This article was published in the Tax Expert Analysis section of Law360 on April 9, 2018. © Copyright 2018, Portfolio Media, Inc., publisher of Law360.
The recently passed Tax Cuts and Jobs Act eliminated the corporate alternative minimum tax (AMT).1 Before its repeal, a corporate taxpayer that was subject to the AMT was entitled to indefinitely carry forward the AMT taxes paid as minimum tax credits (AMT credit) and utilize the AMT credit against regular tax liabilities in future years. The Tax Cuts and Jobs Act further provided that corporate taxpayers carrying forward AMT credits into taxable years beginning after December 31, 2017 may be able to offset a portion of their regular tax liability with the AMT credit. For tax years beginning after 2017 and before 2022, 50 percent of the excess AMT credits are either claimable against corporate taxpayers’ federal tax liability or refundable, and any remaining AMT credits are fully refundable in tax years beginning in 2021.2
Refundable AMT Credits
This is not the first time the government has allowed corporate taxpayers to claim a refund for their AMT credit carryforwards. For certain years before January 1, 2017, Section 168(k) allows a taxpayer to elect to forgo additional first-year depreciation and instead accelerate the use of its prior year AMT credit. Under these rules, the accelerated AMT credit was treated as an overpayment of tax under Section 6401 with an amount of the credit refundable to the taxpayer.
A past issue regarding the refundable AMT credits is their funding under sequestration. Under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011, the Office of Management and Budget (OMB) had determined that corporations claiming refundable prior AMT credits were subject to sequestration (automatic spending cuts made to deal with the government’s budget deficit). This resulted in refund claims being reduced by a sequestration rate, irrespective of when the IRS received the original or amended tax return.3 OMB has yet to determine whether the new rule allowing for refundable AMT credits will subject these refunds to a sequestration rate reduction.
Another issue regarding the refundable AMT credits is whether the credits will be subject to limitation following an ownership change under Section 382. Because the Section 168(k) election did not modify the rules under Section 383, the general application of Section 383 effectively applies the rules of Section 382 to limit the use of AMT credits. Section 382 generally requires a corporation to limit the amount of its income in future years that can be offset by historic net operating losses (NOLs) once that corporation has undergone an "ownership change."4 The amount of the loss that can be used after an ownership change to offset taxable income is generally limited to the value of the corporation immediately before the ownership change multiplied by the "long-term tax-exempt rate." Under Section 383, if an ownership change occurs with respect to a loss corporation, the Section 382 limitation and the Section 383 limitation for a post-change year may limit the ability to offset taxable income with pre-change tax credits of the loss corporation. Treas. Reg. Section 1.383-1(e) provides the computation for the Section 383 credit reduction amount, i.e., the amount that reduces the Section 382 limitation carryforward. Under those rules, pre-change losses absorb the limitation on a dollar-for-dollar basis before impacting any credit carryovers.
The Section 383 credit limitation for any tax year is equal to the excess of (1) the corporation’s income tax liability for the tax year, over (2) the amount of that liability, if an additional deduction was allowed for the amount of the corporation’s remaining Section 382 limitation for that year, after being absorbed by pre-change losses. Because the limitation is applied to reduce the AMT credits from offsetting a corporation’s regular tax liability, there is a question as to whether the refund of a credit is subject to limitation because the AMT credits are not being used to offset taxable income. If Section 383 were to apply to AMT credits, it could theoretically extend the AMT credit carryforward beyond 2021, when the credits are no longer refundable.
The IRS previously determined that AMT credits refundable under Section 168(k)(4) were not subject to limitation under Section 383 because the taxpayer had no regular tax liability. In Chief Counsel Advice 201126029 (CCA), the IRS concluded that a taxpayer’s Section 168(k)(4) election to increase AMT credit by forgoing 50 percent of additional first-year depreciation was not subject to the application of Section 383. The CCA concluded that, because the taxpayer had no regular tax liability to offset, the refundable AMT credit resulting from a Section 168(k)(4) election was not subject to limitation under Section 383. The CCA reasoned that Section 383 applies to limit the use of certain credits available to offset regular tax liability. Thus, Section 383 did not apply because the taxpayer had no regular tax liability in the tax year at issue and the credits at issue would be refunded without offsetting regular tax liability. The Tax Cuts and Jobs Act was silent as to the application of Section 383 to the new refundable AMT credits.
Taxpayers looking to receive refunds of AMT credits should be cognizant of the rules that could limit or eliminate the ability to refund the AMT credits. Taxpayers with AMT credits subject to Section 383 limitation should be aware of potential future IRS guidance addressing the issue. In the meantime, taxpayers may want to review past acquisitions of the stock of one or more target corporations to determine if they are carrying the correct amount of AMT credits. There is ample guidance for allocating attributes for corporations leaving a consolidated group, other than AMT credits, between the group and departing member. In addition, Proposed Treas. Reg. Section 1.1502-55(h) provides some guidance for allocating AMT credit carryforwards between a consolidated group and a departing member. These rules are generally flexible, and consolidated groups may be able to allocate AMT credits to any member of the group using whatever method most efficiently absorbs the AMT credits without a consistency requirement from year to year. In many cases, because the AMT credit carryforwards are subject to Section 383 at the time when the credits were not refundable, buyers and sellers generally had not focused on the allocation. With the potential for added value under the Tax Cuts and Jobs Act, taxpayers may want to understand and document this allocation in past or future transactions.
1 "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," (PL 115-97) (Tax Cuts and Jobs Act). See Sections 12001 and 12002 modifying Section 55(a). Unless otherwise stated, all references to "Section" are to the Internal Revenue Code, and all references to "Regulation" or "Treas. Reg." are to the Treasury Regulations promulgated thereunder.
2 See Section 53(e). What is still unknown is how the new BEAT minimum tax is taken into account for calculating the refundable amount under Section 6401.
3 The current fee is 6.6 percent, if applicable. Some taxpayers have questioned whether the sequestration fee merely reduces the refundable amount of AMT credit or just becomes part of the carryforward amount.
4 An ownership change is a change in the percentage of ownership of the loss corporation’s stock owned by the 5 percent shareholders of more than 50 percentage points (by value) over a three-year period. See Section 382(g) and Treas. Reg. Section 1.382-2T(a)(1).
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.