Attorney-at-Law

ONE RETURN, SEPARATE TAXPAYERS

In Uncategorized on 04/21/2016 at 16:37

Whom MFJ hath joined together, AMT credit puts asunder in a saga of first impression, Nadine L. Vichich, 146 T. C. 12, filed 4/21/16.

Years before Nadine’s late husband William became her husband, and while he had another wife, he exercised an ISO that led to AMT. If you don’t know what that means, consider yourself lucky.

Incentive stock options are generally (love that word) taxed, not when exercised, but rather on the difference between option price and gain at disposition. But they’re preference items for alternative minimum tax, and are taxed at FMV of the stock acquired at time of exercise, even when the exerciser gets nothing but the stock.

This is OK if the stock appreciates; the lucky exerciser gets two sets of bases: the basis at exercise (option price), or the FMV on which s/he paid AMT.

What if the stock tanks? “Section 53 allows a taxpayer to claim a credit for AMT paid in prior years, adjusted for specific items.  The credit is limited to the amount by which a taxpayer’s regular tax liability, reduced by certain other credits, exceeds the taxpayer’s tentative minimum tax.  Sec. 53(c).” 146 T. C. 12, at p. 6.

But the unlucky exerciser may not have enough regular tax liability in the year wherein s/he disposes of the now-tanked stock to use the credit. So back in 2006, with amendments in 2007 and 2008, Congress remedied the problem with carryforwards of the credit.

Remember when Congress actually did something? Oh, sorry, I forgot this is a non-political blog.

Well, Nadine’s late husband William didn’t use all his credit while married to his previous wife (with whom he filed MFJ); then he divorced her, married Nadine, merged their finances, filed MFJ, and then died with credit still unused.

Nadine took the remaining credit. IRS disallowed and handed Nadine a SNOD.

Judge Nega asks, what about previous wife? Both IRS and Nadine assume that late husband William owned the whole thing. But when late husband William and previous wife split, there was no Section 53(c) largesse, so there was no credit to split.

Now does the credit belong to Nadine, since late husband William is late husband William?

This is a case of first instance. So Judge Nega analogizes to deductions, although Nadine’s attorneys claim they aren’t the same. Maybe not always, says Judge Nega, but here it’s close enough.

“Marriage affords its entrants certain benefits, among them the option of filing joint returns.  The Code treats married taxpayers who file jointly as one taxable unit; however, it does not convert two spouses into one single taxpayer.  Joint filing allows spouses to aggregate their income and deductions but ‘does not create a new tax personality’. 146 T. C. 12, at p. 12. (Citations omitted).

Whom the Code hath joined together maybe aren’t really together.

“Thus, petitioner and William Vichich remained separate taxpayers even though they merged finances and filed joint returns during their marriage.  And while joint filing may permit spouses to ‘overr[i]de the limitations incident to separate returns’, see Taft v. Helvering, 311 U.S. 195, 198 (1940), it generally does not permit either spouse to inherit or otherwise retain after the marriage ends a tax benefit that was originally conferred upon the other spouse.  This reasoning is supported in both the Code and the caselaw.” 146 T. C. 12, at pp. 12-13.

Judge Nega cites some NOL cases to show that the spouse who incurred the losses is the one who keeps them, and the losses die with that spouse. And Rev. Rul. 74-175, 1974-1 C.B. 52 (which Judge Nega Skidmore’s into this discussion) says NOLs are decedent’s income and go on the final 1040, not on the estate’s 1041.

“While we recognize that the purposes of the AMT credit and the NOL carryover are not identical, we nonetheless find informative the authorities limiting the transfer of NOL carryovers between spouses.  Petitioner offers us no reason not to extend those authorities to this case.  She grounds her claim to the credit in issue entirely in the remedial purposes she alleges underlie section 53(e) and (f).  Those subsections, however, have no bearing on her ability to take into account, for purposes of section 53(b)(1), the adjusted net minimum tax imposed on her husband before their marriage.  Therefore, because petitioner could not deduct for a postmarital year an NOL incurred by her husband even during their marriage, much less before it, we conclude, on the basis of the record and the arguments before us, that, she was not entitled to take into account under section 53(b)(1) her husband’s premarital adjusted net minimum tax liability in computing her own minimum tax credit….” 146 T. C. 12, at p. 16.

I do want to give a Taishoff “Good Try, First Class” to Nadine’s counsel, Stephen L. Kadish, esq., and Matthew F. Kadish, esq. As the golfers say “Never up, never in.”

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