Easy as A-M-T
by Jenni Black
Jenni Black is a managing director in Citrin Cooperman’s national tax office and the practice leader of the tax procedure and controversy practice. Jenni is also a contributing author for Procedurally Taxing.
In this post, Black examines the interaction between the alternative minimum tax and the additional reporting year tax when computing a partner’s total chapter 1 tax for the reporting year, in situations in which the partnership has made an election to push out the adjustments to its partners under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman.
Under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, any adjustments to partnership-related items must be determined, and any tax attributable to those adjustments must be assessed and collected, at the partnership level, unless BBA provides for an exception.1 One of the exceptions to when the tax attributable to partnership adjustments must be assessed and collected at the partnership level is if the partnership makes an election under section 6226 (or section 6227(b)) to “push out” the adjustments to its partners from the reviewed year.2 This article (published in two
1 Section 6221(a).
2 The reviewed year is the tax year to which the adjustment relates. Section 6225(d)(1); reg. section 301.6241-1(a)(8).
parts) will examine exactly what the partner’s tax as a result of the pushed-out adjustments is, and how it fits in with a partner’s tax for the year. It’s easy as one, two, three.
Under section 6226(b), if the partnership pushes out the adjustments, “each partner’s tax imposed by chapter 1 for the taxable year which includes the date the statement was furnished [by the partnership] shall be adjusted by” the sum of the “amount by which the tax imposed under chapter 1 would increase or decrease if the partner’s share of the adjustments . . . were taken into account” in the tax year to which the adjustments relate, and any year after that if the partner’s chapter 1 tax would have increased or decreased “by reason of the adjustment to tax attributes” “which would have been affected if the adjustments . . . were taken into account” in the year to which they relate. The reporting year is the tax year of the partner that includes the date the partnership furnishes the push out statements to its partners and is the tax year in which the partners must take into account the tax implications of the adjustments in the push out statements.3
Let’s break it down.
For starters, if the partnership pushes out the adjustments to its partners from the reviewed year, those partners’ chapter 1 tax for the reporting year is adjusted. Chapter 1 tax is adjusted. Which chapter 1 tax is adjusted? The partner’s chapter 1 tax for the reporting year (not the year to which the adjustments relate). By how much is the partner’s chapter 1 tax adjusted? By the “aggregate” (that is, sum) of two numbers —
3 Reg. section 301.6226-3(a). For administrative adjustment requests, the reporting year and the adjustment year will be the same tax year. In the context of an exam, the adjustment year and the reporting year will be the same tax year unless the adjustments become finally determined toward the end of one tax year and the statements are not furnished until the next tax year.
(1) the amount by which the partner’s chapter 1 tax would have increased or decreased if the adjustments were taken into account in the year to which they relate (reviewed year4); plus (2) if taking into account the adjustments in the reviewed year would have changed the partner’s tax attributes, then the amount by which the partner’s chapter 1 tax would have increased or decreased in the tax years after the reviewed year (intervening years) as a result of those tax attribute changes. This aggregate change in tax (1 plus 2) is referred to as the “additional reporting year tax.”5 To summarize, the additional reporting year tax is an increase or decrease in the partner’s chapter 1 tax for the reporting year (a “current” year, not the year to which the adjustments relate), calculated by reference to how much the partner’s chapter 1 tax would have increased (or decreased) in the prior years, if th e items were reported as adjusted to begin with.
In computing the partner’s increase or decrease in chapter 1 tax for the reviewed year and any intervening year, you take the amount of chapter 1 tax that would have been imposed in the tax year (if the items were reported as adjusted) and subtract from that the amount of chapter 1 tax actually shown on the return plus amounts previously assessed or collected, and less the amount of rebates made (whatever those are).6 This is the same as the calculation of a deficiency. Or to phrase it in a way that is easier to understand — the amount by which the partner’s chapter 1 tax would have gone up or down if the partner filed an amended return to report the adjustments. You do that calculation for the reviewed year and any intervening year (if the intervening tax years would have been affected by the changes in the reviewed year (for example, if the taxpayer had a net operating loss)). Then you add them all together and that’s your additional reporting year tax. Voila! The partner does this
calculation on Form 8978, “Partner’s Additional Reporting Year Tax,” which is attached to the partner’s reporting year return. Form 8978 loosely resembles Form 1040-X and 1120-X. Recall that the calculation is of the change in chapter 1 tax (which would include the alternative minimum tax as it is imposed by chapter 1) so it would not include any self-employment or net investment income tax. Those would be handled outside of BBA.7
Now that we’ve calculated the additional reporting year tax, we need to report it on the partner’s reporting year tax return. As mentioned above, section 6226(b)(1) describes it as an adjustment to the partner’s chapter 1 tax for the year. What does it mean to adjust someone’s chapter 1 tax for the year? Do you calculate the total chapter 1 tax for the year, then add or subtract the additional reporting year tax? What about AMT?
Before we answer those questions, let’s take a little diversion out of my happy place to discuss AMT. What is AMT? AMT is the amount of chapter 1 tax a taxpayer will pay if the tentative minimum tax is higher than the taxpayer’s regular chapter 1 tax. How is it calculated? This is important.
Under section 55, AMT is calculated by calculating “alternative minimum taxable income,” which starts with the taxpayer’s taxable income for the year and makes some adjustments. Then, alternative minimum taxable income is compared with an exemption amount. The amount by which the alternative minimum taxable income exceeds the exemption amount is called the “taxable excess.” The taxable excess is then multiplied by a specific tax rate (26 percent and 28 percent, depending on the amount of the taxable excess). This results in the “tentative minimum tax.” If the tentative minimum tax exceeds the amount of the taxpayer’s “regular tax” for the year, the taxpayer pays the regular tax plus the AMT — the difference between the tentative minimum tax and the regular tax.
4 Under section 6226(b)(2)(A), it’s the partner’s tax year which includes the end of the reviewed year of the partnership, which the regulations define as the “first affected year.” If the partnership and its partners are all calendar-year taxpayers, the “first affected year” and the “reviewed year” will be the same tax year. For ease of reading, this article will use the term “reviewed year” to both the reviewed year and first affected year.
5 Reg. section 301.6226-3(a).
6 Reg. section 301.6226-3(b).
7 As non-chapter 1 taxes are outside of BBA, the partner would file an amended return for the reviewed year and any intervening year to report and pay any non-chapter 1 taxes. See section 6241(9) (partnership adjustments made under BBA must be taken into account in determining non-chapter 1 taxes); see also section 6501(c)(12) (providing an extension of time to assess taxes under chapters 2 and 2A that result from partnership adjustments).
“Regular tax” is regular tax liability adjusted by a few things, such as foreign tax credits.8 Regular tax liability is the tax imposed by chapter 1, excluding 26 specific types of taxes listed in section 26(b). As relevant for this discussion, the additional reporting year tax is not on the list of exclusions (that is, section 26(b) makes no reference to anything under BBA at all).
How does the additional reporting year tax fit into this? Part 2 of this article discusses whether the additional reporting year tax is a tax imposed by chapter 1 and how it fits into the calculation of the partner’s overall chapter 1 tax in the reporting year.
8 Section 55(c).