Robert Craig Colton is back; you’ll remember Robert Craig was an entrant in my no-prize best excuse sweepstakes. If not, see my blogpost “Never Heard Of It,” 1/19/21. “It” is the Alternative Minimum Tax, 26USC§68. As I said back in January, “I wish I had never heard of it, also.”

So back come Robert Craig Colton and Alina Mazwin, 2021 T. C. Memo. 44, filed 4/21/21. Alina wants innocent spousery, but Judge Albert G. (“Scholar Al”) Lauber takes that off today’s menu. Today’s special is summary J for IRS for the $3K AMT Robert Craig owes.

AMT is a classic trap for the unwary. It readjusts, recalculates, hornswoggles and swangdangles one’s return as only Congress can do.

Robert Craig and his loved-once settled a litigation, the proceeds of which Robert Craig had to split with loved-once. The bank reported the whole $125K, and IRS hit Robert Craig up for all thereof. Robert Craig showed IRS that loved-once got half, and that the attorney who represented them in that lawsuit got a fee of $80K. I will not characterize the size of the fee in proportion to the recovery; I report, you decide.

The fee, alas, triggers the problem.

“Petitioners themselves reported the attorney’s fees as a miscellaneous itemized deduction. They do not contend that the settlement proceeds arose from a lawsuit involving a claim of unlawful discrimination or a whistleblower action, for which an above-the-line deduction for attorney’s fees might be available. See sec.62(a)(20) and (21).” 2021 T. C. Memo. 44, at p. 6, footnote 3.

OK, so the 2% AGI cutout of miscellaneous itemized deductions leaves Robert Craig with a $78K deduction. Whether loved-once should have gotten a piece of that deduction, seeing as how she got half the recovery, does not occur to Judge Scholar Al, IRS, or Robert Craig. Loved-once isn’t a party to this case, anyway.

But the kicker here is AMT. The culprit is Section 56(b)(1)(A)(i). Miscellaneous itemized deductions aren’t deductions for AMT.

I’ll let Judge Scholar Al explain.

“The IRS determined that petitioners had AMTI of $101,111–the sum of their regular taxable income of $14,958, personal exemptions of $8,100, and a miscellaneous itemized deduction of $78,053. See secs. 55(b)(2), 56(b)(1)(A)(i),(E). The IRS then subtracted from their AMTI an exemption of $83,800. See sec.55(b)(1)(A)(ii), (d)(1)(A), (4)(A)(ii). The difference between those amounts, or $17,311, was multiplied by 26%, the applicable AMT rate. See sec. 55(b)(1)(A)(i). That produced a tentative minimum tax of $4,501, from which the IRS subtracted petitioners’ regular tax liability, or $1,498, to yield an AMT liability of $3,003. See sec. 55(a).” 2021 T. C. Memo. 44, at p. 5.

Robert Craig also objects to IRS going after him while this case was pending, but the target was a C Corp in which Robert Craig has some kind of interest, hence no impact here.

Well, now, like the rest of us, Robert Craig has heard of AMT.