Court Opinion

ID: 4330940
Source: CourtListenerOpinion
Date Created: 2018-11-13 23:54:08.339183+00
Date Added: 2024-06-11T14:20:03.633173
License: Public Domain

108 T.C. No. 2

                UNITED STATES TAX COURT

         ROY E. AND LINDA DAY, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20732-94.                    Filed January 9, 1997.

     R determined deficiencies in Ps' Federal income
tax for the years 1988 through 1990. Ps seek to
augment the amount of sec. 29, I.R.C., nonconventional
fuel source credits they may take against regular
income tax by increasing the availability of such
credits under the sec. 29(b)(5), I.R.C., limitation.
Ps argue that if their taxable income in each year had
not been reduced by tax preference items, the resulting
tax payable on that income would nonetheless have been
the same due to sec. 29, I.R.C., credits generated in
these years. R contends that relief under the sec.
59(g), I.R.C., tax benefit rule is not warranted. The
preferences, by reducing Ps' taxable income, allowed an
increased amount of sec. 29, I.R.C., credits to go
unused in the years generated and thereby increased the
sec. 29, I.R.C., credits available to be carried over
indefinitely pursuant to sec. 53, I.R.C. Held: Ps are
not entitled to use the sec. 59(g), I.R.C., tax benefit
rule to reduce their tentative minimum tax in order to
                               - 2 -

     increase the sec. 29, I.R.C., credits available under
     the sec. 29(b)(5), I.R.C., limitation. First Chicago
     Corp. v. Commissioner, 88 T.C. 663 (1987), affd. 842
F.2d 180, 181 (7th Cir. 1988), distinguished.

     Marcia Allen Broughton, for petitioners.

     Michael A. Yost, Jr., for respondent.

                              OPINION

     NIMS, Judge:*   Respondent determined deficiencies in Roy E.

and Linda Day's (petitioners or the Days) Federal income tax for

the taxable years 1988, 1989, and 1990 in the amounts of $6,791,

$14,825, and $10,127, respectively.     The only issue for decision

is whether petitioners can utilize section 59(g) to compute their

tentative minimum taxable income, thereby increasing the extent

to which they can apply qualified section 29 credits against

their regular income tax for the taxable years 1988 through 1990.

For the reasons that follow, we hold that they cannot.

     For ready reference, the following acronyms are used

throughout this Opinion:

          TMT- tentative minimum tax
          TMTI- tentative minimum taxable income
          RIT- regular income tax
          AMT- alternative minimum tax
          AMTI- alternative minimum taxable income

     *
      This case was reassigned to Judge Arthur L. Nims, III, by
Order of the Chief Judge.
                                - 3 -

     All section references, unless otherwise specified, are to

sections of the Internal Revenue Code in effect for the years at

issue.   Statutory provisions applicable to the years in issue are

reproduced in the Appendix.

     All of the facts have been stipulated.    The Court finds

these facts.   This reference incorporates the stipulation of

facts and attached exhibits.    Petitioners were married and

resided in Morgantown, West Virginia, when they filed their

petition.

     Respondent determined deficiencies in petitioners' Federal

income tax for 1988, 1989, and 1990, in the amounts of $6,791,

$14,825, and $10,127, respectively.

     Petitioners invested in oil- and gas-producing properties,

the production from which qualified for section 29

nonconventional fuel source credits of $12,706 in 1988, $14,210

in 1989, and $14,729 in 1990.    Petitioners had depletion,

intangible drilling costs, accelerated depreciation, and

adjustments in 1988, 1989, and 1990 totaling $37,910, $76,329,

and $70,502, respectively.    These amounts were added to

petitioners' taxable income to calculate their AMTI.

     Petitioners' 1988 taxable income as determined by respondent

was $115,374, and their RIT as so determined was $30,611.

Respondent also determined self-employment tax to be $5,859 for

the taxable year 1988.   The Days had no AMT liability for 1988.

For 1989, petitioners' taxable income as determined by respondent
                                - 4 -

was $128,054, with RIT liability of $34,492 and AMT liability of

$2,884.   Respondent also determined petitioners' liability for

self-employment tax to be $6,250 for the taxable year 1989.

Petitioners' 1990 taxable income as determined by respondent was

$101,547, and their RIT as so determined was $25,372.

Petitioners' liability for the AMT was $3,465.      Respondent also

determined petitioners' self-employment tax to be $7,849 for the

taxable year 1990.

     For 1988, $6,649 of the qualified section 29 credit of

$12,706 was allowed by respondent.      No section 29 credit was

allowed for either 1989 or 1990.    An unused section 29 credit of

$6,057 from 1988 was carried over to 1989 pursuant to the section

53 minimum tax credit.    See sec. 53(d)(1)(B)(iii).    The 1988

credit, along with an unused section 29 credit of $14,210 and AMT

of $2,884 from 1989, was subsequently carried forward to 1990 to

produce a minimum tax credit of $23,151.      In 1990, none of

petitioners' $14,729 section 29 credit was allowed, resulting in

a minimum tax credit carryover of $37,880.

     In their petition, the Days do not dispute any of the

adjustments to taxable income set forth in the statutory notice

of deficiency.   The adjustments to income to which the

petitioners have not assigned error or otherwise placed at issue

in the petition total $7,520 for 1988; $12,200 for 1989; and

$70,456 for 1990.    Petitioners instead seek tax relief under

section 59(g) by excluding from AMTI tax preferences and
                               - 5 -

adjustments which they allege do not provide a tax benefit, in

order to increase the section 29 credits they can use against RIT

for each year in issue.

     Section 29(b)(5) (renumbered 29(b)(6) for tax years

beginning after December 31, 1990) limits the section 29

nonconventional fuel source credit available in any year against

RIT to the excess of a taxpayer's RIT (reduced by credits

allowable under sections 27 and 28) over the TMT for that year.

     The complicated interplay between section 29, the AMT, and

the tax benefit rule spawns the case before us.   In order to

readily understand the arguments of the parties in this matter,

we must first examine the history and function of both the

minimum tax and the tax benefit rule.

     A.   The Minimum Tax

     Since 1969, the Internal Revenue Code has included minimum

tax provisions for both corporate and individual taxpayers.     Tax

Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487.   Congress

enacted the minimum tax to prevent corporate and individual

taxpayers from aggregating deductions to the point where they pay

either no tax or a "shockingly low" tax.   First Chicago Corp. v.

Commissioner, 842 F.2d 180, 181 (7th Cir. 1988), affg. 88 T.C.
663 (1987).   Deductions which might otherwise result in this

outcome are classified as "tax preference items."

     Section 301 of the Tax Reform Act of 1969, Pub. L. 91-172,

83 Stat. 580, imposed a minimum tax on certain tax preference
                                 - 6 -

items to be added on to a taxpayer's other tax liability.       This

scheme remained in effect, with only minor changes, as the only

minimum tax formulation in the Internal Revenue Code until 1978.

See Revenue Act of 1978, Pub. L. 95-600, sec. 421(a), 92 Stat.

2871.

     The Revenue Act of 1978, purported to repeal the add-on

minimum tax for individuals and replace it with a new AMT

formulation beginning in 1979.     Other sources indicate, however,

that the two provisions co-existed in the Internal Revenue Code

until the add-on minimum tax was finally repealed by the Tax

Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-

248, sec. 201(a), 96 Stat. 411, and supplanted by an amended

alternative minimum tax.   E.I. du Pont de Nemours & Co. v.

Commissioner, 102 T.C. 1, 18 n.10, affd. 41 F.3d 130 (3d Cir.

1994), affd. sub nom. Conoco, Inc. v. Commissioner, 42 F.3d 972

(5th Cir. 1995); United States v. Deckelbaum, 784 F. Supp. 1206,

1208 (D. Md. 1992).   This TEFRA AMT provision remained in effect

from 1982 until its amendment by the Tax Reform Act of 1986, Pub.

L. 99-514, 100 Stat. 2085, which expanded the AMT for

individuals.   See S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3)

515, 521.

     The post-1986 AMT rules, sections 55-59, were enacted to

achieve one overriding objective:        to establish a floor for tax

liability, so that a taxpayer pays some tax regardless of the tax

breaks otherwise available to him under the RIT.       See S. Rept.
                                - 7 -

99-313, supra, 1986-3 C.B. (Vol. 3) at 518.      The AMT rules

accomplish this goal by eliminating favorable treatment to

certain items that are treated favorably for purposes of the RIT

(tax preference items).    Secs. 55(b)(2)(B), 57(a).

     The AMT is paid only if, and to the extent that, it exceeds

the taxpayer's RIT.   Sec. 55(a).   The starting point in computing

AMT liability is determining AMTI.      AMTI is computed in the same

manner as regular taxable income except that the adjustments

provided in sections 56 and 58 are taken into account for AMTI,

and the tax preference items set forth in section 57 are not

permitted to reduce AMTI.    Sec. 55(b)(2).    To determine the

taxable amount of AMTI, AMTI is reduced by an exemption amount,

which, in the instant case, amounts to $40,000, subject to a

gradual phase-out as AMTI exceeds $150,000.      Sec. 55(d).   The AMT

rate is then applied to AMTI, as reduced by the exemption amount.

Sec. 55(b).   For the taxable years at issue in the instant case,

the applicable AMT rate is 21 percent.      The resulting tax figure

is then reduced by the alternative minimum foreign tax credit

(which petitioners did not have in any of the taxable years at

issue) to arrive at TMT.    Sec. 55(b)(1)(A).

     Next, RIT is compared to TMT.      RIT is not reduced by any

nonrefundable credits, other than the foreign tax credit and the

possessions tax credit, before being compared to the TMT.        Sec.

55(c)(1).   If TMT is greater than the RIT, the TMT is the final

tax liability for the taxable year.      Sec. 55(a).   If, on the
                                  - 8 -

other hand, RIT exceeds the TMT, nonrefundable credits (including

the section 29(a) nonconventional fuel source credit) are applied

in a set order to reduce the RIT, but not below the TMT for the

taxable year.    See, e.g., sec. 29(b)(5).

     Finally, the section 53 minimum tax credit is applied

against the RIT, but again only to the extent that the RIT

exceeds the TMT.    Sec. 53(c).    Pursuant to section

53(d)(1)(B)(iii), the amount available for the minimum tax credit

is increased by any section 29 credits not allowed solely by

reason of the limitation of section 29(b)(5).      The section 53

minimum tax credit can be carried forward indefinitely to

subsequent taxable years and utilized to reduce regular tax to

the extent it exceeds TMT in those years.      Sec. 53(a), (c).

     B.    The Tax Benefit Rule

     Presumably since Congress recognized that it could not

envision all of the possible inequities of the minimum tax, it

incorporated section 58(h), which provided a so-called Tax

Benefit Rule, as part of the add-on minimum tax system in 1976.

Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1553.      The

section 58(h) tax benefit rule mandated that the Secretary of the

Treasury

     prescribe regulations under which items of tax
     preference shall be properly adjusted where the tax
     treatment giving rise to such items will not result in
     the reduction of the taxpayer's tax under this subtitle
     for any taxable years.
                               - 9 -

     Although section 58(h) was added to the Code at a time when

the only minimum tax in the Code was the add-on rather than the

AMT, it survived the transition between the two types of minimum

tax that occurred in 1982 post-TEFRA.

     That Congress affirmatively chose to retain the tax benefit

rule in the wake of the Tax Reform Act of 1986, Pub. L. 99-514,

100 Stat. 2085, is demonstrated by the fact that the provision

was renumbered as section 59(g) and its language slightly

changed.   Nevertheless, there are substantive differences between

former section 58(h) and current section 59(g).   Effective for

taxable years after 1986, section 59(g), as amended by the

Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103

Stat. 2106, provides as follows:

     The Secretary may prescribe regulations under which
     differently treated items shall be properly adjusted
     where the tax treatment giving rise to such items will
     not result in the reduction of the taxpayer's regular
     tax for the taxable year for which the item is taken
     into account or for any other taxable year. [Emphasis
     added.]

     The substitution of the word "may" for "shall" in section

59(g) renders the tax benefit rule discretionary.   (In First

Chicago Corp. v. Commissioner, 88 T.C. 663, 676 n.11 (1987),

affd. 842 F.2d 180 (7th Cir. 1988), we drew attention to the word

change in section 59(g), but noted that it did not affect the

outcome of that case since the change did not apply to the tax

years before the Court.)   Moreover, whereas section 58(h) was

concerned with the effect of preferences on a taxpayer's income
                                - 10 -

tax liability, section 59(g) focuses on the narrower effect of

preferences and adjustments on a taxpayer's regular tax

liability.    The legislative history surrounding retention of the

tax benefit rule indicates that Congress indeed intended to

constrain its application, to wit:

         It is clarified that the application of the tax
      benefit rule to the minimum tax is within the
      discretion of the Secretary of the Treasury. Since the
      regular and minimum taxes generally are computed
      separately, relief from the minimum tax under the tax
      benefit rule is not appropriate solely by reason of the
      fact that a taxpayer has received no benefit under the
      regular tax with respect to a particular item. * * *
      [H. Conf. Rept. 99-841, 1986-3 C.B. (Vol. 4) 262-263;
      emphasis added.]

As further evidence of the limited scope of section 59(g), the

legislative history states, without mentioning the tax benefit

rule, that "Credits that cannot be used by the taxpayer due to

the effect of the alternative minimum tax can be carried over to

other taxable years under the rules generally applying to credit

carryovers."    S. Rept. 99-313, supra, 1986-3 C.B. at 522.

      We now apply the foregoing principles to the facts before

us.

      For the taxable years 1988 through 1990, petitioners were

entitled to certain section 29(a) nonconventional fuel source

credits.     However, due to the section 29(b)(5) limitation, only a

small portion of their qualified section 29 credits could be used

in the taxable years 1988 through 1990.
                              - 11 -

     To increase their permissible section 29 credit limitation,

petitioners assert that for the years 1988 through 1990 they did

not garner any tax benefits against RIT from certain tax

preference items and adjustments.      Rather, petitioners posit that

sufficient section 29 credits would have enabled them to have the

same RIT liability in the absence of the preferences and

adjustments.   Simply put, petitioners seek to avoid adding back

tax preference items to AMTI for which they allegedly received no

tax benefit against RIT in computing the limitation on section 29

credits they may take against RIT.

     Respondent contends, on the other hand, that relief under

section 59(g) is not warranted simply because petitioners

received no current regular tax benefit with respect to

preferences, deductions, and/or credits.

     We hold that the application of the section 59(g) tax

benefit rule is inappropriate in petitioners' case for the

following reasons:   (1) The AMT limits the use of nonrefundable

credits as well as preferences and exclusions; (2) the disallowed

section 29 credits may be carried forward indefinitely to future

taxable years under section 53; (3) significant differences exist

between the AMT and the add-on minimum tax; and (4) petitioners

did in fact receive a current tax benefit against RIT from their

tax preference items.

1. The AMT Limits the Use of Nonrefundable Credits as Well as
Preferences and Exclusions
                               - 12 -

       Petitioners would recompute AMTI by excluding certain

preferences that are not otherwise deductible from AMTI.       If

successful, petitioners would lower their TMT and thereby augment

the availability of section 29 credits under the section 29(b)(5)

limitation.    In effect, petitioners would increase the spread

between RIT and TMT.    Thus, petitioners seek to do, indirectly,

that which the Code does not allow directly:    apply nonrefundable

credits against TMT.    See S. Rept. 99-313, supra, 1986-3 C.B. at

537.

       If section 59(g) applied in the manner petitioners advocate,

taxpayers with sufficient amounts of nonrefundable credits as

well as adjustments and/or preferences would be able to

completely avoid Federal income tax liability, despite having

large economic incomes.    Respondent's brief offers a useful

illustration of how petitioners' position skirts Congress' intent

in enacting the AMT.    See First Chicago Corp. v. Commissioner,
842 F.2d at 181.

       Suppose that for 1990 a taxpayer, with no foreign tax

credits, had $1 million of gross income and $1 million of

preferential deductions.    Although the taxpayer would have no RIT

liability, the taxpayer would have AMT liability because

preferential deductions are not allowable in computing minimum

taxable income.    But if the taxpayer also had sufficient

nonrefundable credits to completely eliminate regular tax

liability on $1 million of gross income, under petitioners'
                              - 13 -

theory, none of the $1 million of preferences would be added back

to taxable income in computing AMTI.   Thus, the taxpayer would

completely avoid Federal income tax liability, despite having an

economic income of $1 million.

     That petitioners seek to avoid less tax than is

hypothetically possible under their theory as shown by the

preceding scenario does not bolster their tenuous position.    See

United States v. Deckelbaum, 784 F. Supp. at 1207.

2. Section 53 Permits an Indefinite Carryover of Disallowed
Section 29 Credits to Future Taxable Years

     The putative use of the section 59(g) tax benefit rule is

also inappropriate due to the availability of the section 53

minimum tax credit.   Congress recognized that taxpayers may not

be able to use currently all of their section 29 credits because

of the section 29(b)(5) limitation and therefore allowed the

indefinite carryover of these credits under section 53.    Sec.

53(a).

     Section 59(g) was added to the Code to give the Secretary

the flexibility to provide relief in the event a taxpayer would

not get a reduction in regular tax liability from an item that

was includable in the AMT base.   Section 59(g) explicitly

authorizes relief only where an item "will not result in the

reduction of the taxpayer's regular tax for the taxable year for

which the item is taken into account or for any other taxable

year." (Emphasis added.)   In the instant case, however,
                               - 14 -

petitioners may obtain a tax benefit from their tax preference

items indirectly, through "liberated" section 29 credits that can

be applied against RIT in future taxable years pursuant to

section 53.

     Petitioners argue that the fact that they may, at some

future time, indirectly derive a tax benefit from the tax

preference items via the freed-up section 29 credits is mooted by

First Chicago Corp. v. Commissioner, 842 F.2d 180 (7th Cir.

1988).

     In First Chicago Corp., the taxpayer had no regular tax

liability for 1980 and 1981 in large part due to a plethora of

foreign tax credits.    Id. at 180-181.    The credits were

sufficient to offset in full the tax liability that would have

resulted if the taxpayer's regular income had not also been

reduced by preference items.    Id.     Thus, the taxpayer received no

current tax benefit from the preferences.       Id. at 181.   Moreover,

the excess credits liberated by the preferences had not yet

expired unused.   Id.

     Respondent argued that the add-on minimum tax should

nevertheless be imposed for 1980 and 1981 because of the

potential for tax reduction in subsequent years.      However, this

Court, as well as the Court of Appeals for the Seventh Circuit,

was concerned that if the taxpayer paid tax on a preference item

for a year in which it derived no benefit due to the existence of

credits, and those credits later expired unused, the statute of
                                - 15 -

limitations on refunds could bar recovery by the taxpayer of the

extra tax it had paid in the earlier year.        Id. at 182-183; First

Chicago Corp. v. Commissioner, 88 T.C. 672-673.        This Court

held that "no minimum tax is due * * * for the years in which the

then useless preferences arose, but * * * the tax is best imposed

only when, and only to the extent that, petitioner realizes tax

benefits generated by the preferences."        First Chicago Corp. v.

Commissioner, 88 T.C. 668.

       First Chicago Corp. is readily distinguishable from the

instant case; perhaps most saliently, section 29(b)(5) played no

role whatsoever in the decision therein.

3.   The AMT Differs Markedly From the Add-on Minimum Tax

       In their misplaced reliance on First Chicago Corp.,

petitioners also ignore the substantial differences between the

add-on minimum tax at issue in that case and the AMT at issue in

the instant case.   In First Chicago Corp. itself this Court

stated: "The 'minimum tax' is to be sharply distinguished from

the 'alternative minimum tax'".     First Chicago Corp. v.

Commissioner, 88 T.C. 668 n.5.        These differences overshadow

any similarities, and render the principles set forth in First

Chicago Corp. inapplicable to the matter before us.       See United

States v. Deckelbaum, 784 F. Supp. at 1208.

       The District Court in Deckelbaum expressly declined to

extend the holding of First Chicago Corp. to cases involving the

AMT.    United States v. Deckelbaum, 784 F. Supp. at 1208.      The
                                - 16 -

issue was whether the taxpayers could adjust certain tax

preference items downward to determine the amount of AMT they

owed for 1985 under section 58(h).       The taxpayers' revised

computation of tax, although consonant with the taxpayers'

approach in First Chicago Corp., was rejected as directly

contrary to the stated goal of the AMT.       Id.   In Deckelbaum,

because the taxpayer could not avoid AMT even in the absence of

any preferences, and because nonrefundable credits could not be

used to reduce AMT, the court held that a reduction of AMT under

then-section 58(h) because of excess nonrefundable credits was

not warranted.   Id. at 1209.

     In so holding, Deckelbaum clarified the important

distinction in the methods by which the add-on minimum tax and

the AMT are calculated.   Id. at 1208.      The add-on minimum tax was

computed on a tax base consisting of the sum of a taxpayer's tax

preferences less an applicable minimum tax deduction.       The

minimum tax was then added to the taxpayer's RIT in order to

determine his total income tax liability.       Thus, a taxpayer who

reported items of tax preference but who, irrespective of such

items, would have owed no tax because of the availability of

credits, subjected himself to tax liability under the add-on tax

provisions solely by virtue of the fact that he reported the tax

preference items.   Stated otherwise, the taxpayer in such a case

theoretically could have avoided payment of the add-on minimum

tax by simply not claiming the items of tax preference.
                              - 17 -

     First Chicago Corp. resolved this anomaly by holding that if

a taxpayer did report such items, and they resulted in no

immediate tax benefit, they would not increase the add-on minimum

tax for that year.   First Chicago Corp. v. Commissioner, 842 F.2d

at 183. No such anomaly is present in cases involving the AMT.

In contrast to the add-on minimum tax at issue in First Chicago

Corp., a taxpayer cannot avoid AMT liability simply by failing to

claim preferences.

     There is another important distinction between First Chicago

Corp., which involved section 58(h), and the instant case.

Whereas section 58(h) was mandatory even in the absence of

implementing regulations, the application of section 59(g) lies

at the discretion of the Secretary.    See First Chicago Corp. v.

Commissioner, 88 T.C. 669, 676 n.11.   Unlike our decision in

First Chicago, where the Court reluctantly felt it necessary to

do the Secretary's job, the discretionary nature of section 59(g)

relieves us of that awkward responsibility.    First Chicago Corp.

v. Commissioner, 88 T.C. 669, 671, 676-677.

4. Petitioners Received a Current Tax Benefit from Tax
Preference Items

     Finally, if the Court were to sanction petitioners'

computation of AMTI, petitioners' tax liabilities would

approximate the amount of tax that they would have owed had they

been able to use the section 29 credits against RIT without

regard for the section 29(b)(5) limitation in the first place.
                               - 18 -

Petitioners, in effect, argue that the ceiling on the section 29

credit is raised for every dollar of credit they have.

Petitioners would transpose the express limitation of section

29(b)(5) into a dead letter.   It seems unlikely that Congress

intended to legislate a limitation so elastic as to be no

limitation at all.

     As a result of the section 29(b)(5) limitation, petitioners

cannot claim that sufficient section 29 credits would have

reduced RIT as much as their items of tax preference and that

therefore they received no benefit from the latter.     In fact,

only a small amount of petitioners' credits was allowed in 1988,

and none was permitted in 1989 and 1990 against RIT pursuant to

section 29(b)(5).    See supra pp. 3-4.    Thus, petitioners' tax

preference items reduced their RIT to an extent that their

section 29 credits could not match.      This sharply contrasts with

the situation in First Chicago Corp., in which the taxpayer's use

of foreign tax credits against RIT was not subject to an initial

limitation.   First Chicago Corp. v. Commissioner, 88 T.C. 665.

     The instant case is also readily distinguishable from

Breakell v. Commissioner, 97 T.C. 282, 286-287 (1991), affd. in

part, revd. in part and remanded without published opinion 996
F.2d 1231 (11th Cir. 1993), in which this Court held that

preference items should be reduced by certain itemized deductions

in calculating the taxpayers' AMT.      In Breakell, the Court was

concerned that if this were not done, the taxpayers would be
                                - 19 -

subject to the AMT on an amount that "in no way produced a tax

benefit."   Id. at 287.    Furthermore, the taxpayers' net operating

loss deduction therein was not eligible to be carried over to a

subsequent taxable year.     Id. at 284.    In contrast, as already

discussed, the Days currently benefited from their tax preference

items and may also indefinitely carry over liberated section 29

credits to subsequent taxable years due to section 53.

     To reflect the foregoing,

                                         Decision will be entered

                                 for respondent.
                                   - 20 -

                                  Appendix

SEC. 29(b)(5).

     (b)   Limitations and Adjustments.--

           *       *     *    *    *        *   *

          (5) Application with other credits.--The credit
     allowed by subsection (a) for any taxable year shall not
     exceed the excess (if any) of --

                (A) the regular tax for the taxable year reduced
           by the sum of the credits allowable under subpart A and
           sections 27 and 28, over

                   (B)   the tentative minimum tax for the taxable
           year.

SEC. 53.   CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.

     (a) Allowance of Credit.--There shall be allowed as a
credit against the tax imposed by this chapter for any taxable
year an amount equal to the minimum tax credit for such taxable
year.

     (b) Minimum Tax Credit.--For purposes of subsection (a),
the minimum tax credit for any taxable year is the excess (if
any) of --

          (1) the adjusted net minimum tax imposed for all prior
     taxable years beginning after 1986, over

          (2) the amount allowable as a credit under subsection
     (a) for such prior taxable years.

     (c) Limitation.--The credit allowable under subsection (a)
for any taxable year shall not exceed the excess (if any) of --

          (1) The regular tax liability of the taxpayer for such
     taxable year reduced by the sum of the credits allowable
     under subparts A, B, D, E, and F of this part, over

           (2)   the tentative minimum tax for the taxable year.

     (d)   Definitions.--For purposes of this section--

           (1)   Net minimum tax.--
                   - 21 -

     (A) In General.--The term "net minimum tax" means
the tax imposed by section 55.

     (B) Credit Not Allowed For Exclusion
Preferences.--

         (i) Adjusted Net Minimum Tax.--The adjusted
    net minimum tax for any taxable year is--

              (I) the amount of the net minimum tax
         for such taxable year, reduced by

              (II) the amount which would be the net
         minimum tax for such taxable year if the only
         adjustments and items of tax preference taken
         into account were those specified in clause
         (ii) and if section 59(a)(2) did not apply.

         (ii) Specified Items.--The following are
    specified in this clause--

              (I) the adjustments provided for in
         subsection (b)(1) of section 56, and

              (II) the items of tax preference
         described in paragraphs (1), (5), and (7) of
         section 57(a).

         (iii) Special Rule.--The adjusted net
    minimum tax for the taxable year shall be
    increased by the amount of the credit not allowed
    under section 29 (relating to credit for producing
    fuel from a nonconventional source) solely by
    reason of the application of section 29(b)(6)(B)
    or not allowed under section 28 solely by reason
    of the application of section 28(d)(2)(B), or not
    allowed under section 30 solely by reason of the
    application of section30(b)(3)(B).

         (iv) Credit Allowable For Exclusion
    Preferences of Corporations.--In the case of a
    corporation--

              (I) the preceding provisions of this
         subparagraph shall not apply, and

              (II) the adjusted net minimum tax for
         any taxable year is the amount of the net
         minimum tax for such year increased by the
                                - 22 -

                       amount of any credit not allowed under
                       section 29 solely by reason of the
                       application of section 29(b)(5)(B) or not
                       allowed under section 28 solely by reason of
                       the application of section 28(d)(2)(B).

          (2) Tentative Minimum Tax.--The term "tentative
     minimum tax" has the meaning given to such term by section
     55(b).

SEC. 55.    ALTERNATIVE MINIMUM TAX IMPOSED.

     (a) General Rule.--There is hereby imposed (in addition to
any other tax imposed by this subtitle a tax equal to the excess
(if any) of--

            (1)   the tentative minimum tax for the taxable year,
     over

            (2)   the regular tax for the taxable year.

     (b)    Tentative Minimum Tax.--For purposes of this part--

          (1) In general.--The tentative minimum tax      for the
     taxable year is--

                 (A) 20 percent (21 percent in the case of a
            taxpayer other than a corporation) of so much of the
            alternative minimum taxable income for the taxable year
            as exceeds the exemption amount, reduced by

                 (B) the alternative minimum tax foreign tax
            credit for the taxable year.

          (2) Alternative Minimum Taxable Income.--The term
     "alternative minimum taxable income" means the taxable
     income of the taxpayer for the taxable year--

                 (A) determined with the adjustments provided in
            section 56 and section 58, and

                 (B) increased by the amount of the items of tax
            preference described in section 57.

If a taxpayer is subject to the regular tax, such taxpayer shall
be subject to the tax imposed by this section (and, if the
regular tax is determined by reference to an amount other than
                                 - 23 -

taxable income, such amount shall be treated as the taxable
income of such taxpayer for purposes of the preceding sentence).

     (c)   Regular Tax.--

          (1) In general.--For purposes of this section, the
     term "regular tax" means the regular tax liability for the
     taxable year (as defined in section 26(b)) reduced by the
     foreign tax credit allowable under section 27(a) and the
     section 936 credit allowable under section 27(b). Such term
     shall not include any tax imposed by section 402(e) and
     shall not include any increase in tax under section 47 or
     subsection (j) or (k) ofsection 42.

          (2) Cross references.--For provisions providing that
     certain credits are not allowable against the tax imposed by
     this section, see sections 26(a), 28(d)(2), 29(b)(5), and
     38(c).

     (d)   Exemption Amount.--For purposes of this section--

          (1) Exemption amount for taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation, the term "exemption   amount" means--

                (A)   $40,000 in the case of --

                      (i)    a joint return, or

                      (ii)    a surviving spouse,

                (B)   $30,000 in the case of an individual who--

                      (i)    is not a married individual, and

                      (ii)    is not a surviving spouse, and

                (C)   $20,000 in the case of--

                     (i) a married individual who files a
                separate return, or

                      (ii)    an estate or trust.

          For purposes of this paragraph, the term "surviving
     spouse" has the meaning given to such term by section
     2(a), and marital status shall be determined under
     section 7703.
                               - 24 -

SEC. 57.   ITEMS OF TAX PREFERENCE.

     (a) General Rule.--For purposes of this part, the items of
tax preference determined under this section are--

           (1)   Depletion.-- * * *

           (2)   Intangible drilling costs.-- * * *

                 *    *    *    *       *   *   *

           (6)   Appreciated property charitable deduction.