T.C. Memo. 1995-502
UNITED STATES TAX COURT
THOMAS N. RAWLINS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13383-94. Filed October 18, 1995.
Thomas N. Rawlins, pro se.
Louis H. Hill, for respondent.
MEMORANDUM OPINION
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1 This case was submitted at trial fully stipulated.
1
All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
Respondent determined a deficiency in petitioner's 1992
Federal income tax in the amount of $1,648. Petitioner resided
in Wheelersburg, Ohio, at the time the petition was filed.
The issue is whether petitioner is subject to the
alternative minimum tax (AMT) imposed by section 55.
Petitioner is an electrician and a union member. Although
his job assignments are generally for relatively short periods of
time, he works as a common law employee for each of his
employers. Petitioner filed a 1992 Federal income tax return as
a married taxpayer filing separately reflecting the following
information:
Adjusted gross income $48,271
Schedule A--Itemized deductions
Taxes $1,861
Home mortgage interest 1,647
Contributions 1,950
Misc. itemized deductions:
Unreimbursed employee
expenses $13,230
Tax preparation 50
Sec. 67 limit (965)
12,315
Total itemized deductions 17,773
Personal exemptions 6,900
Taxable income 23,598
Income tax liability $4,274
Respondent does not challenge any item of income or the
deductions. Rather, respondent determined that petitioner had an
additional AMT liability in the amount of $1,648, calculated as
follows:
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Alternative minimum taxable income:
Taxable income (before
deductions for exemptions) $30,498
Adjustments:
Misc. itemized deductions 12,315
Taxes 1,861
Total adjustments 14,176
44,674
Exemption amount 20,000
Tentative minimum taxable income 24,674
x 24%
Tentative minimum tax 5,922
Regular tax 4,274
AMT $1,648
Petitioner does not challenge respondent's calculation of the
tax. He argues, rather, that the AMT imposed by section 55(a)
unconstitutionally distinguishes between the expenses of self-
employed individuals and employees in violation of the Due
Process Clause of the Fifth Amendment.
Generally, under the AMT scheme an individual's tax
liability is equal to 24 percent of the so-called "tentative
minimum taxable income", which is the excess of the "alternative
minimum taxable income" (AMTI) over the exemption amount provided
by section 55(d)(1). Sec. 55(b)(1). AMTI is determined,
generally, through adjustments to the taxpayer's taxable income
pursuant to sections 56, 57, and 58. Sec. 55(b)(2). In
determining the AMTI of individuals, no deduction is allowed for
miscellaneous itemized deductions. Sec. 56(b)(1)(A)(i). The
trade or business expenses of a self-employed taxpayer, however,
are deductible "above the line" in arriving at adjusted gross
income under section 62(a)(1); generally these deductions are not
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affected by the AMT calculations. See Johnson v. Commissioner,
T.C. Memo. 1993-530. It is this distinction between employees
and self-employed persons that petitioner attacks.
To the extent a statutory classification results in
disparate treatment, the classification is permissible if it has
a reasonable relation to a legitimate governmental end. Welch v.
Henry, 305 U.S. 134, 144 (1938); Okin v. Commissioner, 808 F.2d
1338, 1342 (9th Cir. 1987), affg. T.C. Memo. 1985-199; see also
Vance v. Bradley, 440 U.S. 93, 96-97 (1979). In this regard, a
classification does not violate equal protection or due process
principles "if any state of facts rationally justifying it is
demonstrated to or perceived by the courts." United States v.
Maryland Savings-Share Ins. Corp., 400 U.S. 4, 6 (1970).
Prior to 1944, trade or business expenses were deducted from
gross income regardless of the individual's employment status.
See sec. 23(a)(1)(A), Internal Revenue Code of 1939. The
Individual Income Tax Act of 1944, ch. 210, 58 Stat. 231,
introduced the concepts "adjusted gross income", "itemized
deductions", and "standard deduction" in an effort to simplify
tax administration and compliance. See S. Rept. 885, 78th Cong.,
2d Sess. (1944), 1944 C.B. 858, 858-859. Under this scheme,
individuals may account for their deductible expenses as itemized
deductions, or they may eschew recordkeeping and claim the
standard deduction amount. See sec. 63. The amount is then
deducted from adjusted gross income.
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Adjusted gross income is calculated by deducting from gross
income, inter alia, trade or business expenses "if such trade or
business does not consist of the performance of services by the
taxpayer as an employee." Sec. 62(a)(1). Congress decided that
allowance of these deductions "above the line" is
necessary to make as nearly equivalent as practicable
the concept of adjusted gross income, when that concept
is applied to different types of taxpayers deriving
their income from varying sources. Such equivalence is
necessary for equitable application of a mechanical tax
table or a standard deduction which does not depend
upon the source of income. * * * [S. Rept. 885, supra,
1944 C.B. at 877-878.]
The Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085,
limited the deductibility of miscellaneous itemized deductions,
allowing their deduction only in excess of 2 percent of adjusted
gross income. See sec. 67. In Lickiss v. Commissioner, T.C.
Memo. 1994-103, we held that section 67 did not create an
unconstitutional distinction vis-a-vis the expenses of employees
and of self-employed individuals. We noted that Congress imposed
the limitation to simplify the enforcement and administrative
aspects of the tax law as well as to ease the recordkeeping
burdens on taxpayers.
In creating the AMT, Congress sought to correct the "unfair
distribution of tax burden resulting from abuses by individuals
who escaped taxation on certain portions of their income because
of provisions in the tax laws." Graff v. Commissioner, 74 T.C.
743, 767 (1980), affd. per curiam 673 F.2d 784 (5th Cir. 1982).
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The AMT would "ensure that high-income individuals and
corporations pay at least a minimum rate of tax on their tax
preferences". S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49,
147. Such a goal is a legitimate governmental end. Okin v.
Commissioner, supra at 1342. Tax Reform Act of 1976, Pub. L. 94-
455, sec. 301(c)(1)(A), 90 Stat. 1520, designated as a tax
preference a portion of an individual's "excess itemized
deductions", including miscellaneous itemized deductions. See
former secs. 57(a)(1), (b).2 This provision was designed "to
prevent high-income people from using itemized deductions to
avoid all tax liability." S. Rept. 94-938, supra, 1976-3 C.B.
(Vol. 3) at 150; see H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2)
695, 823.
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, sec. 201(a), 96 Stat. 411, introduced the concept
of AMTI, calculated by, among other adjustments, reducing
adjusted gross income by "alternative tax itemized deductions".
Sec. 55(b), as amended by TEFRA sec. 201(a), Pub. L. 97-248, 96
Stat. 411. Absent entirely from the alternative tax itemized
deductions were miscellaneous itemized deductions. Sec. 55(e),
as amended by TEFRA sec. 201(a), Pub. L. 97-248, 96 Stat. 411.
In making revisions to the AMT, Congress had "one overriding
2
Currently miscellaneous itemized deductions are not classified
as tax preferences; rather, sec. 56(b) imposes "Adjustments
Applicable to Individuals", including the disallowance of these
deductions.
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objective: no taxpayer with substantial economic income should be
able to avoid all tax liability by using exclusions, deductions
and credits. * * * The only deductions allowed, other than costs
of producing [investment] income, are for important personal or
unavoidable expenditures * * * or for charitable contributions".
S. Rept. 97-494, at 108 (1982).
It is apparent that any difference in the AMT treatment of
the expenses of employees and the self-employed is rationally
related to Congress' goal of implementing a broad based tax
system. As the 1944 legislative history indicates, trade or
business expenses of the self-employed are deductible "above the
line" to achieve parity in treatment with other taxpayers. The
rationale behind this dichotomy applies with equal force to the
AMT, as the distinction levels the field for employees and the
self-employed for the application of the AMT. Neither class of
taxpayer may deduct miscellaneous itemized deductions in
calculating AMT.
Petitioner contends, however, that he is not a high-income
taxpayer. To a great extent what constitutes a "high-income"
taxpayer or a taxpayer having "substantial economic income" lies
within the eyes of the beholder. Nonetheless, Congress, in
addition to other adjustments, provided a so-called exemption
amount of $20,000, for married taxpayers filing separate returns,
in computing the amount of the AMT. Sec. 55(d). This provides
the statutory parameter, and petitioner falls within that
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parameter. As Judge Garth observed in Estate of Kunkel v. United
States, 689 F.2d 408, 416 (3d Cir. 1982):
It is not for the courts to conduct a more exacting
inquiry into the "true" purpose of the statute, or to
ask whether some alternative means would have been more
closely tailored to achievement of the end sought.
In sum, to the extent there is a distinction between
employees and self-employed individuals in the application of the
AMT, it is a permissible byproduct of Congress's pursuit of a
legitimate governmental end. Whether another approach could have
been taken is beyond our limited scope of judicial review of the
determinations made by the legislative branch.
Based on the foregoing,
Decision will be entered
for respondent.