T.C. Summary Opinion 2002-20
UNITED STATES TAX COURT
ALCMENE AND PETER HALOFTIS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5925-00S. Filed March 5, 2002.
Alcmene and Peter Haloftis, pro sese.
Richard A. Stone, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioners’ Federal
income tax for 1998 of $4,315. The issues for decision are: (1)
Whether petitioners are entitled to a student loan interest
deduction, and (2) whether petitioners are subject to the
alternative minimum tax. At the time the petition was filed,
petitioners lived in Boyds, Maryland. Petitioners are husband
and wife.
Alcmene Haloftis (Ms. Haloftis) is a chemical engineer with
the U.S. Department of Labor, Office of General Industry
Compliance. She holds a bachelor of science degree in chemical
engineering from the University of Maryland, College Park, and a
master of science degree in environmental engineering from George
Washington University. At the time of trial, Ms. Haloftis had
worked for the Department of Labor for approximately 12 years,
including the year in issue. Mr. Haloftis, an electrical
engineer, worked for MA Bioservices, Inc., in Rockville,
Maryland, during the year in issue.
In 1998, petitioners paid $2,257.77 in student loan interest
to the Student Loan Marketing Association. The underlying
student loan was incurred for petitioners’ continued education.
The parties do not dispute the nature of this loan or the amount
of interest paid during 1998.
In their timely filed 1998 joint Federal income tax return,
petitioners claimed on their Schedule A, Itemized Deductions, a
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deduction of $2,257.77 for student loan interest paid during
1998. Petitioners did not file Form 6251, Alternative Minimum
Tax--Individuals, with their 1998 Federal income tax return.
In a notice of deficiency, respondent determined that
petitioners were not entitled to the student loan interest
deduction because they were not eligible for the deduction under
section 221(b). Respondent further determined that petitioners
were subject to the alternative minimum tax for 1998.
A deduction is allowed on interest paid by a taxpayer on any
“qualified education loan” in the year paid. Sec. 221(a). A
“qualified education loan” means any indebtedness incurred to pay
qualified higher education expenses which are incurred by the
taxpayer or the taxpayer’s spouse, paid or incurred within a
reasonable period of time before or after the indebtedness was
incurred, and attributable to education during a period the
recipient was an eligible student. Sec. 221(e)(1). Married
taxpayers must file joint returns in order to qualify for the
deduction. Sec. 221(f)(2). The maximum deduction allowed for
tax year 1998 was $1,000. Sec. 221(b)(1).
For a moderate-income taxpayer the deduction for qualified
education loan interest is phased out according to the taxpayer’s
modified adjusted gross income (modified AGI). Sec. 221(b)(2).
The phaseout begins at a modified AGI level of over $60,000 for
joint return filers. Sec. 221(b)(2)(B)(i)(II). The deduction is
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completely phased out at a modified AGI level of $75,000 for
joint return filers. Sec. 221(b)(2)(B).
Petitioners contend that respondent improperly disallowed
their education loan interest deduction because the “IRS treated
the interest as a new loan and not a loan in the repayment
stage”. We are unsure why petitioners make a distinction between
a new loan and a loan in “repayment stage”, but the distinction
is irrelevant. The limitations of section 221(b), entitled
“Maximum Deduction”, apply to all education loan interest
deductions so long as the education loan is qualified and with
respect to the first 60 months of repayment. Sec. 221(d).
Respondent does not contest that the loan payments were within
the 60-month period.
Petitioners’ next argument is that they are not subject to
any limitation on the education loan interest deduction because
“line 28 of * * * [Schedule A] states that if line 34 is over
$124,500, your deduction is not limited.” Petitioners are
misguided in this assertion. Line 28 refers to the itemized
deduction phaseout amount1 and has no bearing on petitioners’
entitlement to the education loan interest deduction. Section
1
Sec. 68 establishes an overall limitation on itemized
deductions. For 1998, the phaseout begins at adjusted gross
income of $124,500 for joint return filers. Petitioners
correctly assert, and respondent does not contest, that
petitioners are not subject to the sec. 68 limitation on itemized
deductions.
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221(b) sets the deduction limit specifically on qualified
education loan interest paid in 1998 at $1,000. Therefore,
assuming all other requirements of section 221 are met, for
petitioners’ student loan interest of $2,257.77, they would be
entitled to deduct only $1,000 as their education loan interest
deduction. Sec. 221(b).
Respondent contends that petitioners are not entitled to the
deduction because their modified AGI exceeds the phaseout amount
of section 221(b)(2). We agree. For tax year 1998, petitioners
reported an adjusted gross income of $99,213.90. Petitioners’
modified AGI equals the adjusted gross income determined without
regard to the deduction for the education loan interest. Sec.
221(b)(2)(C). For tax year 1998, petitioners’ modified AGI was
$101,471.67.2 Because petitioners’ modified AGI for 1998 is more
than $75,000, we hold that interest paid on petitioners’
qualified education loan is not deductible under section 221(b).
Respondent is sustained on this issue.
Section 55(a) imposes an alternative minimum tax on
noncorporate taxpayers equal to the excess of the “tentative
minimum tax” over the “regular tax”.3 The alternative minimum
2
$99,213.90 (adjusted gross income) plus $2,257.77
(student loan interest) = $101,471.67.
3
For petitioners, the term “regular tax” means “the
regular tax liability for the taxable year (as defined in sec.
(continued...)
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tax is the amount in excess of, and in addition to, any regular
tax owed.
The tentative minimum tax for noncorporate taxpayers is
equal to 26 percent of so much of the taxable excess as does not
exceed $175,000. Sec. 55(b)(1)(A)(i). The taxable excess is
that amount by which the alternative minimum taxable income
(AMTI) exceeds the exemption amount. Sec. 55(b)(1)(A)(ii). The
exemption amount for married couples filing a joint return is
$45,000. Sec. 55(d)(1)(A).
AMTI equals the taxpayer’s taxable income for the year
determined with the adjustments provided in section 56 and
increased by the amount of tax preference items described in
section 57. Sec. 55(b)(2). In calculating AMTI, no deduction is
allowed for State and local income taxes paid and miscellaneous
itemized deductions. Sec. 56(b)(1)(A). Also, no deduction for
personal exemptions under section 151 is allowed. Sec.
56(b)(1)(E).
Petitioners did not file Form 6251 with their 1998 return.
In computing petitioners’ AMTI for the year in issue, respondent
disallowed petitioners’ deductions for taxes paid and for job
expenses and other miscellaneous itemized deductions. We have
reviewed respondent’s computations of the alternative minimum tax
3
(...continued)
26(b))”. Sec. 55(c)(1).
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and find that they comport with the provisions of sections 55 and
56. The following computation shows the proper amount of
alternative minimum tax:
I. Individual Income Tax Return - Form 1040
1
Adjusted gross income (Form 1040, lines 33/34) $101,471.67
Less: Itemized deductions (Schedule A) -43,819.43
Balance (Form 1040, Line 37) 57,652.24
Less: Exemptions (Form 1040, Line 38) -10,800.00
Taxable income (Form 1040, Line 39) 46,852.24
Tax (secs. 1(a), 3(c)) 7,620.00
Regular tax (secs. 26(b)(1), (2)(A), 55(c)(1)) 7,620.00
1
This amount reflects the disallowance of petitioners’ student
loan interest deduction as discussed above. $99,213.90 (petitioners’
reported AGI) plus $2,257.77 (student loan interest = $101,471.67.
II. Itemized Expenses - Schedule A
Taxes paid (Line 9) $25,220.26
Interest paid (Line 14) +6,315.83
Charitable contributions (Line 18) +2,080.00
Miscellaneous itemized deductions
(Unreimbursed employee expenses) (Line 26) +10,203.34
Total itemized deductions 43,819.43
III. Alternative Minimum Taxable Income
Taxable income (Form 1040, line 39) $46,852.24
Adjustments
Taxes +25,220.26
Miscellaneous itemized deductions
(Unreimbursed employee expenses) +10,203.34
Exemptions +10,800.00
Refund of taxes -2,397.61
Balance 90,678.23
Plus: Items of tax preference -0-
Alternative minimum taxable income 90,678.23
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IV. Alternative Minimum Tax
Alternative minimum taxable income $90,678.23
Less: Exemption amount -45,000.00
Taxable excess 45,678.23
Times: Applicable AMT rate x 26%
Tentative minimum tax 11,876.34
Less: Regular tax -7,620.00
Alternative minimum tax 4,256.34
Petitioners’ taxable income for 1998 was $46,852.24, the
amount reported on line 39 of Form 1040.
As relevant herein, the adjustments provided in section
56(b) include the disallowance of the following: (1)
Miscellaneous itemized deductions as defined in section 67(b);
(2) taxes described in paragraph (1), (2) or (3) of section
164(a); and (3) personal exemptions defined in section 151.
Secs. 56(b)(1)(A)(i) and (ii), (E). Any amount refunded by way
of taxes paid that is includable in computing adjusted gross
income is not subject to disallowance. See sec. 56(b)(1)(A).
After we take into account the foregoing adjustments,
petitioners’ AMTI for 1998 equals $90,678.23. AMTI exceeds the
applicable exemption amount of $45,000 by $45,678.23. See sec.
55(d)(1)(C)(i). Petitioners’ “tentative minimum tax” is
therefore 26 percent of the excess, or $11,876.34. See sec.
55(b)(1)(A)(i)(I), (iii). Because petitioners’ tentative minimum
tax exceeds the regular tax of $7,620, petitioners are liable for
the alternative minimum tax in the amount of the excess; i.e.,
$11,876.34 less $7,620, or $4,256.34. See sec. 55(a).
In view of the foregoing, we hold that petitioners are
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liable for the alternative minimum tax. Respondent is sustained
on this issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.