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					                                    CHAPTER 15

                         ALTERNATIVE MINIMUM TAX

                   SOLUTIONS TO PROBLEMS MATERIALS




                                                                Status:       Q/P
Question/                                                       Present     in Prior
Problem                          Topic                          Edition     Edition

   1        AMT purpose                                         Unchanged      1
   2        AMTI: direct versus indirect calculation approach   Unchanged      2
   3        AMT adjustments versus tax preferences              New
   4        Tax preferences                                     Modified       4
   5        Tax preferences                                     Unchanged      5
   6        AMT formula                                         Unchanged      6
   7        Regular income tax liability versus AMT             Unchanged      7
   8        AMT exemption amount                                Unchanged      8
   9        AMT rates                                           New
  10        AMT and nonrefundable tax credits                   Unchanged    10
  11        AMT adjustment for cost recovery on personalty      New
  12        AMT adjustment for mining exploration and           Unchanged    12
                development costs
  13        Issue ID                                            Unchanged    13
  14        Long-term contract income adjustment                Unchanged    14
  15        Incentive stock options adjustment                  Modified     15
  16        Regular income tax adjusted basis versus AMT        Unchanged    16
                adjusted basis
  17        Issue ID                                            Modified     17
  18        Passive activity losses AMT adjustment              Unchanged    18
  19        ATNOLD                                              Unchanged    19
  20        AMT and itemized deductions                         Unchanged    20
  21        Issue ID                                            Unchanged    21
  22        AMT cutback adjustment                              Unchanged    22
  23        AMT and interest                                    Unchanged    23
  24        AMT and personal and dependency exemptions          New
                and standard deduction
  25        Percentage depletion preference                     Unchanged    25

                                         15-1
15-2               2005 Comprehensive Volume/Solutions Manual


                                                                      Status:        Q/P
Question/                                                             Present      in Prior
Problem                           Topic                               Edition      Edition

    26      Private activity bond preference                         Unchanged      26
    27      Purpose of AMT credit                                    Unchanged      27
    28      Corporate versus noncorporate AMT                        New
    29      Effect of ACE adjustment on financial and tax            Unchanged      29
                accounting
    30      AMT planning on recognition of income                    Unchanged      30
*   31      AMT base                                                 Modified       31
*   32      AMT calculation                                          Modified       32
*   33      AMT calculation                                          Modified       33
*   34      AMT exemption amount                                     Modified       34
*   35      AMT and nonrefundable credits                            Unchanged      35
    36      AMT adjustments: circulation expenditures                Modified       36
*   37      Adjustments for circulation expenditures                 Unchanged      37
*   38      Cost recovery adjustment for AMT: realty                 New
    39      Cost recovery adjustment for AMT: personalty             Modified       39
    40      Mining and exploration costs adjustment                  Unchanged      40
*   41      AMT adjustment for long-term contract                    Unchanged      41
*   42      Incentive stock option adjustment                        Unchanged      42
    43      Adjustments for incentive stock options                  Unchanged      43
*   44      AMT adjustments: adjusted gain or loss                   New
    45      Computing AMT passive loss                               Unchanged      45
    46      Itemized deductions adjustment for AMT and               Unchanged      46
                medical expenses
* 47        AMT adjustments for itemized deductions                  Unchanged      47
* 48        Mortgage interest adjustment for AMT                     Unchanged      48
  49        Adjustment for investment interest and private           Unchanged      49
                activity bond preference
* 50        Itemized deductions adjustment for AMT                   Unchanged      50
  51        AMT standard deduction and personal exemption            Modified       51
                adjustments
  52        AMT percentage depletion preference                      Unchanged      52
* 53        AMT IDC preference                                       Unchanged      53
  54        Tax preference items and AMT adjustments                 Unchanged      54
                including private activity bonds
*   55      Comprehensive AMT calculation                            Modified       55
*   56      AMT calculation                                          Unchanged      56
*   57      Computation of taxable income and AMT                    Unchanged      57
*   58      Computation of taxable income and AMT                    Modified       58
*   59      AMT tax credit carryover                                 Unchanged      59
*   60      Exemption from corporate AMT for small                   Modified       60
                corporations
*   61      ACE adjustment                                           Unchanged      61
*   62      Corporate AMT                                            Unchanged      62
*   63      Corporate AMT                                            Modified       63
*   64      Cumulative                                               Modified       64
*   65      Cumulative                                               Modified       65

            *The solution to this problem is available on a transparency master.
                           Alternative Minimum Tax             15-3



                                                     Status:
Research                                             Present
Problem                         Topic                Edition

   1       Tax preference: pre-1987 depreciation     New
   2       AMT and Form 6251                         New
   3       Internet activity                         New
15-4                   2005 Comprehensive Volume/Solutions Manual


                                     CHECK FIGURES

31.     $196,625.                              44.c.   Negative AMT adjustment of
32.a.   $30,328.                                       $33,000.
32.b.   $61,355.                               45.     No deduction; $11,750 suspended
33.     Case 1: MFJ $35,607; single                    regular tax; $3,000 suspended AMT.
        $29,342.                               46.a.   $14,500.
        Case 2: MFJ $16,607; single            46.b.   $9,500.
        $10,342.                               46.c.   $5,000 positive.
34.     Case 1: Single $30,875; MFJ            47.a.   $14,500.
        $58,000; MFS $10,250.                  47.b.   $8,500 positive.
        Case 2: Single $5,875; MFJ             48.     $5,000 positive.
        $33,000; MFS $0.                       49.     Regular income tax $10,000; AMT
        Case 3: Single $0; MFJ $0; MFS $0.             $11,500.
35.a.   $0.                                    50.a.   $17,450 positive.
35.b.   $78,000.                               50.b.   $17,450 positive and $1,100 tax
36.     Expensing saves $29,067; amortizing            preference.
        saves $34,440.                         51.     $223,950.
37.     2004 positive $90,000; 2005            52.     $9,000 tax preference.
        negative $5,000.                       53.     $24,000.
38.a.   $2,087 positive adjustment for         54.     $51,950.
        Forsythia Acres.                       55.     $76,600 taxable income; $24,180
38.b.   $2,386 positive adjustment for                 tentative AMT.
        Forsythia Acres; $0 for SquareOne.     56.     $17,961.
39.a.   $15,000 positive.                      57.a.   $125,950.
39.b.   Elect 150% DB method.                  57.b.   $35,281.
40.a.   $540,000 positive adjustment for       58.     Regular income tax is $32,091 and
        2004.                                          AMT is $39,358.
40.b.   Amortize expenditures over 10 years.   59.     $64,965.
41.     $120,000 positive adjustment for       60.a.   Exempt initially from AMT as a
        2004; $120,000 negative adjustment             “small corporation” in 1998.
        for 2005.                              60.b.   No.
42.a.   No reporting required in 2004.         61.     2003 $750 positive; 2004 $750
42.b.   No reporting required in 2008.                 positive; 2005 $1,500 negative.
42.c.   Positive adjustment of $30,000 for     62.     Quincy $22,000; Redland $24,500;
        AMT in 2009.                                   Tanzen $64,000.
42.d.   Regular income tax recognized gain     63.a.   $884,000.
        of $80,000; AMT recognized gain of     63.b.   AMTI $4,690,000; tentative AMT
        $50,000.                                       $938,000.
43.     $27,000 positive AMT adjustment in     63.c.   AMT $54,000.
        2004; $27,000 negative AMT             64.     $1,113 regular tax liability plus
        adjustment in 2005.                            $18,238 AMT.
44.a.   Regular income tax recognized gain     65.     $38,529 regular tax liability plus
        of $268,000 on the building.                   $10,846 AMT.
44.b.   AMT recognized gain of $235,000
        on the building.
                               Alternative Minimum Tax                                      15-5


DISCUSSION QUESTIONS

1.   Through the use of exclusions, deductions, and credits, the regular income tax liability
     can be reduced or eliminated. Congress felt that some taxpayers with substantial
     economic incomes were taking undue advantage of these tax reduction opportunities and
     thereby were concerned about the inequality that resulted. Therefore, the AMT was
     enacted. p. 15-2

2.   Starting with taxable income in calculating the AMT is the indirect approach. This is the
     approach normally used and the one followed in Form 6251. However, the AMT also can
     be calculated using the direct approach.

     Gross income computed by applying the AMT rules
     Minus:        Deductions computed by applying the AMT rules
     Equals:       AMTI before tax preferences
     Plus:         Tax preferences
     Equals:       AMT income
     Minus:        Exemption
     Equals:       AMT base
     Times:        Rates
     Equals:       Tentative AMT before foreign tax credit
     Minus:        AMT foreign tax credit
     Equals:       Tentative AMT
     Minus:        Regular income tax liability before credits other than the foreign tax credit
     Equals:       AMT

     Note that both approaches produce the same amount of AMT. pp. 15-3 to 15-5 and
     Figure 15-1

3.   Tax preferences are always positive. Through the use of tax preferences, the AMT is
     designed to take back part or all of the tax benefits of certain exclusions or deductions
     allowed to taxpayers for regular income tax purposes.

     AMT adjustments can be both positive and negative. Most, although not all, AMT
     adjustments are timing differences in the treatment for regular income tax purposes and
     AMT purposes. As such, the adjustments will reverse and eventually net to zero.

     pp. 15-4 to 15-6
4.   a., d., and e. are tax preferences for the AMT. p. 15-6

5.   d. and e. are tax-preferences for the AMT. a. and b. are neither an AMT adjustment nor a
     tax preference. c. is an AMT adjustment. pp. 15-4 to 15-6

6.   The AMT tax formula is as follows:

     Regular taxable income
     Plus or minus: Adjustments
     Equals:        Taxable income after AMT adjustments
     Plus:          Tax preferences
     Equals:        Alternative minimum taxable income
     Minus:         AMT exemption
     Equals:        Alternative minimum tax base
     Times:         26% or 28% rate
15-6                     2005 Comprehensive Volume/Solutions Manual


       Equals:          Tentative AMT before foreign tax credit
       Minus:           Alternative minimum tax foreign tax credit
       Equals:          Tentative minimum tax
       Minus:           Regular tax liability*
       Equals:          Alternative minimum tax (if amount is positive)

       *Regular tax liability for the year reduced by any allowable foreign tax credit.

       Figure 15-2

 7.    The statement is incorrect. There is an AMT liability only if the tentative AMT exceeds
       the regular income tax liability. The amount of the excess is the AMT. The total tax
       liability is the summation of the regular income tax liability and the AMT. p. 15-9

 8.    a.        The AMT exemption can be thought of as a materiality amount. It relieves
                 taxpayers who do not have substantial adjustments and preferences from the
                 burden of the AMT.
       b.        The initial amount (prior to the phaseout) of the exemption is as follows:

                    $40,250 for a single taxpayer.

                    $58,000 for married taxpayers filing jointly.

                    $29,000 for married taxpayers filing separately.

       c.        The phaseout of the exemption amount is an application of the wherewithal to pay
                 concept. As the ability to pay increases as measured by the taxpayer’s AMTI, the
                 justification for relieving the taxpayer of the burden of the AMT decreases.

       p. 15-8

 9.    There are two AMT rates for the individual taxpayer. The rates are multiplied by the
       AMT base to produce the tentative AMT (before foreign tax credit). The 26% rate
       applies to the first $175,000 ($87,500 for married filing separately) of the AMT base, and
       the 28% rate applies to the excess over $175,000. If the individual taxpayer has net
       capital gain, the alternative tax rate that is used in the regular tax liability calculation is
       also available for AMT purposes. p. 15-8
10.    Historically the answer was no. Only the foreign tax credit could reduce the regular
       income tax liability below the amount of the tentative AMT. However, now certain
       nonrefundable personal credits (e.g., child tax credit, adoption expenses credit, credit for
       elective deferrals and IRA contributions) are permitted to offset both the regular income
       tax liability and the AMT. p. 15-9

11.    Since Tad placed the machinery in service prior to January 1, 1999 (and assuming it was
       depreciated under MACRS rather than ADS), a positive AMT adjustment for
       depreciation is required in 1998 and a negative AMT adjustment in 2004. For most
       personal property placed in service after 1986 (MACRS property), the MACRS deduction
       for regular income tax purposes is based on the 200% declining-balance method with a
       switch to straight-line when that method produces a larger depreciation deduction. For
       AMT purposes, the taxpayer must use ADS for such property placed in service before
       January 1, 1999. ADS is based on the 150% declining-balance method with a similar
       switch to straight-line. Thus, the MACRS deduction for personal property is larger than
                                Alternative Minimum Tax                                       15-7


      the ADS deduction in the early years of an asset’s life (e.g., 1998). Conversely, the ADS
      deduction is larger than the MACRS deduction in the later years (e.g., 2004). pp. 15-11
      and 15-12

12.   For regular income tax purposes, mining exploration and development costs may be
      expensed in the year incurred. For AMT purposes, such costs must be amortized over 10
      years. The AMT adjustment for mining exploration and development costs is equal to the
      amount expensed minus the amount that would have been allowed if the costs had been
      capitalized and amortized ratably over a 10-year period. The AMT adjustment can be
      avoided if the taxpayer elects to write off the costs over a 10-year period for regular
      income tax purposes. pp. 15-12 and 15-13

13.   Rick may be misinformed regarding the AMT. Merely because the AMT exemption
      amount is zero and there are adjustments or tax preferences present does not
      automatically mean an AMT will result. What Rick needs to do is to determine if an
      AMT (and the amount) would result if he expenses the mining exploration and
      development costs for regular income tax purposes. pp. 15-8 and 15-13

14.   For a long-term contract, taxpayers are required to use the percentage of completion
      method for AMT purposes. If a taxpayer uses the completed contract method for regular
      income tax purposes, this will give rise to an AMT adjustment equal to the difference
      between income reported under the percentage of completion method and the amount
      reported using the completed contract method. The adjustment can be either positive or
      negative depending on the amount of income recognized under the different methods.
      p. 15-13

15.   a.     If Megan exercises the incentive stock option (ISO), she will have an AMT
             adjustment of $7,000 [($60 fair market value – $25 option price) X 200 shares] in
             the first taxable year in which the rights in the stock are freely transferable or are
             not subject to a substantial risk of forfeiture. She will not be required to recognize
             any income for regular income tax purposes as a result of exercising the ISOs.
             For AMT purposes, the basis of such stock is equal to the fair market value taken
             into account in determining the adjustment. Examples 10 and 11 and related
             discussion

      b.     Yes. If Megan exercises the option and disposes of the stock in the same tax year,
             there is no AMT adjustment. p. 15-14

16.   The regular income tax adjusted basis for the building is determined by subtracting the
      regular income tax depreciation deductions. The AMT adjusted basis for the building is
      determined by subtracting the AMT depreciation deductions. Since the regular income
      tax and the AMT depreciation deductions are not the same for a building placed in
      service before January 1, 1999, the adjusted basis for regular income tax and AMT
      purposes will differ. Consequently, the recognized gain or loss for regular income tax
      and AMT purposes will also differ. pp. 15-14 to 15-16

17.   The relevant issues are the tax consequences of each of the two proposed transactions for
      both regular income tax purposes and for AMT purposes. The AMT analysis is relevant
      only if the AMT applies since the adjustment would be negative. For regular income tax
      purposes, the sale to Abby in 2005 would result in deferring the reporting of the gain of
      $85,000 until 2005. This deferral treatment also would apply for AMT purposes (i.e., the
      realized loss of $10,000 cannot be recognized). If the sale occurred in 2004 to Ed, for
      regular income tax purposes, the $85,000 realized gain is recognized. However, for AMT
15-8                   2005 Comprehensive Volume/Solutions Manual


       purposes, there would be a $95,000 negative adjustment for the difference between the
       $85,000 gain for regular income tax purposes and the $10,000 loss for AMT purposes.
       Note also that for regular income tax purposes, any portion of the $85,000 recognized
       gain that is classified as ordinary income will be subject to a lower tax rate in 2004 (25%)
       than in 2005 (28%). pp. 15-14 to 15-16

18.    Income or loss from passive activities is computed differently for regular income tax
       purposes and for AMT purposes. For example, the depreciation and depletion rules differ
       for regular income tax and AMT purposes. The resulting difference in net income (loss)
       could require an AMT adjustment. pp. 15-16, 15-17, and Example 15

19.    Positive adjustments and tax preferences are added to the regular income tax NOL in
       calculating the ATNOLD (i.e., making the ATNOLD a smaller amount). Negative
       adjustments are subtracted from the regular income tax NOL in calculating the ATNOLD.
       p. 15-17

20.    The tax treatment for regular income tax and AMT purposes is the same for the
       following:

              Casualty losses
              Charitable contributions

       A deduction for state income taxes, miscellaneous itemized deductions subject to the 2%
       floor, and real estate taxes is not permitted for AMT purposes. While a deduction is
       permitted for medical expenses for AMT purposes, the floor is 10% of AGI rather than
       the 7.5% floor.

       pp. 15-17 to 15-19

21.    The obvious issue is whether Matt should follow the friend’s advice in order to increase
       his itemized deductions. On the surface, this appears to be sound tax advice. Factoring
       in the effect of indexing on the standard deduction, it appears that Matt may have to use it
       in the future. Incurring the mortgage on the beach house would enable him to continue to
       itemize deductions. However, another issue that needs to be addressed is whether Matt
       will be subject to the AMT. The mortgage interest on the beach house will be deductible
       for AMT purposes, since it is qualified housing interest. In addition, determination needs
       to be made of whether the tax-exempt bonds in which Matt is investing are private
       activity bonds, since the interest on such bonds is a tax preference. pp. 15-19 and 15-22

22.    The purpose of the cutback adjustment for regular income tax purposes is to partially
       phase out the deduction for itemized deductions for high income taxpayers (i.e., AGI
       exceeds a threshold amount). The AMT calculation takes a different approach by
       disallowing certain itemized deductions (e.g., state income taxes, property taxes) and by
       reducing the amount of others (e.g., medical expenses, qualified housing interest versus
       qualified residence interest). There is no cutback adjustment in calculating the AMT.
       Since the starting point for calculating the AMT is taxable income, there is a negative
       adjustment for the amount of the cutback adjustment in calculating AMTI. p. 15-18

23.    The interest deduction for regular income tax purposes includes qualified residence
       interest, investment interest to the extent of net investment income reported in computing
       taxable income, and qualified interest on student loans (i.e., a deduction for AGI). The
       alternative minimum tax itemized deduction for interest includes qualified housing
       interest, plus other interest to the extent of qualified net investment income that is
                                 Alternative Minimum Tax                                      15-9


      included in the AMT base, and qualified interest on student loans. Qualified housing
      interest could be less than qualified residence interest. pp. 15-19 and 15-20

24.   A taxpayer who does not itemize is required to make an adjustment (positive) for the
      standard deduction. The adjustment is required because the standard deduction is not
      allowed for AMT purposes and the starting point for AMT is taxable income. Similarly,
      a positive adjustment is required for personal and dependency exemptions in calculating
      AMTI. pp. 15-20 and 15-21

25.   A tax preference is created for AMT purposes once the adjusted basis of the mineral
      deposit is reduced to $0 and percentage depletion continues to be deducted. p. 15-21

26.   For regular income tax purposes, the $18,000 of interest income is excludible from gross
      income and the $7,000 of interest expense is not deductible. For AMT purposes, interest
      earned on private activity bonds is included in AMTI. Interest incurred in purchasing or
      carrying such bonds is offset against the interest income. Also, for AMT purposes, the
      interest earned (net of any related expenses) on private activity bonds is included in the
      calculation of net investment income in calculating the investment interest deduction.
      p. 15-22

27.   The purpose of the AMT credit is to provide equity for the taxpayer when timing
      differences that give rise to AMT adjustments reverse. The credit arises when positive
      adjustments are included in the AMT base. It is used to reduce the regular income tax
      liability for prior years’ AMT liability attributable to timing differences.

      To determine the amount of the AMT credit, it is necessary to compute the AMT with
      timing adjustments and AMT exclusions (non-timing adjustments and preferences)
      included in the AMT base. The AMT credit carryover is the difference between the
      amount so computed and the AMT that would result without including timing
      adjustments in the AMT base. The AMT credit may be carried over indefinitely.
      Examples 29 to 31 and related discussion

28.   To be exempt from the AMT, a corporation must be a “small corporation.” A corporation
      is classified as a small corporation if it had average annual gross receipts of less than $5
      million for the three-year period beginning after December 31, 1993. A corporation will
      continue to be classified as a small corporation if its average annual gross receipts for the
      three-year period preceding the current tax year and any intervening three-year periods do
      not exceed $7.5 million. However, if a corporation ever fails the gross receipts test, it is
      ineligible for small corporation classification in future tax years. Note that a corporation
      will automatically be classified as a small corporation in the first year of existence.
      p. 15-27

29.   Through the ACE adjustment, Congress is indirectly imposing a conformity requirement
      on corporations. While a corporation may still choose to use different methods for tax
      and financial accounting purposes, it may no longer be able to do so without the
      possibility of incurring AMT as a result of the ACE adjustment. Thus, a corporation may
      incur AMT not only because of specifically targeted adjustments and preferences, but also
      as a result of any methods that cause adjusted current earnings to exceed AMTI before the
      ACE adjustment. pp. 15-28 to 15-30

30.   Situations can arise when it would be advisable for a taxpayer to accelerate income into
      an AMT year. A 28% to 35% taxpayer who is subject to the AMT in the current year
      should consider accelerating income into the AMT year so the income will be taxed at a
      26% or 28% rate. For example, collectibles that produce long-term capital gain can be
15-10                  2005 Comprehensive Volume/Solutions Manual


        sold in the AMT year, exposing the gain to a possible 26% rate, rather than the 28%
        alternative capital gains rate that might otherwise apply. Examples 36 and 37 and related
        discussion


PROBLEMS

31.     Rachel’s taxable income                                                          $162,000
        Plus:     Positive AMT adjustments                                                 95,000
                  Tax preferences                                                          35,000
        Less:     Negative AMT adjustments                                                (80,000)
        Equals: AMTI                                                                     $212,000
        Less:     Exemption [$40,250 – 25%($212,000 – $112,500)]                          (15,375)
        Equals: AMT base                                                                 $196,625

        pp. 15-4 to 15-8
32.     a.     Calculation of regular income tax liability:
               Tax on $130,000:
                 On $70,350                                                              $ 14,325
                 On $59,650 X 30%                                                          16,702
                                                                                         $ 31,027

               Calculation of AMT:
               Taxable income                                                            $130,000
               Adjustments                                                                 62,000
               Tax preferences                                                             48,000
               AMTI                                                                      $240,000
               Exemption [$40,250 – 25%($240,000 – $112,500)]                              (8,375)
               AMT base                                                                  $231,625

               Rate:
                 26% X $175,000                                          $45,500
                 28% X $ 56,625                                           15,855
               Tentative AMT                                                             $ 61,355
               Regular income tax liability                                               (31,027)
               AMT                                                                       $ 30,328
        b.     Arthur’s total tax liability is $61,355, the summation of the regular tax liability of
               $31,027 and the AMT of $30,328.

        c.                      Willis, Hoffman, Maloney, and Raabe, CPAs
                                          5191 Natorp Boulevard
                                             Mason, OH 45040

               February 6, 2005

               Mr. Arthur East
               100 Colonel’s Way
               Conway, SC 29526
               Dear Mr. East:
                                   Alternative Minimum Tax                                   15-11


               As you requested, we have calculated your Federal tax liability for 2004. The
               total amount is $61,355. This consists of the regular income tax liability of
               $31,027 and the alternative minimum tax (AMT) liability of $30,328. The
               calculation of the regular income tax liability appears on Form 1040.

               Since this is the first year that you have been subject to the AMT, I thought that I
               should comment on this additional tax. The calculation of the AMT appears on
               Form 6251. The AMT is a parallel income tax system. Its purpose is to provide
               assurance that no taxpayer with substantial economic income can avoid significant
               tax liability by using exclusions, deductions, and credits. As indicated on Form
               6251, some of the exclusions and deductions on your Form 1040 are disallowed
               on your Form 6251. Such items are treated as positive adjustments and
               preferences on Form 6251.

               I would like to work with you to minimize your AMT in the future. Since this is
               our first year to do tax compliance work for you, we think we can use tax planning
               techniques to reduce your Federal tax liability. Please call me so we can schedule
               a meeting at a time convenient to you.

               Sincerely,


               Steve Ash, CPA
               Partner

      pp. 15-6 to 15-9 and Figure 15-2

33.   Case 1
                                                                        Married
                                                                     filing jointly   Single
           Tentative AMT                                               $194,000     $194,000
      –    Regular tax liability                                       (158,393)** (164,658)*
      =    AMT                                                         $ 35,607     $ 29,342

           * $92,593 + $72,065 = $164,658.
           ** $86,328 + $72,065 = $158,393.

      Case 2
                                                                        Married
                                                                     filing jointly   Single
           Tentative AMT                                               $175,000     $175,000
      –    Regular tax liability                                       (158,393)** (164,658)*
      =    AMT                                                         $ 16,607     $ 10,342

      Figure 15-2

34.   Single taxpayer:
            Case 1          $40,250 – 25%($150,000 – $112,500) =        $30,875
            Case 2          $40,250 – 25%($250,000 – $112,500) =        $ 5,875
            Case 3          $40,250 – 25%($450,000 – $112,500) =        $    -0-
15-12                     2005 Comprehensive Volume/Solutions Manual


        Married filing jointly:
             Case 1        $58,000 – $0(no exemption phase out) =          $58,000
             Case 2        $58,000 – 25%($250,000 – $150,000) =            $33,000
             Case 3        $58,000 – 25%($450,000 – $150,000) =            $    -0-

        Married filing separately:
             Case 1        $29,000 – 25%($150,000 – $75,000) =             $10,250
             Case 2        $29,000 – 25%($250,000 – $75,000) =             $    -0-
             Case 3        $29,000 – 25%($450,000 – $75,000) =             $    -0-

        p. 15-8

35.     a.        Leona’s AMT is $0.

                  Tentative AMT                                                           $ 78,000
                  Regular income tax liability                                            (135,000)
                  Excess of tentative AMT over regular tax liability                     ($ 57,000)
                  Since the result is negative, Leona has no AMT.

        b.        The nonrefundable credits cannot reduce the regular income tax liability below the
                  amount of the tentative AMT. Therefore, Leona can use only $57,000 of the
                  $65,000 nonrefundable credits to reduce her regular income tax liability to
                  $78,000 ($135,000 – $57,000). The remaining $8,000 ($65,000 – $57,000) of
                  nonrefundable credits will be lost unless they are the type of credits which qualify
                  for carryback and/or carryforward.

        pp. 15-8, 15-9, and Figure 15-2

36.     Angela has two options available for the $123,000 of circulation expenditures. First, she
        could deduct the entire $123,000 in 2004. If she does this, she will have a positive AMT
        adjustment of $82,000 ($123,000 – $41,000) in 2004 and negative AMT adjustments of
        $41,000 ($0 – $41,000) in 2005 and 2006.

        Under the second option, Angela could elect to capitalize the circulation expenses and
        deduct them over a 3-year period (i.e., $41,000 per year). If this election is made, there is
        no AMT adjustment, since the deduction will be the same for regular income tax
        purposes and AMT purposes.
        The 28% bracket for single taxpayers begins at $70,350 and ends at $146,750 in 2004.
        The first $7,150 is taxed at 10%, the next $21,900 is taxed at 15%, and the next $41,300
        is taxed at 25%.

        If Angela deducts the entire $123,000 in 2004, she will have zero taxable income. As a
        result, she will have used $7,150 of the $123,000 deduction to offset income that would
        be taxed at 10%, $21,900 of the $123,000 deduction to offset income that would be taxed
        at a 15% rate, $41,300 to offset income that would be taxed at the 25% rate, and $52,650
        to offset income that would be taxed at 28%. Her maximum potential savings from this
        strategy will be $14,325 (the tax on $70,350) plus 28% on the remainder of $52,650
        ($123,000 – $70,350). Thus, the tax effect of the $123,000 deduction would be $29,067
        [$14,325 + .28($52,650)].
        The 28% bracket spans more than $41,000 in 2004 ($146,750 – $70,350 = $76,400), and
        the 28% bracket is likely to span a similar range in 2005 and 2006. If Angela writes off
                               Alternative Minimum Tax                                    15-13


      the circulation expenditures over three years at the rate of $41,000 per year, the entire
      $123,000 deduction will offset income that would be taxed at near 28% (i.e., 28% in 2004
      and 28% in 2005 and 2006). Therefore, Angela should be advised that she can achieve
      substantial tax savings by amortizing the circulation expenditures over a three-year
      period. Her tax savings from a $123,000 deduction spread over 3 years at 28% in 2004
      and 28% in 2005 and 2006 would be $34,440 [($41,000 X 28%) + ($41,000 X 28%) +
      ($41,000 X 28%)].

      In summary, Angela could save $29,067 in income tax if she expenses the circulation
      expenditures in the year incurred, but could save $34,440 if she amortizes them over 3
      years.

      Note: The time value of money should be considered in computing the final tax savings
      achieved by the three-year amortization strategy.

      p. 15-10
37.   Computation of adjustment for circulation expenditures:

      2004 regular income tax deduction                                       $135,000
      2004 AMT deduction ($135,000/3)                                          (45,000)
      Positive AMT adjustment in 2004                                         $ 90,000

      2005 regular income tax deduction                                       $ 60,000
      2005 AMT deduction: [($135,000/3) + ($60,000/3)]                         (65,000)
      Negative AMT adjustment in 2005                                        ($ 5,000)

      p. 15-10

38.   a.     Lonzo must recognize a positive AMT adjustment if the regular MACRS
             deduction (Table 8-8) exceeds the AMT deduction (Table 8-9)

             Forsythia Acres
             For 1998

             MACRS deduction for regular income
                tax purposes ($210,000 X 3.182%)                                $6,682
             Depreciation deduction for AMT purposes
                ($210,000 X 2.188%)                                             (4,595)
             Positive AMT adjustment                                            $2,087

      b.     Forsythia Acres
             For 2004

             MACRS deduction for regular income
                tax purposes ($210,000 X 3.636%)                                $7,636
             Depreciation deduction for AMT purposes
                ($210,000 X 2.500%)                                             (5,250)
             Positive AMT adjustment                                            $2,386
15-14                2005 Comprehensive Volume/Solutions Manual


             Square One
             For 2004

             MACRS deduction for regular income
                tax purposes ($625,000 X 2.879%)                                       $17,994
             Depreciation deduction for AMT purposes
                ($625,000 X 2.879%)                                                    (17,994)
             AMT adjustment                                                            $    -0-

             The AMT depreciation adjustment for real property applies only to real property
             placed in service before January 1, 1999. Real property placed in service after
             December 31, 1998 uses the same MACRS recovery periods (Table 8-8) for
             calculating the AMT as for calculating the regular income tax. pp. 15-10 and
             15-11

39.     a.   In order to produce the largest depreciation deduction for regular income tax
             purposes, Helen will use Table 8-1 (200% DB method). For AMT purposes, she
             must use Table 8-4 (150% DB method).

             Regular income tax depreciation ($300,000 X 20%)                          $60,000
             AMT depreciation ($300,000 X 15%)                                         (45,000)
             Positive adjustment                                                       $15,000

             Note that Helen cannot deduct additional first-year depreciation because the
             equipment is used rather than new.

        b.   Helen could elect to depreciate the equipment using Table 8-4 (150% DB method)
             for regular income tax purposes rather than under the regular MACRS method
             (200% DB method). The election reduces the depreciation percentage factor from
             20% to 15%. Therefore, the depreciation deduction for both AMT purposes and
             regular income tax purposes would be $45,000.

             Making the election reduces the AMT adjustment to $0. Such an election may be
             beneficial if Helen is going to be subject to the AMT. The election would not be
             beneficial if Helen’s regular tax liability is going to exceed her tentative AMT
             anyway.

        c.                  Willis, Hoffman, Maloney, and Raabe, CPAs
                                      5191 Natorp Boulevard
                                         Mason, OH 45040


             August 9, 2004

             Ms. Helen Carlon
             500 Monticello Avenue
             Glendale, AZ 85306

             Dear Ms. Carlon:

             In response to your inquiry regarding the appropriate depreciation method for the
             $300,000 of used equipment placed in service during March 2004, two options are
             available. The first will produce a larger depreciation deduction, but may result in
                                Alternative Minimum Tax                                    15-15


             the AMT being paid. The second option will produce a smaller depreciation
             deduction, but will have no effect on the AMT. Note that as we discussed, you
             decided not to elect § 179 limited expensing treatment.

             Under the first option, depreciation is calculated using the 200% declining balance
             method with a 5-year recovery period. The amount of the depreciation deduction
             under this method is $60,000 ($300,000 X 20%). However, for AMT purposes,
             the depreciation is calculated using the 150% declining balance method with a 5-
             year recovery period. The amount of the depreciation deduction for AMT
             purposes is $45,000 ($300,000 X 15%). Therefore, for AMT purposes, there will
             be a positive adjustment of $15,000 ($60,000 – $45,000).

             Under the second option, depreciation for regular income tax purposes and AMT
             purposes is calculated using the depreciation method and recovery period required
             for AMT purposes. Thus, in both cases, the amount of the depreciation deduction
             is $45,000. The benefit of electing to calculate the regular income tax
             depreciation this way is that the aforementioned positive adjustment for AMT
             purposes is avoided.

             Whether the election that produces a smaller depreciation deduction for regular
             income tax purposes but avoids a positive AMT adjustment is beneficial depends
             on your AMT status absent the effect of the depreciation deduction. In order to
             advise you regarding this election, I need to meet with you to obtain additional tax
             information. Please provide me with a date and time that is convenient to you.

             Sincerely,


             James Singer, CPA
             Partner

      pp. 15-10 and 15-12

40.   a.     Mining exploration and development costs can be expensed in the year incurred
             for regular income tax purposes. These expenditures must be amortized over a
             10-year period for AMT purposes. Gary’s regular income tax deduction would be
             $600,000 in 2004 and his AMT deduction would be $60,000 ($600,000/10).
             Therefore, Gary would have a positive adjustment of $540,000 in 2004 ($600,000
             regular income tax deduction – $60,000 AMT deduction). His negative
             adjustment for each of the next nine years will be $60,000 ($0 regular income tax
             deduction – $60,000 AMT deduction).

      b.     Gary can avoid having an adjustment by electing to amortize the mining
             exploration and development costs over a ten-year period for regular income tax
             purposes.

      c.     Gary should consider the present value of the cash flows, different tax brackets
             between regular income tax and AMT, and the possible effect this adjustment will
             have on future AMT calculations.

      Example 9 and related discussion
15-16                  2005 Comprehensive Volume/Solutions Manual


41.     For 2004, there is a positive AMT adjustment of $120,000.

        AMT:
               Revenues ($500,000 X 60%)                   $300,000
               Expenses                                    (180,000)                 $120,000

        Regular income tax:
               Revenues                                    $     -0-
               Expenses                                         (-0-)                     (-0-)
        AMT adjustment                                                               $120,000

        For 2005, there is a negative AMT adjustment of $120,000.

        AMT:
               Revenues ($500,000 – $300,000)              $200,000
               Expenses ($295,000 – $180,000)              (115,000)                 $ 85,000
        Regular income tax:
               Revenues                                    $500,000
               Expenses                                    (295,000)                 (205,000)
        AMT adjustment                                                              ($120,000)

        p. 15-13

42.     a.     For regular income tax purposes and for AMT purposes, there are no tax results
               which need to be reported in 2004, the year of grant.

        b.     For regular income tax purposes and for AMT purposes, there are no tax results
               which need to be reported in 2008, the year of exercise.

        c.     For regular income tax purposes, the spread of $30,000 ($100,000 fair market
               value – $70,000 option price) is not recognized in 2009, the year when rights in
               the stock become freely transferable and are not subject to a substantial risk of
               forfeiture. For AMT purposes, however, the spread of $30,000 is a positive AMT
               adjustment in 2009.

        d.     The regular income tax basis of $70,000 is different from the AMT basis of
               $100,000 ($70,000 + $30,000). Thus, there is a negative AMT adjustment in
               2012, the year of sale, of $30,000 ($80,000 – $50,000).

                                                   Regular Income Tax                AMT
               Amount realized                        $150,000                     $150,000
               Amount basis                            (70,000)                    (100,000)
               Recognized gain                        $ 80,000                     $ 50,000

        pp. 15-13 and 15-14

43.     In 2004, when the rights become freely transferable and are not subject to a substantial
        risk of forfeiture, Diego has a positive $27,000 adjustment for AMT purposes [($92 –
        $65) X 1,000 shares]. The transaction has no effect on regular taxable income or
        alternative minimum taxable income in 1999. There is no effect on regular taxable
        income in 2004 when the rights in the stock become freely transferable and are not
        subject to a substantial risk of forfeiture.
                               Alternative Minimum Tax                                  15-17


      When the stock is sold in 2005, the recognized gain for regular income tax purposes and
      AMT purposes is calculated as follows:

                                                 Regular Income Tax                AMT
             Amount realized                        $100,000                     $100,000
             Amount basis                            (65,000)                     (92,000)
             Recognized gain                        $ 35,000                     $ 8,000

      The AMT basis is the fair market value on the exercise date (i.e., $92 per share). Since
      the gain on the sale for regular income tax purposes exceeds the recognized gain for AMT
      purposes, there is a $27,000 negative adjustment in calculating AMT. pp. 15-13 and
      15-14

44.   a.     Amount realized                                                       $580,000
             Less: Adjusted basis                                                  (312,000)
             Realized and recognized gain                                          $268,000
      b.     Amount realized                                                       $580,000
             Less: Adjusted basis                                                  (345,000)
             Realized and recognized gain                                          $235,000

      c.     Gain for regular income tax purposes                                  $268,000
             Less: Gain for AMT purposes                                           (235,000)
             Negative AMT adjustment                                               $ 33,000

      pp. 15-14 to 15-16

45.   The 2004 loss will not be deductible either for regular income tax or AMT purposes,
      since no passive income is present. The suspended passive loss for regular income tax
      purposes is $11,750 ($160,000 gross income – $122,000 operating expenses – $49,750
      regular income tax depreciation). The suspended passive loss for AMT purposes is
      $3,000 ($160,000 gross income – $122,000 operating expenses – $41,000 ADS
      depreciation). Examples 15 and 16 and related discussion

46.   a.     All of the medical expenses are eligible for the medical expense deduction.
             Therefore, for regular income tax purposes, Wally’s and Gloria’s medical expense
             deduction is $14,500 [$29,500 – 7.5%($200,000)].
      b.     For AMT purposes, only the medical expenses in excess of 10% of AGI can be
             deducted. Therefore, the medical expense deduction is $9,500 [$29,500 – 10%
             ($200,000)].

      c.     The AMT adjustment for medical expenses is a positive adjustment of $5,000
             ($14,500 – $9,500).

      p. 15-18

47.   a.     Wolfgang’s itemized deductions for AMT purposes are calculated as follows:

             Medical expenses [$5,500 – (10% X $60,000)]                            $    -0-
             Charitable contributions                                                 7,000
             Qualified housing interest                                               6,000
             Casualty loss                                                            1,500
             Total                                                                  $14,500
15-18                  2005 Comprehensive Volume/Solutions Manual


               Neither the state income taxes of $4,200 nor the miscellaneous itemized
               deductions of $3,300 are deductible for AMT purposes. An additional 2.5% of
               AGI ($1,500) is disallowed in calculating medical expenses. Thus, none of the
               medical expenses are deductible.

        b.     The AMT adjustment is calculated as follows:

               Itemized deductions for regular income tax                               $23,000
               Less: Itemized deductions for AMT purposes                               (14,500)
               Positive AMT adjustment                                                  $ 8,500

        pp. 15-17 to 15-19

48.     For regular income tax purposes, the following amounts are deductible as qualified
        residence interest:

               Interest on personal residence                                           $12,000
               Interest on cabin                                                          4,800
               Interest on home equity loan                                               5,000
               Total qualified residence interest deduction                             $21,800

        For AMT purposes, however, the deduction is limited to qualified housing interest, which
        includes the following:

               Interest on personal residence                                           $12,000
               Interest on cabin                                                          4,800
               Total qualified housing interest deduction                               $16,800

        Interest on the home equity loan is not deductible for AMT purposes because the
        proceeds were not used to substantially improve a qualified residence. Therefore, an
        AMT adjustment is required:

               Total qualified residence interest deduction                             $21,800
               Total qualified housing interest deduction                               (16,800)
               Positive AMT adjustment                                                  $ 5,000

        p. 15-19
49.     For regular income tax and AMT purposes, investment interest expense is limited to net
        investment income. Therefore, Yoon’s regular income tax deduction for investment
        interest expense is limited to $10,000 (the amount of dividends received). For regular
        income tax purposes, the private activity bond interest of $5,000 is excludible from gross
        income and the related $3,500 interest expense is not deductible. The $5,000 interest
        income on the private activity bonds is offset by the $3,500 interest expense, so Yoon
        reports a $1,500 tax preference for AMT purposes. In addition, the net investment
        income of $1,500 ($5,000 – $3,500) from the private activity bonds is treated as part of
        net investment income for AMT purposes. Net investment income is $11,500 ($10,000 +
        $1,500). Therefore, for AMT purposes, $11,500 of the $13,000 investment interest
        expense can be deducted. pp. 15-19 and 15-20
                               Alternative Minimum Tax                                   15-19


50.   a.     Walter and Edith’s itemized deductions are calculated as follows:

                                                      Regular
                                                    Income Tax         AMT       Adjustment
             Medical expenses (see Note 1)            $ 1,250        $    -0-       $ 1,250
             State income taxes                         2,800             -0-         2,800
             Personal property tax                        900             -0-           900
             Real estate tax                            9,100             -0-         9,100
             Interest on residence                      8,600          8,600             -0-
             Interest (home equity)                     1,800             -0-         1,800
             Investment interest                        2,600          2,600             -0-
             Charitable contribution                    4,200          4,200             -0-
             Employee expenses (Note 2)                 1,600             -0-         1,600
                Totals                                $32,850        $15,400        $17,450

             NOTES
             (1)    Medical expenses:

                    For regular income tax [$9,500 – (7.5% X $110,000)]               $1,250
                    For AMT [$9,500 – (10% X $110,000)]                                  -0-
                    Positive adjustment                                               $1,250

             (2)    Unreimbursed employee expenses:

                    Expenses                                                          $3,800
                    2% of AGI ($110,000)                                              (2,200)
                    Deduction for regular income tax                                  $1,600

      b.     Walter and Edith would have a positive adjustment of $17,450, as computed
             above. In addition, they would have a tax preference of $1,100 ($5,000 interest on
             private activity bonds – $3,900 related interest expense).

      pp. 15-17 to 15-20

51.   There are positive AMT adjustments of $4,850 for the standard deduction and $3,100 for
      the personal exemption. Alternative minimum taxable income is $223,950 ($98,000
      taxable income + $118,000 preferences + $4,850 standard deduction + $3,100
      exemption). Examples 24 and 25 and related discussion

52.   Emily’s percentage depletion deduction for regular income tax purposes is $21,000
      ($140,000 income X 15% depletion rate). This results in a tax preference of $9,000
      ($21,000 percentage depletion – $12,000 basis at beginning of year). Example 26

53.   Amos’s preference item for IDC is computed as shown below:

             IDC expensed in the year                                              $70,000
             Less: IDC if amortized over 10 years                                   (7,000)
             Excess IDC                                                            $63,000
             Less: 65% of $60,000 net income from oil and gas                      (39,000)
             IDC preference                                                        $24,000
      pp. 15-21 and 15-22
15-20                  2005 Comprehensive Volume/Solutions Manual


54.     $9,000 interest on private activity bonds + $35,000 bargain element on incentive stock
        options + $4,850 standard deduction + $3,100 personal exemption = $51,950. pp. 15-13,
        15-14, and 15-20 to 15-22

55.     Pat’s tentative AMT for 2004 is computed as shown below:

               Taxable income computation
               Salary                                                              $ 90,000
               Interest income                                                        1,000
               Dividend income                                                        5,000
               Gambling income                                                        4,000
               Adjusted gross income                                               $100,000

               Itemized deductions:
                  Medical expenses ($12,000 – $7,500)                 $4,500
                  State income taxes                                   4,100
                  Real estate taxes                                    2,800
                  Mortgage interest on residence                       3,100
                  Investment interest expense                          1,800
                  Gambling losses (limited to gambling income)         4,000
                        Total itemized deductions                                   (20,300)
               Personal exemption                                                    (3,100)
               Taxable income                                                      $ 76,600

               Tentative minimum tax computation
               Taxable income                                                      $ 76,600
               Plus adjustments:
                  Medical expenses                                                    2,500
                  Regular income tax [$12,000 – (7.5% X $100,000) = $4,500]
                     AMT [$12,000 – (10% X $100,000) = $2,000]
                  State income taxes                                                  4,100
                  Real estate taxes                                                   2,800
                  Personal exemption                                                  3,100
               Subtotal                                                            $ 89,100
               Plus: Preference (interest on private activity bonds)                 40,000
               Alternative minimum taxable income (AMTI)                           $129,100
               Exemption [$40,250 – 25%($129,100 – $112,500)]                       (36,100)
               AMT base                                                            $ 93,000
               AMT rate                                                              X .26
               Tentative AMT                                                       $ 24,180

        pp. 15-17 to 15-21

56.     Based on the amount of Ronald’s standard deduction and number of personal and
        dependency exemptions, Ronald’s filing status is head of household. Therefore, Ronald’s
        regular income tax liability is $20,600 [$5,325 + 25%($100,000 – $38,900)]. Ronald’s
        AMT is calculated as follows:

        Taxable income                                                              $100,000
        Adjustments ($7,150 + $6,200)                                                 13,350
        Preferences                                                                   60,000
        AMTI                                                                        $173,350
        Exemption [$40,250 – 25%($173,350 – $112,500)]                               (25,038)
                                Alternative Minimum Tax                                 15-21


      AMT base                                                                     $148,312
      Rate                                                                         X 26%
      Tentative AMT                                                                $ 38,561
      Regular income tax liability                                                  (20,600)
      AMT                                                                          $ 17,961

      pp. 15-3 to 15-9, 15-21, and Figure 15-2

57.   a.     Computation of Tara’s items of AMT adjustments and preferences for 2004:

             Incentive stock option adjustment                                       $ 45,000
             Excess depreciation on building adjustment ($49,000 – $26,000)            23,000
             Percentage depletion in excess of property’s adjusted basis preference    50,000
             Standard deduction adjustment                                              4,850
             Personal exemption adjustment                                              3,100
             Total adjustments and preferences                                      $125,950
             pp. 15-11, 15-13, 15-20, and 15-21

      b.     Calculation of alternative minimum tax:

             Taxable income                                                        $121,000
             Adjustments and preferences                                            125,950
             Alternative minimum taxable income (AMTI)                             $246,950
             Less: Exemption amount (Note 1)                                         (6,637)
             Alternative minimum tax base                                          $240,313

             Tentative minimum tax (Note 2)                                        $ 63,788
             Less: Regular income tax on $121,000                                   (28,507)
             Alternative minimum tax                                               $ 35,281

             Regular income tax calculation

             Tax on $121,000:
               On $70,350                                                          $ 14,325
               On ($121,000 – $70,350) at 28%                                        14,182
             Total tax                                                             $ 28,507

             Notes

             (1)     Exemption phase-out: ($246,950 – $112,500) X .25 = $33,613; then
                     $40,250 – $33,613 = $6,637 exemption amount. pp. 15-8 and 15-9

             (2)     AMT tax calculations:
                     $175,000 X 26%                                                $45,500
                     ($240,313 – $175,000) X 28%                                    18,288
                     Tentative minimum tax                                         $63,788

             Concept Summary 15-1 and Examples 24 and 25
15-22                   2005 Comprehensive Volume/Solutions Manual


58.     Gross income:
               Salary                                               $141,000
               Interest from bank                                     12,000
               Interest on corporate bonds                             7,000
               Short-term capital gain                                 8,000         $168,000
        Less: Deductions for AGI                                                          (-0-)
        Adjusted gross income                                                        $168,000
        Less: Deductions from AGI
               Itemized deductions (Note 1)                         $ 31,781
               Personal exemptions (Note 5)                            2,418          (34,199)
        Taxable income                                                               $133,801

        Regular income tax calculation

        Tax on $133,801:
                On $70,350                                                           $ 14,325
                On $133,801 – $70,350 at 28%                                           17,766
        Total tax                                                                    $ 32,091

        Computation of alternative minimum tax:

        Taxable income                                                               $133,801
        Plus adjustments and preferences:
               Itemized deductions (Note 6)                                            17,381
               Personal exemption                                                       2,418
               Preferences                                                            116,000
               Cutback adjustment                                                        (759)
        Alternative minimum taxable income                                           $268,841
        Less: Exemption [partial phaseout (Note 7): AMTI does not
              exceed $273,500]                                                         (1,165)
        AMT base                                                                     $267,676

        Tentative AMT (Note 8)                                                       $ 71,449
        Less: Regular income tax                                                      (32,091)
        Alternative minimum tax                                                      $ 39,358

        Notes
        (1)     Because Larry’s AGI exceeds $142,700, Category A itemized deductions are
                those subject to the cutback adjustment (i.e., subject to the 3% of AGI floor).
                p. 10-30

                             Category A                                 Category B

                Unreimbursed employee                       Not subject to cutback adjustment:
                  business expenses (Note 2) $ 640          Medical expenses            $11,400
                State income taxes             6,500        Casualty loss (Note 4)           -0-
                Real property taxes            6,800
                Mortgage interest              7,200
                Totals                       $21,140                                     $11,400
                         Alternative Minimum Tax                              15-23


       (a)    Determine 80% limitation: (80% X $21,140 Category A deductions =
              $16,912 maximum reduction).

       (b)    Determine 3% of the excess amount over the threshold: [3% X ($168,000
              – $142,700) = $759].

       (c)    Subtract from the Category A itemized deductions the lesser of the
              amounts determined in Step a. or b.: ($21,140 – $759 = $20,381).

       (d)    Add the amount determined in Step c. to the Category B itemized
              deductions: ($20,381 + $11,400 = $31,781 total itemized deductions).

(2)    Unreimbursed employee expenses                                      $4,000
       Less: 2% of $168,000                                                (3,360)
       Deductible amount                                                   $ 640

(3)    Total medical expenses                                             $24,000
       Less: 7.5% of $168,000                                             (12,600)
       Deductible amount                                                  $11,400

(4)    Casualty loss ($20,000 decline – $12,000 insurance – $100 floor)   $ 7,900
       Less: 10% of $168,000 AGI                                          (16,800)
       Deductible amount                                                  $    -0-

(5)    Personal exemption phaseout:
       Personal exemption amount                                           $3,100
       AGI less threshold amount ($168,000 – $142,700) = $25,300
       $25,300/$2,500 (rounded up) = 11 X 2% = 22%
       22% X $3,100 =                                                        (682)
       Personal exemption amount                                           $2,418

(6)    AMT itemized deductions:
       Mortgage interest                                                  $ 7,200
       Medical expenses [$24,000 – 10%($168,000)]                           7,200
       Total                                                              $14,400

       Regular income tax itemized deductions (Note 1)                    $31,781
       Less: AMT itemized deductions                                      (14,400)
       Positive adjustment                                                $17,381

(7)    AMT exemption phaseout:
       Exemption amount                                                   $40,250
       Less: Reduction [($268,841 – $112,500) X 25%]                      (39,085)
       Exemption                                                          $ 1,165

(8)    AMT tax calculation:
       $175,000 X 26%                                                     $45,500
       ($267,676 – $175,000) X 28%                                         25,949
       Tentative minimum tax                                              $71,449

pp. 15-17 to 15-21
15-24                  2005 Comprehensive Volume/Solutions Manual


59.     AMT computation
        Taxable income                                                                  $     -0-
        Plus: Timing adjustments                                                         200,000
        Plus: AMT exclusion items                                                        100,000
        AMTI                                                                            $300,000
        Minus: Exemption [$40,250 – .25($300,000 – $112,500)]                                (-0-)
        AMT base                                                                        $300,000

        Tentative AMT [.26($175,000) + .28($300,000 – $175,000)]                        $ 80,500
        Minus: Regular income tax liability                                                  (-0-)
        AMT                                                                             $ 80,500

        AMT without timing adjustments
        Taxable income                                                                  $      -0-
        Plus: AMT exclusion items                                                        100,000
        AMTI                                                                            $100,000
        Minus: Exemption [$40,250 – .25($100,000 – $112,500)]                             (40,250)
        AMT base                                                                        $ 59,750

        Tentative AMT (.26 X $59,750)                                                   $ 15,535
        Minus: Regular income tax liability                                                  (-0-)
        AMT                                                                             $ 15,535

        Credit carryover computation
        AMT                                                                             $ 80,500
        Less: AMT without timing adjustments                                             (15,535)
        AMT credit carryover                                                            $ 64,965

        Examples 29 to 31

60.     a.     Aqua is first exempt from the AMT for 1998 (the first year for which the
               exemption is available) as a “small corporation.” Aqua is classified as a small
               corporation if (1) it had average annual gross receipts of $5 million or less for the
               three-year period beginning after December 31, 1993 and (2) it had average
               annual gross receipts for each subsequent three-year period of $7.5 million or less
               (i.e., 1995, 1996, and 1997 if the tax year is 1998; 1996, 1997, and 1998 if the tax
               year is 1999; 1997, 1998, and 1999 if the tax year is 2000; 1998, 1999, and 2000
               if the tax year is 2001; 1999, 2000, and 2001 if the tax year is 2002; 2000, 2001,
               and 2002 if the tax year is 2003; 2001, 2002, and 2003 if the tax year is 2004).
               For the three-year period which includes 1994, 1995, and 1996, Aqua had average
               annual gross receipts of:

                      $4,800,000 + $5,300,000 + $4,600,000 = $4,900,000
                                     3 years

               Thus, Aqua passes the $5 million test for this period. For the three-year period
               which includes 1995, 1996, and 1997, Aqua had average annual gross receipts of:

                      $5,300,000 + $4,600,000 + $8,200,000 = $6,033,333
                                     3 years
               Thus, Aqua passes the $7.5 million test for this period. Aqua is a small
               corporation for 1998. Thus, it is exempt from the AMT for 1998.
                               Alternative Minimum Tax                                   15-25


      b.     Aqua remains exempt from the AMT in 2004. In order to do so, Aqua’s average
             annual gross receipts for the three-year period consisting of 1996, 1997, and 1998
             do not exceed $7.5 million.

                    $4,600,000 + $8,200,000 + $8,500,000 = $7,100,000
                                   3 years

             Likewise, Aqua’s average annual gross receipts for the three-year period
             consisting of 1997, 1998, and 1999 do not exceed $7.5 million.

                    $8,200,000 + $8,500,000 + $5,200,000 = $7,300,000
                                   3 years

             Likewise, Aqua’s average annual gross receipts for the three-year period
             consisting of 1998, 1999, and 2000 do not exceed $7.5 million.

                    $8,500,000 + $5,200,000 +$8,000,000 = $7,233,333
                                   3 years

             Likewise, Aqua’s average annual gross receipts for the three-year period
             consisting of 1999, 2000, and 2001 do not exceed $7.5 million.

                    $5,200,000 + $8,000,000 + $6,000,000 = $6,400,000
                                   3 years

             Likewise, Aqua’s average annual gross receipts for the three-year period
             consisting of 2000, 2001, and 2002 do not exceed $7.5 million.

                    $8,000,000 + $6,000,000 + $6,200,000 = $6,733,333
                                   3 years

             Finally, Aqua’s average annual gross receipts for the three-year period consisting
             of 2001, 2002, and 2003 do not exceed $7.5 million.

                    $6,000,000 + $6,200,000 + $6,100,000 = $6,100,000
                                   3 years

      pp. 15-27

61.                                                     2003           2004           2005
      ACE                                              $4,000         $3,000         $2,000
      Less: Unadjusted AMTI                            (3,000)        (2,000)        (5,000)
      Difference                                       $1,000         $1,000        ($3,000)
      Rate                                             X .75          X .75          X .75
      Adjustment                                       $ 750          $ 750         ($1,500)*

      *$2,250 ($3,000 X .75) but limited to $750 + $750, or $1,500. Further, the unusable
      negative adjustment of $750 ($2,250 – $1,500) is lost forever.

      Concept Summary 15-2, Example 32, and related discussion
15-26                   2005 Comprehensive Volume/Solutions Manual


62.     Quincy Corporation:
              AMTI                                                                  $150,000
              Less: Exemption amount                                                 (40,000)
              AMT base                                                              $110,000
              Rate                                                                    X .20
              Tentative AMT                                                         $ 22,000

                 Note: In this case, there is no reduction in the exemption amount because AMTI
                 does not exceed $150,000.

        Redland Corporation:
        Step 1
               AMTI                                                                 $160,000
               Less: Threshold amount for exemption                                 (150,000)
               Amount by which AMTI exceeds $150,000                                $ 10,000
               Reduction rate                                                         X .25
               Applicable reduction in exemption amount                             $ 2,500
        Step 2
                 Exemption amount                                                   $ 40,000
                 Less: Reduction in exemption amount from Step 1                      (2,500)
                 Applicable exemption amount                                        $ 37,500

        Step 3
                 AMTI                                                               $160,000
                 Less: Applicable exemption amount from Step 2                       (37,500)
                 AMT base                                                           $122,500
                 Rate                                                                 X .20
                 Tentative AMT                                                      $ 24,500

        Tanzen Corporation:
        Step 1
               AMTI                                                                 $320,000
               Less: Threshold amount for exemption                                 (150,000)
               Amount by which AMTI exceeds $150,000                                $170,000
               Reduction rate                                                         X .25
               Applicable reduction in exemption amount                             $ 42,500
        Step 2
                 Exemption amount                                                   $ 40,000
                 Less: Reduction in exemption amount from Step 1                      (42,500)
                 Applicable exemption amount                                        $      -0-

        Step 3
                 AMTI                                                               $320,000
                 Less: Applicable exemption amount from Step 2                           (-0-)
                 AMT base                                                           $320,000
                 Rate                                                                 X .20
                 Tentative AMT                                                      $ 64,000

                 Note: In this case, the exemption amount is phased out entirely because AMTI
                 exceeds $310,000.

        pp. 15-28 to 15-30
                               Alternative Minimum Tax                                  15-27


63.   a.     Tax on taxable income of $2,600,000:

                   $2,600,000 X 34% = $884,000

      b.     Taxable income                                                       $2,600,000
             Adjustments and tax preferences:
                 Depreciation for regular income tax on realty in
                      excess of ADS straight-line                     $550,000
                 Excess amortization of certified pollution control
                      facilities                                        450,000
                 Tax-exempt interest on private activity bonds        1,030,000
                 Percentage depletion in excess of the property’s
                      adjusted basis                                    60,000     2,090,000
             AMTI                                                                 $4,690,000
             Less: Exemption (AMTI exceeds $310,000)                                     (-0-)
             Alternative minimum tax base                                         $4,690,000
             AMT tax rate                                                             X .20
             Tentative AMT (no foreign tax credit)                                $ 938,000

      c.     Tentative AMT                                                        $ 938,000
             Less: Regular income tax liability                                     (884,000)
             AMT                                                                  $ 54,000

      pp. 15-28 to 15-31


CUMULATIVE PROBLEMS

64.   Regular income tax computation:
      Free housing (Note 1)                                                          $     -0-
      Grocery allowance (Note 2)                                                      10,400
      Short-term capital gain                                                         44,000
      Interest income (Note 3)                                                        12,000
      Lottery winnings                                                                  9,000
      Incentive stock option exercise (Note 4)                                             -0-
      Life insurance proceeds (Note 5)                                                     -0-
      AGI before rental loss and alimony                                             $75,400
      Real estate rental loss (Note 6)                                               (25,000)
      Alimony                                                                        (18,000)
      Traditional IRA contribution (Note 7)                                            (3,000)
      Adjusted gross income                                                          $29,400
      Itemized deductions:
           Charitable contribution (Note 8)                        $2,600
           Consumer interest (Note 9)                                   -0-
           State and local income taxes                              3,600
           Medical expenses [$4,500 – (7.5% X $29,400 AGI)](Note 10) 2,295
           Gambling losses (Note 11)                                 8,000
           Miscellaneous itemized deductions (Note 12)                  -0-          (16,495)
      Personal exemption (Note 13)                                                    (3,100)
      Taxable income                                                                 $ 9,805
      Income tax on $9,805 (Note 14)                                                 $ 1,113
15-28                  2005 Comprehensive Volume/Solutions Manual


        AMT computation:

        Taxable income                                                                 $     9,805
        Adjustments and preferences:
            Incentive stock option adjustment                    $48,000
            State and local income taxes                           3,600
            Medical expenses (Note 15)                               735
            Personal exemption                                     3,100
            Interest on private activity bonds                    49,000
            Total adjustments and preferences                                           104,435
        Alternative minimum taxable income                                             $114,240
        Less: AMT exemption [$40,250 – 25%($114,240 – $112,500)]                        (39,815)
        AMT base                                                                       $ 74,425
        AMT rate                                                                         X .26
        Tentative AMT                                                                  $ 19,351
        Less: Regular income tax                                                         (1,113)
        AMT                                                                            $ 18,238
        2004 Tax Liability
        Regular income tax liability                                                   $  1,113
        Alternative minimum tax                                                          18,238
        Total tax liability                                                            $ 19,351

        Note 1

        Because Ron is a minister of the gospel, he can exclude the fair rental value of the
        parsonage of $2,000 per month.

        Note 2

        The grocery allowance of $200 per week does not qualify for the § 119 meal exclusion.

        Note 3

        The $49,000 of interest on private activity bonds is excludible from gross income.

        Note 4
        The spread on the ISO of $48,000 ($68,000 – $20,000) is not recognized in 2004.

        Note 5

        The life insurance proceeds of $750,000 are excludible from Ron’s gross income.

        Note 6

        Loss on rental property: Because Ron is an active participant, he may deduct part of the
        $55,000 loss ($190,000 – $245,000) under the rental real estate exception. Because his
        AGI is less than $100,000, the loss allowed under the rental real estate exception is
        $25,000. The balance of the loss of $30,000 is suspended. p. 11-23
                          Alternative Minimum Tax                                   15-29


Note 7

The $3,000 contribution to the traditional IRA is a deduction for AGI.

Note 8

Because the holding period of the stock is long-term and the stock is an intangible asset,
the full fair market value of $1,600 qualifies for the charitable contribution deduction.
The $1,000 he gave to the church from the lottery also qualifies.

Note 9

The $3,500 of consumer interest cannot be deducted.

Note 10

The $8,500 of medical expenses paid by Ron for the hospital expenses of Kate’s deceased
husband are not deductible by Ron because he was not Ron’s dependent.

Note 11

Gambling losses can be deducted only to the extent of gambling income. Thus, all of the
$8,000 of gambling losses from the lottery can be deducted since the gambling winnings
are $9,000.

Note 12

Miscellaneous itemized deductions are deductible only to the extent they exceed 2% of
AGI ($29,400 X 2% = $588). The $200 for the safe deposit box rental is classified as a
miscellaneous itemized deduction. Since the $200 is less than the $588, none of it can be
deducted.

Note 13

Ron receives a personal exemption for himself. He is not eligible for a dependency
deduction for Kate’s baby.

Note 14
Tax on $7,150                                                                   $ 715
15% X ($9,805 – $7,150)                                                            398
                                                                                $1,113

Note 15

Regular income tax medical deduction                                            $2,295
AMT medical deduction                                                           (1,560)*
Medical deduction positive adjustment                                           $ 735

* $4,500 – (10% X $29,400) = $1,560 medical deduction.
15-30                   2005 Comprehensive Volume/Solutions Manual


65.     Robert and Jane have taxable income for 2003 as follows:

        Salary for Robert (Indiana Foundry, Inc.)                                   $ 89,000
        Salary for Jane (Carmel Computer Associates)                                 102,000
        Interest income (Carmel National Bank) (Note 1)                                3,300
        Dividend income (Able Computer Corporation)                                    3,500
        Gambling income (Note 2)                                                       4,000
        Award income (Note 3)                                                         15,000
        Capital gain (Note 4)                                                         13,000
        Adjusted gross income                                                       $229,800

        Deductions from AGI

        Itemized deductions:
              Medical expenses [$19,725 – 7.5% X $229,800 AGI)]     $ 2,490
              State income tax ($3,970 + $4,710)                      8,680
              Real property tax on personal residence                 4,600
              Mortgage interest on personal residence                 7,500
              Investment interest expense                             1,900
              Contributions ($11,000 + $2,000)                       13,000
              Gambling losses (Note 2)                                4,000
              Subtotal                                              $42,170
              Minus: reduction under 3% cutback adjustment (Note 5) (2,709)
              Total itemized deductions                                              (39,461)
        Exemptions (Note 6)                                                          (10,004)
        Taxable income                                                              $180,335

        Alternative minimum tax for Robert and Jane is computed as shown below.

        Taxable income plus exemptions ($180,335 + $10,004)                         $190,339
        Reduction caused by 3% cutback adjustment for itemized deductions             (2,709)
             (Note 5)
        Subtotal                                                                    $187,630

        Adjustments:
             Medical expenses [$2,490 for regular income tax – $0
               for AMT (Note 7)]                                          $ 2,490
             Taxes ($8,680 state income tax + $4,600 real
               property tax)                                               13,280
             Total adjustment for itemized deductions                                 15,770

        Preference:
              Interest on private activity bonds                                      30,200
        Alternative minimum taxable income (AMTI)                                   $233,600
        Less: Exemption (Note 8)                                                     (37,100)
        Alternative minimum tax base                                                $196,500
        Less: Amount eligible for alternative tax on net capital gain (Note 9)       (16,500)
        AMT base subject to ordinary tax rates                                      $180,000

        Tentative AMT liability on $180,000 (Note 13)                               $ 46,900
        Tentative AMT liability on $16,500 (Note 14)                                   2,475
        Tentative AMT                                                               $ 49,375
        Less: Regular income tax liability (Note 10)                                 (38,529)
        AMT                                                                         $ 10,846
                          Alternative Minimum Tax                                   15-31


Note 1 – excludible interest income

The Carmel Sanitation District Bonds interest income of $30,200 is excluded from gross
income.

Note 2– gambling income and losses

Since their gambling losses of $5,750 exceed the gambling income of $4,000, the excess
loss of $1,750 is disallowed. The $4,000 of gambling income is included in gross income
and the allowed $4,000 of gambling losses are classified as an itemized deduction.

Note 3 – award received

The $15,000 that Jane received for the “Citizen of the Year” is included in her gross
income.

Note 4 – sale of land
Robert’s adjusted basis for the land he purchased is $67,000. So his recognized gain on
the sale of the land is $13,000 ($80,000 amount realized – $67,000 adjusted basis).
Robert’s holding period is long term. The gain is classified as long-term capital gain and
is eligible for the alternative tax rate.

Note 5 - reduction for 3% cutback adjustment for itemized deductions

This computation determines the reduction in itemized deductions from application of the
3% cutback adjustment. The computation follows the format provided by the IRS in the
instructions for Schedule A.

Medical expenses [$19,725 – (7.5% X $229,800 AGI)]                             $ 2,490
State income tax                                                                 8,680
Real property tax on personal residence                                          4,600
Mortgage interest on personal residence                                          7,500
Investment interest expense                                                      1,900
Contributions                                                                   13,000
Gambling losses                                                                  4,000
Total itemized deductions                                                     $42,170
Medical expenses [$19,725 – (7.5% X $229,800 AGI)]               $2,490
Investment interest expense                                       1,900
Gambling losses                                                   4,000
Total of itemized deductions not subject to reduction                          (8,390)
Itemized deductions subject to reduction                                      $33,780
80% of $33,780 = maximum cutback adjustment                                   $27,024

AGI                                                           $229,800
Less: Threshold for married, joint return                     (139,500)
Excess AGI                                                    $ 90,300
3% of $90,300 excess AGI                                                      $ 2,709
Reduction (smaller of $27,024 or $2,709)                                      $ 2,709

Note 6 – dependency deductions and phaseout
Robert and Jane qualify for four personal and dependency exemptions. The two
dependency deductions are for the twins, Ellen and Sean. They do not qualify for a
15-32                    2005 Comprehensive Volume/Solutions Manual


        dependency deduction for Robert’s daughter, Amy, even though Robert provides over
        50% of her support. Margaret, Robert’s former wife, is the custodial parent, and she does
        not furnish Robert with a signed Form 8332.

                        $3,050 X 4 = $12,200

        However, because Robert and Jane’s AGI exceeds the threshold amount, the personal and
        dependency exemptions are subject to the phaseout provision.

                 AGI                                                  $229,800
                 Less: Threshold amount                               (209,250)
                 Excess                                               $ 20,550
                 Divided by $2,500 =                                    8.22%
                 Round to                                                  9%
                 X 2% = Phaseout percentage                               18%

                 Amount of phaseout ($12,200 X 18%)                   $   2,196
                 Personal and dependency exemptions                    $12,200
                 Less: Phaseout                                         (2,196)
                 Deductible personal and dependency exemptions         $10,004

        Note 7 - AMT medical deduction

        $229,800 X 10% = $22,980
        $19,725 – $22,980 = $0 medical deduction for AMT.

        Note 8 - alternative minimum tax exemption

        The AMT exemption phase-out for a married couple filing jointly applies if alternative
        minimum taxable income (AMTI) exceeds $150,000. The Armstrong’s have AMTI of
        $233,600, so the $58,000 exemption is reduced as follows:

                 AMTI                                                 $233,600
                 Less: Threshold                                      (150,000)
                 Excess                                               $ 83,600
                 X 25%                                                 X 25%
                 Amount of phaseout                                   $ 20,900
                 Exemption amount                                     $ 58,000
                 Less: Amount of phaseout                              (20,900)
                 Deductible exemption amount                          $ 37,100

        Note 9

        Amounts eligible for the beneficial 15% rate include the following:

                 Net capital gain from stock sale                      $13,000
                 Dividend income                                         3,500
                                                                       $16,500
                             Alternative Minimum Tax                                  15-33


Note 10 - regular income tax liability

Taxable income                                                                 $180,335

Tax on $174,700                                                                $ 39,096
33% X ($180,335 – $174,700)                                                       1,860
                                                                               $ 40,956

However, since the $13,000 long-term capital gain on the sale of the land and the
dividend income are eligible for the beneficial rates for the alternative tax on net capital
gain, Robert and Jane’s regular income tax liability is $38,529 rather than the $40,956
calculated above.

       Tax on $163,835 ($180,335 – $16,500):
              Tax on $114,650                                                   $22,282
              28% X ($163,835 – $114,650)                                        13,772
                                                                                $36,054
       Plus: Tax on $16,500 at beneficial rate:
             $16,500 X 15%                                                        2,475
                                                                                $38,529

Note 11 – holding period for the land

Robert’s holding period begins on March 15, 1998.

Note 12 – Jane’s inheritance

The $600,000 that Jane inherited from her grandfather is excluded from Jane’s gross
income.

Note 13 – tentative AMT liability on AMT base subject to ordinary tax rates

       $175,000 X 26% =         $45,500
          5,000 X 28% =           1,400
       $180,000                 $46,900

Note 14 – tentative AMT liability on AMT base eligible for alternative tax on net capital
gain
The $16,500 amount that qualifies for the alternative tax treatment for regular income tax
purposes also qualifies for alternative tax treatment for AMT purposes.

       $16,500 X 15% =          $2,475

Note 15 – child tax credit

The twins, Ellen and Sean, satisfy the statutory requirements for the child tax credit.
However, Robert and Jane’s AGI of $229,800 results in a full phaseout of the credit (i.e.,
the phaseout commences at an AGI of $110,000).

See the tax return solution beginning on p. 15-35 of the Solutions Manual.
15-34                   2005 Comprehensive Volume/Solutions Manual


                          Willis, Hoffman, Maloney, and Raabe, CPAs
                                    5191 Natorp Boulevard
                                       Mason, OH 45040


        April 2, 2004

        Mr. and Mrs. Robert Armstrong
        1802 College Avenue
        Carmel, IN 46302

        Dear Bob and Jane:

        Your 2003 income tax return is enclosed and indicates that you have a refund of $5,625
        ($49,375 tax liability – $55,000 withholdings).

        Because the Carmel Sanitation District bonds are private activity bonds subject to the
        alternative minimum tax, $10,846 of the total tax owed is due to the alternative minimum
        tax. In order to avoid this tax in the future, you might consider changing the investment
        to tax-free bonds which are not private activity bonds and, therefore, not subject to the
        alternative minimum tax. If you have any questions, please call me.

        Sincerely,


        John Jones, CPA
        Partner




The answers to the Research Problems are incorporated into the 2005 Comprehensive Volume of
the Instructor’s Guide with Lecture Notes to Accompany WEST FEDERAL TAXATION:
COMPREHENSIVE VOLUME.
      Alternative Minimum Tax   15-35


65.
15-36           2005 Comprehensive Volume/Solutions Manual


65. continued
                Alternative Minimum Tax   15-37


65. continued
15-38           2005 Comprehensive Volume/Solutions Manual


65. continued
                Alternative Minimum Tax   15-39


65. continued
15-40           2005 Comprehensive Volume/Solutions Manual


65. continued
                Alternative Minimum Tax   15-41


65. continued
15-42           2005 Comprehensive Volume/Solutions Manual


65. continued
                Alternative Minimum Tax   15-43


65. continued
15-44           2005 Comprehensive Volume/Solutions Manual


65. continued

				
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