127 T.C. No. 9
UNITED STATES TAX COURT
JONATHAN N. AND KIMBERLY A. PALAHNUK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12015-05. Filed October 11, 2006.
In 2000, P acquired stock through his exercise of
an incentive stock option (ISO) within the meaning of
sec. 422(b), I.R.C. P realized no income or loss on
the exercise for purposes of computing Ps’ 2000 taxable
income but realized $2,086,009 of income for purposes
of computing Ps’ 2000 alternative minimum taxable
income (AMTI). In 2001, P sold the stock and realized
on the sale a regular tax capital gain of $148,461 and
an alternative minimum tax (AMT) capital loss of
$1,937,547. During 2001, P also realized $153,625 of
capital losses unrelated to any ISO. Ps calculated
their 2001 taxable income by including $3,000 of their
regular tax capital loss resulting from all of the
sales. Ps argue that they may calculate their 2001
AMTI by reducing their 2001 taxable income by the
$2,086,009 difference (as rounded) between the $148,461
regular tax capital gain and $1,937,547 AMT capital
loss attributable to the stock related to the ISO. Ps
argue alternatively that their 2001 AMTI is calculated
by reducing their 2001 taxable income by the $151,461
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difference between the $148,461 regular tax capital
gain and $3,000 of their 2001 AMT capital loss.
Held: Pursuant to secs. 56(b)(3) and 1211(b),
I.R.C., Ps’ 2001 AMTI is calculated by computing their
2001 AMT capital loss by using the AMT adjusted basis
of the stock related to the ISO and the $153,625 of
capital losses on the other sales, and adjusting Ps’
2001 taxable income by the difference between the 2001
regular tax capital loss included in the calculation of
that taxable income and Ps’ 2001 AMT capital loss up to
a maximum of $3,000. Because Ps included a $3,000
capital loss in computing their 2001 taxable income and
are allowed the same amount as a 2001 AMT capital loss,
Ps’ adjustment to their 2001 taxable income is zero.
Don Paul Badgley, Brian G. Isaacson, and Duncan C. Turner,
for petitioners.
Julie L. Payne, for respondent.
OPINION
LARO, Judge: This case is before the Court for decision
without trial. See Rule 122.1 Petitioners petitioned the Court
to redetermine respondent’s determination of a $155,305
deficiency in their 2001 Federal income tax. The deficiency
stems from respondent’s disallowance of an adjustment that
petitioners made in calculating their 2001 alternative minimum
taxable income (AMTI). We decide whether the calculation of
petitioners’ 2001 AMTI includes an adjustment for the difference
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Section references are to the applicable versions of
the Internal Revenue Code. Dollar amounts are rounded.
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between the 2001 regular tax capital gain and 2001 alternative
minimum tax (AMT) capital loss that were attributable to the sale
of stock purchased through the exercise of an incentive stock
option within the meaning of section 422(b) (ISO).2 We hold that
petitioners’ 2001 AMTI is calculated by adjusting their 2001
taxable income by the difference between the regular tax capital
loss included in the computation of their 2001 taxable income and
the $3,000 AMT capital loss that is allowed for 2001 under
section 1211(b).
Background
All facts were stipulated or contained in the exhibits
submitted therewith. We find the facts accordingly. Petitioners
are husband and wife, and they filed a joint 2001 Form 1040, U.S.
Individual Income Tax Return (2001 return). They resided in
Hauppauge, New York, when their petition was filed.
During 2000 and 2001, Jonathan N. Palahnuk (petitioner) was
employed by Metromedia Fiber Network, Inc. (Metromedia). On
February 23, 1998, he and Metromedia entered into an agreement
(petitioner’s ISO) that allowed him to purchase shares of
Metromedia class A common stock at a set price. Petitioner’s ISO
qualified as an ISO under section 422(b).
2
We consider petitioners to have conceded any allegation of
error asserted in their petition that they did not adequately
pursue in their posttrial brief. See Harbor Cove Marina Partners
Pship. v. Commissioner, 123 T.C. 64, 66 (2004); Davis v.
Commissioner, 119 T.C. 1 n.1 (2002).
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On March 15, 2000, petitioner exercised petitioner’s ISO and
purchased some Metromedia shares at a total cost of $99,949. On
that date, the purchased shares had a total fair market value of
$2,185,958. Petitioner realized no income or loss on the
exercise for purposes of computing petitioners’ 2000 taxable
income but realized $2,086,009 of income for purposes of
computing petitioners’ 2000 AMTI.
In 2001, petitioner sold the Metromedia shares for $248,410
and realized a regular tax capital gain of $148,461 (shares’
selling price of $248,410, less the shares’ exercise cost of
$99,949) and (as rounded) a $1,937,547 AMT capital loss (shares’
selling price of $248,410, less the shares’ AMT adjusted basis of
$2,185,958).3 Unrelated to any ISO, petitioner during 2001 also
realized capital losses totaling $153,625.
On their 2001 return, petitioners included a $3,000 capital
loss in calculating their 2001 taxable income as $561,161 and
calculating their regular tax liability as $191,457. Although
petitioners were not subject to the AMT in 2001, they computed
their 2001 AMTI to ascertain the amount of the section 53 credit
for prior year minimum tax liability that they could claim in
3
A statement attached to petitioners’ 2001 return reports
that the selling price of the shares totaled $248,972 and that
the resulting gain was $149,024 ($248,972 - $99,948). While
petitioners acknowledge in their posttrial brief that the
resulting gain was $148,461, they do not explain this
discrepancy.
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2001. Petitioners calculated their 2001 AMTI on 2001 Form 6251,
Alternative Minimum Tax--Individuals, by reporting a negative
$1,929,509 adjustment on line 9 of that form and by reporting two
other unrelated adjustments in the total amount of $5,999.4 They
reported that their AMTI was negative $1,362,349 (taxable income
of $561,161 + negative $1,929,509 + $5,999) and that their 2001
tentative minimum tax and 2001 AMT were both zero. For 2000,
petitioners’ AMT equaled $588,066. Petitioners adjusted that
amount by $46,553 to reflect a net minimum tax on exclusion items
and claimed on their 2001 return that they had a $541,513 minimum
tax credit that could be applied to 2001 and later years.
Petitioners applied $191,457 of this credit to their 2001 regular
tax liability of $191,457, thus reducing that liability to zero,
and claimed the $350,056 balance as a minimum tax carryover to
2002.
Respondent determined that petitioners were not entitled to
the negative $1,929,509 adjustment. Accordingly, respondent
determined, petitioners’ 2001 AMTI was $567,160 (negative
$1,362,349 + $1,929,509) and their resulting 2001 tentative
minimum tax was $155,305. Further, respondent determined,
4
We are unsure of the specifics of the negative $1,929,509
adjustment. Petitioners claim in their posttrial brief that they
are entitled to a negative adjustment of $2,086,009, or in other
words, the difference (as rounded) between the 2001 regular tax
capital gain of $148,461 and the 2001 AMT capital loss of
$1,937,547.
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petitioners had no 2001 net minimum tax on exclusion items and a
$588,066 minimum tax credit ($541,513 + $46,553) that was
available for 2001 and later years. Respondent determined that
petitioners could apply $36,152 of that credit to 2001 (regular
tax liability of $191,457 - 2001 tentative minimum tax of
$155,305) and carry over the $551,914 balance to later years.
Discussion
The Internal Revenue Code imposes upon taxpayers an AMT in
addition to all other taxes imposed by subtitle A. See sec.
55(a); Allen v. Commissioner, 118 T.C. 1, 5 (2002). The AMT is
imposed upon a taxpayer’s AMTI, which is an income base broader
than the usual base of taxable income applicable to Federal
income taxes in general. See Allen v. Commissioner, supra at 5.
In order to compute AMTI, an individual must first compute his or
her taxable income and then alter that amount (by way of an
adjustment or an increase) to reflect the items described in the
remainder of part VI, subchapter A, chapter 1, subtitle A (part
VI).5 Id. at 10.
5
Part VI includes five sections, numbered and titled as
follows:
SEC. 55. Alternative Minimum Tax Imposed;
SEC. 56. Adjustments in Computing Alternative Minimum
Taxable Income;
SEC. 57. Items of Tax Preference;
SEC. 58. Denial of Certain Losses; and
SEC. 59. Other Definitions and Special Rules.
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One item described in part VI is ISOs. Specifically,
section 56(b)(3) provides that “Section 421 shall not apply to
the transfer of stock acquired pursuant to the exercise of an
incentive stock option * * *. The adjusted basis of any stock so
acquired shall be determined on the basis of the treatment
prescribed by this paragraph.” Under section 421, an individual
who exercises an ISO is not taxed on the exercise but is taxed
when he or she sells the resulting stock. See sec. 421(a).
Thus, pursuant to sections 56(b)(3) and 421(a), petitioners were
required to recognize the following income or loss on the
exercise of petitioner’s ISO in 2000 and the sale of the
resulting stock in 2001: For 2000, zero and income of $2,086,009
for regular tax and AMT purposes, respectively; for 2001, a
capital gain of $148,461 and a capital loss of $1,937,547 for
regular tax and AMT purposes, respectively.
Petitioners assert that section 56 entitles them to deduct a
net operating loss for 2001 equal to the $2,086,009 difference
(as rounded) between the 2001 regular tax capital gain of
$148,461 and the 2001 AMT capital loss of $1,937,547. To this
end, petitioners argue, the $2,086,009 difference is an AMT net
operating loss within the meaning of section 56(d)(2)(A)(i) and
allowing such a deduction comports with legislative intent,
equity, and policy. In Merlo v. Commissioner, 126 T.C. 205
(2006), the Court recently rejected similar arguments made by the
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taxpayers there. We do likewise here for the same reasons stated
in Merlo.6 Accord Montgomery v. Commissioner, 127 T.C.
(2006); Spitz v. Commissioner, T.C. Memo. 2006-168.
Alternatively, petitioners argue, they may compute their
2001 AMTI by subtracting from their 2001 taxable income the
$151,461 difference between the $148,461 regular tax capital gain
for 2001 and the $3,000 allowable AMT capital loss for 2001.
According to petitioners, this difference is a net operating loss
negative adjustment that reduces their 2001 taxable income.
While we agree with petitioners that the difference between a
regular tax capital gain or loss and an AMT capital gain or loss
must be taken into account in calculating a taxpayer’s AMTI, we
disagree with petitioners that the difference in this case is a
net operating loss for the same reasons set forth in Merlo v.
Commissioner, supra. Accord Montgomery v. Commissioner, supra;
Spitz v. Commissioner, supra. For the reasons stated below, we
also disagree with petitioners that $151,461 is the difference
that must be taken into account in computing their 2001 AMTI.
In Allen v. Commissioner, supra at 10, we explained that an
individual calculates AMTI by first computing regular taxable
income and then making the necessary alterations to reflect the
6
Petitioners acknowledge in their posttrial brief that this
issue was decided adversely to them in Merlo v. Commissioner, 126
T.C. 205 (2006).
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items described in part VI. Thus, petitioners must calculate
their 2001 AMTI by adjusting their 2001 taxable income to reflect
the mandate of section 56(b)(3) that their AMTI be computed using
their AMT adjusted basis in the stock acquired through the
exercise of petitioner’s ISO rather than their regular tax
adjusted basis in that stock. In other words, given that
petitioners computed their 2001 taxable income by factoring in a
$3,000 capital loss, petitioners’ adjustment under section
56(b)(3) must reflect the substitution of that $3,000 capital
loss with the $3,000 allowable portion of their 2001 AMT capital
loss (discussed below).
Petitioners calculate their 2001 AMTI by reducing their
taxable income by the $148,461 regular tax capital gain
attributable to petitioner’s ISO (rather than the $3,000 capital
loss factored into the computation of their 2001 taxable income).
We do not do similarly. In addition to the sales underlying the
$148,461 capital gain, petitioners had other sales of capital
assets during 2001. Although those other sales were unrelated to
petitioner’s ISO, they are nevertheless sales that entered into
the calculation of petitioners’ 2001 regular tax capital loss
and, hence, must necessarily enter into the calculation of
petitioners’ adjustment under section 56(b)(3). Considering all
of the sales together, petitioner realized a regular tax capital
loss of $5,164 (the sum of the non-ISO losses of $153,625 and the
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regular tax ISO gains of $148,461) and an AMT capital loss of
$2,091,170 (the sum of the non-ISO losses of $153,625 and the AMT
ISO losses of $1,937,547). The recognition of both the regular
tax capital loss and the AMT capital loss is limited to $3,000,
see sec. 1211(b); see also Merlo v. Commissioner, supra (section
1211(b) limits an individual’s annual deduction of an AMT capital
loss to $3,000), which, in turn, means that petitioners’
adjustment under section 56(b)(3), representative of the
difference between the recognized losses for regular tax and AMT
purposes, is zero as determined by respondent.
We sustain respondent’s determination. In so doing, we have
considered all of petitioners’ arguments and conclude that those
arguments not discussed herein are without merit.
Decision will be entered
for respondent.