies only to individual taxpayers.
________ 2. Generally, business income tax credits reduce the AMT liability of
individual taxpayers.
________ 3. Taxpayers are allowed to use the double declining balance method of
depreciation for both the regular tax and the AMT computations.
________ 4. There is no difference between a tax preference item and an AMT
adjustment.
________ 5. If the taxpayer elects the ADS method of depreciation for regular tax
purposes, he will also be allowed to use ADS for AMT purposes.
________ 6. Circulation and research expenditures are AMT adjustments for both
corporate and individual taxpayers.
________ 7. The child care credit is always computed using the applicable
percentage, which is 30% times the lesser of employment-related
expenses or earned income.
________ 8. An eligible small business can elect to take a non-refundable tax credit
equal to the amount of the eligible disabled access expenditures
exceeding $250 but not exceeding $10,250 for any taxable year.
________ 9. The AMT applies only to taxpayers with a significant amount of tax
preference items.
________ 10. Taxpayers with lower marginal rates benefit more from tax deductions
than do those in higher brackets, while credits provide equal benefits to
all taxpayers.
________ 11. When a taxpayer takes the rehabilitation investment tax credit on
qualified property, he or she is required to reduce the basis for
depreciation of the asset by the amount of the credit claimed. The
amount of basis reduction may be recaptured as ordinary income on a
later sale of the property.
________ 12. If a taxpayer had previously taken an investment credit on qualified
property, and later, before the end of its recovery period, gave it to her
daughter, there will be a recapture of investment credit on the original
property.
________ 13. The amount of the child care credit can vary depending on the number of
children that are qualified dependents.
________ 14. A good method to generate tax credits for high-income taxpayers is to
purchase qualifying buildings for rehabilitation investment credit,
renovate, and take either 10 percent or 20 percent of the renovation cost
as a credit, then immediately sell the building and roll the proceeds from
the sale into another renovation.
________ 15. The basis of the property must be reduced by 50 percent of the business
energy credit claimed.
________ 16. The earned income credit is the same for a taxpayer with a six-year-old
dependent and a taxpayer with a six-month-old dependent.
________ 17. A married couple must file a joint return in order to claim a child care
credit.
________ 18. The majority of the persons old enough to qualify for the credit for the
elderly will not be able to claim the credit because they also receive
social security benefits.
________ 19. None of the nonbusiness credits can be carried forward to offset regular
taxes imposed in subsequent years.
________ 20. The earned-income credit is refundable.
Multiple Choice
________ 21. The alternative minimum tax applies to which of the following?
a. Individuals and corporations
b. Corporations and estates
c. Trusts and corporations
d. Individuals and trusts
e. All of the above
________ 22. Which one of the following must be done before the AMT calculations
can be made?
a. The taxpayer’s current taxable income must be calculated.
b. The taxpayer’s Federal tax liability for regular tax purposes must be
calculated.
c. AMT adjustments and tax preferences must be identified.
d. Both a. and b.
e. Choices a., b. and c.
________ 23. Congress revised the AMT legislation to
a. Simplify the procedures in accordance with the general principles of
the Tax Reform Act of 1986
b. Increase the AMT burden on certain taxpayers with high income
c. Do away with the separate tax calculations and the requirement of a
separate set of books
d. Implement all of the above modifications
________ 24. L earned $200,000 on the LPGA. She has deductible self-employment
away-from-home expenses of $100,000 and current year’s circulation
expenditures of $90,000. L uses the standard deduction. Determine L’s
regular taxable income, and her alternative minimum taxable income.
a. $10,000, $10,000
b. $6,900, $10,000
c. $95,900, $100,000
d. $500, $70,000
________ 25. L earned $200,000 on the LPGA. She has deductible self-employment
away-from-home expenses of $100,000 and current year’s circulation
expenditures of $90,000. L uses the standard deduction. Determine the
regular tax liability and the AMT liability.
a. $15,000, $2,100
b. $1,035, $2,100
c. $50, $5,553
d. $705, $8,400
________ 26. T is married and files a joint return. The Ts have an AMTI of $350,000
and do not have a minimum tax foreign tax credit. The tentative
minimum tax liability is
a. $94,500
b. $79,300
c. $85,400
d. $84,000
________ 27. Which one of the following is not an adjustment for individuals in
computing the alternative minimum tax?
a. Regular tax standard deduction
b. Regular tax personal exemption
c. Research and experimental expenditures
d. Cost recovery deductions on assets placed in service after 1986
e. None of the above; all are adjustments.
________ 28. Alternative tax itemized deductions (ATIDs) for individuals do not
include
a. Miscellaneous itemized deductions
b. Itemized deductions relating to the payment of any tax
c. Medical expenses
d. Both a. and b.
e. All of the above
________ 29. S receives incentive stock options (ISOs) as part of a compensation plan.
The unrestricted option is for 100 shares at $100 per share. S exercises
the option five years later when the FMV of the stock is $190 per share.
S holds the stock for five more years and then sells it for $225 per share.
In the year of exercise, S has reportable amounts for regular tax purposes
and for AMT purposes, respectively, of
a. $19,000 and $0
b. $19,000 and $9,000
c. $0 and $9,000
d. $0 and $19,000
e. $0 and $0
________ 30. S receives incentive stock options (ISOs) as part of a compensation plan.
The unrestricted option is for 100 shares at $100 per share. S exercises
the option five years later when the FMV of the stock is $190 per share.
S holds the stock for five more years and then sells it for $225 per share.
Regarding the sale by S of the ISO stock, S will have a regular tax gain
and AMT gain, respectively, of
a. $2,500 and $12,500
b. $22,500 and $3,500
c. $13,590 and $12,500
d. $12,500 and $13,590
e. $12,500 and $3,500
________ 31. M Corporation has gross receipts of $800,000 and an AMTI of $400,000
without regard to the ACE adjustment. M’s adjusted current earnings are
determined to be $600,000. M’s regular tax liability is $60,000. M’s
AMTI is
a. $350,000
b. $550,000
c. $600,000
d. $110,000
e. $50,000
________ 32. Which one of the following is not a tax preference item used in
computing the alternative minimum tax for an individual?
a. Tax-exempt income from a Colorado Water Board bond
b. Percentage depletion in excess of cost depletion on a silver mining
property
c. Tax-exempt interest on specified private activity bonds in tax years
after 2012
d. Exclusion of gain on the sale of certain qualified small business
corporation stock in tax years after 2012
e. None of the above; all are preference items.
________ 33. Mr. and Mrs. T have one dependent and file a joint return which shows
taxable income of $96,900, a regular tax liability of $16,475 and an
AMT adjusted taxable income of $160,000. The T’s also have a child
care credit of $480 and a rehabilitation investment credit of $16,000.
Determine the amount of the check (without regard to any possible
penalties) that Mr. and Mrs. T must send to the IRS, and the amount of
tax credits that can be carried back or forward. Assume Mr. and Mrs. T
do not qualify for the child tax credit because the dependent is 18 years
old and is incapacitated.
a. $22,413, $16,000
b. $16,739, $10,000
c. $14,070, $0
d. $9,245, $0
e. $29,400, $16,480
________ 34. Mr. W’s tax liability for the year was $85,000 before claiming a general
business tax credit. During the year, Mr. W qualified for $100,000 of
general business credits. The general business credit allowed for the year
is
a. $100,000
b. $85,000
c. $70,000
d. $55,000
e. $25,000
________ 35. Which of the following is not deductible in computing alternative
minimum taxable income?
a. Casualty losses
b. Interest on a home equity loan used to purchase a new automobile
c. Charitable contributions
d. Medical expenses
e. All of the above are deductible.
________ 36. Which of the following is deductible in computing alternative minimum
taxable income?
a. State income taxes
b. Property taxes on a personal residence
c. Employee business expenses
d. Tax preparation expenses
e. None of the above
________ 37. Which one of the following is a characteristic of the general business
credit?
a. Carried back three years if not used up currently
b. Limited to $25,000 plus 75 percent of the net tax liability in excess
of $25,000
c. At the end of the carryforward period, a deduction is determined with
respect to the amount of credit that expired.
d. Carried forward 15 years—applied on a first-in, first-out basis—for
any part of the credit not used up in the carryback period
e. All of the above
________ 38. Which one of the following is a component of the general business
credit?
a. The alcohol fuels credit
b. The disabled individual access credit
c. The rehabilitation investment credit
d. The business energy investment credit
e. All of the above
________ 39. R bought new solar panels to be used to heat water for a production
process on May 4, 2011 for $100,000 (the qualified investment is
$100,000). Assume that she sold the solar panels on May 31, 2012 for
$90,000. She claimed and used the maximum energy investment credit
in 2011, did not take any §179 expense, and used the MACRS tables to
calculate the depreciation deduction. What was the amount of energy
investment credit that was taken in 2011?
a. $0—the energy investment credit was not allowed in 2011.
b. $6,000
c. $100,000
d. $10,000
e. $30,000
________ 40. R bought new solar panels to be used to heat water for a production
process on May 4, 2011 for $100,000 (the qualified investment is
$100,000). Assume that she sold the solar panels on May 31, 2012 for
$90,000. She claimed and used the maximum energy investment credit
in 2011, did not take any § 179 expense, and used the MACRS tables to
calculate the depreciation deduction. What is the amount of IC recapture
tax that R must pay to the IRS in 2012?
a. $0—the IC is fully earned.
b. $2,000
c. $80,000
d. $8,000
e. $24,000
________ 41. R bought new solar panels to be used to heat water for a production
process on May 4, 2011 for $100,000 (the qualified investment is
$100,000). Assume that she sold the solar panels on May 31, 2012 for
$90,000. She claimed and used the maximum energy investment credit
in 2011, did not take any § 179 expense, and used the MACRS tables to
calculate the depreciation deduction. (Assume the solar panels have a
class life of nine years and R used the half-year convention for
computing cost recovery deductions in 2011.) On the sale of her solar
panels on May 31, 2012, what is the amount of gain that must be
reported by R with respect to the solar panels?
a. $23,600
b. $10,000
c. $30,000
d. $70,000
e. $25,200
________ 42. Which one of the following transactions is not a disposition of property
that would cause a recapture of unearned investment credit?
a. Property transferred by reason of death
b. Business property converted to personal use
c. Property destroyed by vandals
d. Property that has been abandoned
e. Property transferred by reason of gift
________ 43. B purchased an old textile factory building in Chicago that had been
certified as a historic structure. The purchase price was $1 million, and
he spent $3 million this year renovating it. B’s tax credit [without regard
to possible limitations imposed by § 38(c)] and his basis in the building
are
a. $60,000 credit; $4 million basis
b. $300,000 credit; $3,700,000 basis
c. $600,000 credit; $3,400,000 basis
d. $600,000 credit; $400,000 basis
________ 44. Which one of the following statements concerning the work opportunity
tax credit is not true?
a. The employer’s current wage expense must be reduced by the
amount of the jobs tax credit elected for the current year.
b. The purpose of the credit is to encourage the hiring of persons from
under-hired groups.
c. To qualify, an individual must obtain certification from a designated
local agency.
d. The credit is available only for entry level jobs, or those paying less
than $12,000 per year.
________ 45. BobCo incurred $60,000 of qualifying research and experimentation
expenses in 20×5. It had gross receipts of $420,000. Prior years’ research
expenses and gross receipts were
Research Expenses Gross Receipts
1986 $33,000 $370,000
1987 25,000 250,000
1988 32,000 380,000
2000 33,000 410,000
2001 30,000 410,000
2002 25,000 400,000
2003 32,000 380,000
2004 30,000 410,000
BobCo’s tax liability before credits was $25,000. Its research credit for
2005 is:
a. $25,000
b. $10,000
c. $20,000
d. $8,000
e. $4,800
________ 46. Which one of the following is true concerning the low-income housing
credit?
a. Classified as a component of the general business credit
b. Limited by an annual cap
c. Only available for low-income housing constructed, rehabilitated, or
acquired after 1986
d. Both a. and c.
e. Choices a., b. and c.
________ 47. Which one of the following does not describe the minimum tax credit?
a. Indefinite carryforward
b. Will never become a refundable credit
c. Offsets any future regular tax liability
d. Referred to as the adjusted net minimum tax
________ 48. W, a widower, maintains a household for himself and two preschool
children, for whom he is entitled to a dependency deduction. He has
adjusted gross income of $25,000: $20,000 wages and $5,000 interest. W
paid employment-related expenses of $4,000 for household services
within his home, and paid $1,200 child care expenses at a nursery
school. His child care credit for the year is
a. $1,560
b. $1,144
c. $1,200
d. $1,440
e. None of the above
________ 49. Which one of the following child or dependent care expenses qualifies as
an employment-related expense?
a. Payments to a full-time nursing home for your dependent mother-in–
law who is not mentally nor physically incapacitated
b. Payments for transportation to and from nursery school
c. Payments to a lawn service when a child is cared for in the home
d. Payments to a nursery school for your preschool children
e. None of the above
________ 50. When D leaves home to go to her job, she pays the neighbor to watch
over her 89-year-old mother, M. The latter has lived with D for five
years and has only $1,000 includible gross income each year. If D has no
taxable income this year and has a $300 dependent care credit, she may
a. Obtain a $300 tax refund this year for the credit
b. Carry the $300 credit back three years and then forward 15 years
c. Carry the $300 credit forward indefinitely
d. Not use the $300 credit for any purpose
________ 51. Which one of the following is not an example of a refundable credit?
a. The credit for federal income tax withheld on salary
b. Earned income credit
c. Credit for the elderly, or permanently and totally disabled
d. Quarterly estimated tax payments
e. Credit for Federal tax on gasoline and special fuels
________ 52. J, a sole proprietor, had gross receipts of $500,000 last year and incurred
$15,000 of eligible access expenditures this year. J’s disabled access
credit for this year is
a. $7,500
b. $5,000
c. $0
d. $1,500
e. $3,000
________ 53. C, a single mother, has modified AGI of $42,000. In 2011, C’s daughter,
D, begins studying for her bachelor’s degree as a full-time student at
County University. On September 1, C pays $3,000 in qualified tuition
for D’s first semester. The amount of allowable American Opportunity
Tax Credit scholarship credit allowed to C is
a. $2,500
b. $1,800
c. $1,350
d. $400
e. $0
________ 54. H and W are married and have three children. At the close of 20×6, the
children, X, Y, and Z, were ages 12, 16 and 18 respectively. H and W
claim a dependency exemption for each of the children. This year H and
W reported adjusted gross income of $104,200. The allowable child tax
credit for H and W is
a. $1,500
b. $2,000
c. $400
d. $550
e. $0
________ 55. H and W are married with three children. At the close of 20×6, the
children, X, Y, and Z, were ages 2, 6, and 8, respectively. H and W
claim a dependency exemption for each of the children. This year H and
W reported adjusted gross income of $115,500. The allowable child tax
credit for H and W is
a. $2,700
b. $0
c. $1,200
d. $1,000
e. $900
________ 56. M is a single mom raising one child at home, age 16. M may claim a
dependency exemption for her child. This year M earned $70,000 as
salary and had investment income of $12,500. The allowable child tax
credit for M is
a. $400
b. $150
c. $600
d. $250
e. $500
________ 57. D is a single dad and has modified AGI of $39,000. This year D’s son
begins his junior year of college as a half-time student at Arapahoe
College. On September 1, D pays $2,000 in qualified tuition for his son’s
fall semester. The amount of tax credit available to D is
a. $2,000
b. $1,500
c. $500
d. $0
e. $1,000
________ 58. H and W are married and have twins that are attending State University
as freshmen this year. State University is on the semester system and
charges $1,000 tuition per semester. H and W pay State University
$2,000 this year. H and W have adjusted gross income of $170,000. The
allowable American Opportunity Tax Credit for H and W is
a. $2,000
b. $400
c. $600
d. $1,000
e. $0
13
The Alternative Minimum Tax and Tax Credits
Solutions to Test Bank
True or False
Multiple Choice
