Monday, July 2, 2012

IRS Chief Counsel Issues Advice on Interaction Between Charitable Contribution Deduction and Alternative Minimum Tax Net Operating Loss Carryover

As reported in Tax Notes Today (electronic citation 2012 TNT 127-25), in advice from the Chief Counsel, the IRS has determined whether a corporate taxpayer's charitable contribution deduction may reduce the amount of alternative tax net operating loss (ATNOL) absorbed in a carryover year.  The taxpayer in question had substantial ATNOL carryovers from Year 1, Year 2, and Year 3, and made charitable contributions in years 4 and 5.  The issue presented was whether Taxpayer was entitled to take charitable contribution deductions into account in determining the amount of ATNOL absorbed in Year 5. The Chief Counsel concluded that it was. 

By way of background, Code section 56(a)(4) requires that alternative minimum taxable income (AMTI) be computed by deducting the taxpayer's ATNOL, rather than the taxpayer's NOL.  In general, Code section 56(d)(1)(A) limits the amount of ATNOL that may be deducted to the lesser of the ATNOL or 90 percent of AMTI determined without regard to the ATNOL deduction.  Otherwise, the Code generally requires a taxpayer to compute its ATNOL in the same manner as it computes its NOL.  Under Code section 172(b)(2), the amount of an NOL that is absorbed in a carryover or carryback year equals taxable income for that year determined with certain modifications (modified taxable income). 
 
Also by way of background, Code section 170(b)(2) generally limits the amount of a corporation’s charitable contribution deduction to no more than 10 percent of the corporation's taxable income.  The 10 percent limit on a corporation's charitable contribution deduction is computed by taking into account NOL carryovers.  The Chief Counsel explains that modified taxable income, however,

is computed without deducting the NOL carryover to be absorbed. This means that more charitable contribution deductions may be allowable in computing modified taxable income than are allowable in computing taxable income. By reducing modified taxable income these additional charitable contribution deductions may result in less NOL being absorbed than the actual amount of NOL used to reduce positive taxable income. Thus, the additional charitable contribution deductions allowed in determining modified taxable income may increase the amount of NOL carryover to a subsequent taxable year thereby "freeing up" some of the NOL for future use.

These rules also apply to the absorption of ATNOL.  The Chief Counsel then explains the problematic relationships between rules created by the statutory language:

The statutory language that imposes the 90 percent limit on the ATNOL deduction does not exclude the charitable contribution deduction from the measure of income on which the limitation is computed. Likewise, the statutory language that imposes the 10 percent limit on the charitable contribution deduction does not exclude any ATNOL deduction attributable to an ATNOL carryover from the measure of income on which that limitation is computed. Therefore, Taxpayer's 90 percent limit on its ATNOL deduction must be computed on a measure of income that includes the charitable contribution deduction, and Taxpayer's 10 percent limit on its charitable contribution deduction must be computed on a measure of income that includes the ATNOL carryover deduction. ....  We agree that simultaneous linear equations may be used to determine the proper amount of each deduction.

The Chief Counsel advice then derives the simultaneous linear equations necessary to compute the amount of ATNOL and charitable contribution deductions absorbed in the relevant years.

JRB

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