1.57-4 Limitation on amounts treated as items of tax preference for taxable years beginning before January 1, 1976.
§ 1.57-4 Limitation on amounts treated as items of tax preference
for taxable years beginning before January 1, 1976.
(a) In general. If in any taxable year beginning before
January 1, 1976, a taxpayer has deductions in excess of gross
income and all or a part of any item of tax preference described in
§ 1.57-1 results in no tax benefit due to modifications required
under section 172(c) or section 172(b)(2) in computing the amount
of the net operating loss or the net operating loss to be carried
to a succeeding taxable year, then, for purposes of section
56(a)(1), the sum of the items of tax preference determined under
section 57(a) (and § 1.57-1) is to be limited as provided in
paragraph (b) of this section.
(b) Limitation. The sum of the items of tax preference,
for purposes of section 56(a)(1) and § 1.56A-1(a), is limited to an
amount determined under subparagraphs (1) and (2) of this
paragraph.
(1) Loss year. If the taxpayer has no taxable income for
the taxable year without regard to the net operating loss
deduction, the amount of the limitation is equal to -
(i) In cases where the taxpayer does not have a net operating
loss for the taxable year, the amount of the recomputed income (as
defined in paragraph (c) of this section) or
(ii) In cases where the taxpayer has a net operating loss for
the taxable year, the amount of the net operating loss (expressed
as a positive amount) increased by the recomputed income or
decreased by the recomputed loss for the taxable year (as defined
in paragraph (c) of this section,
plus the amount of the taxpayer's stock option item of tax
preference (as described in § 1.57-1(f)).
(2) Loss carryover and carryback years. Except in cases
to which subparagraph (1)(ii) of this paragraph applies, if, in any
taxable year to which a net operating loss is carried, a capital
gains deduction is disallowed under section 172(b)(2) in computing
the amount of such net operating loss which may be carried to
succeeding taxable years, the amount of the limitation is equal to
the amount, if any, by which the sum of the items of tax preference
(computed with regard to subparagraph (1)(i) of this paragraph)
exceeds the lesser of -
(i) The amount by which such loss is reduced because of a
disallowance of the capital gains deduction in such taxable year,
or
(ii) The capital gains deduction.
The amount determined pursuant to the preceding sentence shall be
increased by the amount, if any, that such reduction is
attributable to that portion of such a net operating loss described
in section 56(b)(1)(B) and § 1.56A-2(a)(2) (relating to excess tax
preferences).
(c) Recomputed income or loss. For purposes of this
section, the phrase “recomputed income or loss” means the taxable
income or net operating loss for the taxable year computed without
regard to the amounts described in § 1.57-1 except paragraph (i)(2)
of that section (relating to corporate capital gains) and without
regard to the net operating loss deduction. For this purpose, the
reference to the amounts described in § 1.57-1 is a reference to
that portion of the deduction allowable in computing taxable income
under the appropriate section equal to the amount which is
determined in each paragraph of § 1.57-1. For example, the amount
described in § 1.57-1(h) (relating to excess of percentage
depletion over basis) is that portion of the deduction allowable
for depletion under section 611 which is equal to the amount
determined under § 1.57-1(h). For purposes of this paragraph, the
amount described in § 1.57-1(i)(1) (relating to capital gains) is
to be considered as the amount of the deduction allowable for the
taxable year under section 1202.
(d) Determination of preferences reduced. When, pursuant
to paragraph (b)(1) of this section, the sum of the items of tax
preference (determined without regard to this section) are reduced,
such reduction is first considered to be from the capital gains
item of tax preference (described in § 1.57-1(i)(1)) and each item
of tax preference relating to a deduction disallowed in computing
the net operating loss pursuant to section 172(d), pro rata. The
balance of the reduction, if any, is considered to be from the
remaining items of tax preference, pro rata. For purposes of this
subparagraph, deductions not attributable to the taxpayer's trade
or business which do not relate to items of tax preference are
considered as being applied in reducing gross income not derived
from such trade or business before such deductions which do relate
to items of tax preferences.
(e) Examples. The principles of this section may be
illustrated by the following examples in each of which the
deduction for the personal exemption is disregarded and the
taxpayer is an individual who is a calendar year taxpayer.
Example 1.The taxpayer has the following items of income and
deduction for 1970:
Gross income (all
business income)
$120,000
Deductions:
Nonbusiness
deductions
30,000
Items of tax
preference (excess accelerated depreciation on real property held
in taxpayer's business)
80,000
Other business
deductions
50,000
Based on the above figures, the taxpayer has a net operating loss
of $10,000 (business deductions of $130,000 less business income of
$120,000, the nonbusiness deductions having been disallowed by
reason of section 172(d)(4)). The limitation on the amount treated
as items of tax preference is computed as follows:
Tax
preferences
$80,000
Net
operating loss
$10,000
Recomputed income or loss:
Gross
income
$120,000
Deductions
other than tax preference items
80,000
Recomputed income
40,000
Sum of
net operating loss and recomputed income
50,000
Stock
options preference
0
Limitation
50,000
Thus, the minimum tax computed under section 56(a) would be 10
percent of $20,000 (items of tax preference of $50,000 less the
minimum tax exemption of $30,000), $1,000 of which would be
deferred tax liability pursuant to section 56(b). Example 2.Assume
the same facts as in example 1 except that the other business
deductions are $130,000, resulting in a net operating loss of
$90,000. The limitation on the amount treated as items of tax
preference is computed as follows:
Tax
preferences
$80,000
Net
operating loss
$90,000
Recomputed income
or loss:
Gross
income
$120,000
Deductions
other than tax preference items
160,000
(40,000)
Disallowance of
nonbusiness deductions under sec. 172(d)
30,000
Recomputed loss
10,000
Net
operating loss less recomputed loss
80,000
Stock
options preference
0
Limitation
80,000
Thus, the minimum tax computed under section 56(a) would be 10
percent of $50,000 (items of tax preference of $80,000 less the
minimum tax exemption of $30,000), all of which will be deferred
tax liability pursuant to section 56(b). Example 3.The taxpayer has
the following items of income and deduction for 1970:
Gross income (all
from business):
Ordinary
$50,000
Net
section 1201 gains
120,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution control facilities
$45,000
Capital gains deduction
60,000
105,000
Other business
deductions
75,000
In addition, the taxpayer has a $55,000 item of tax preference
resulting from qualified stock options. Based on the above figures,
the taxpayer has no taxable income and no net operating loss as the
capital gains deduction is disallowed in determining the net
operating loss pursuant to section 172(d). The limitation on the
amount treated as items of tax preference is computed as follows:
Tax
preferences
$160,000
Net
operating loss
0
Recomputed income
or loss:
Gross
income
$170,000
Deductions
other than tax preference items
75,000
Recomputed income
$95,000
Plus: Stock options preference
55,000
Limitation
150,000
Thus, the minimum tax computed under section 56 would be 10 percent
of $120,000 (items of tax preference of $150,000 less the minimum
tax exemption of $30,000). Example 4.Assume the same facts as in
example (3) except that the taxpayer has a net operating loss
carryover from 1969 of $80,000. The taxpayer has $160,000 of tax
preferences which are limited to $150,000 pursuant to §
1.57-4(b)(1). In order to determine the amount of the 1969 net
operating loss which remains as a carryover to 1971, the 1970
taxable income is redetermined in accordance with section 172(b)(2)
and the regulations thereunder, as follows:
Gross income -
1970
$170,000
Deductions:
Capital gains
deduction disallowed business deductions
$120,000
120,000
Taxable income for section 172(b)(2)
50,000
Thus, the 1969 net operating loss which remains as a carryover to
1971 is $30,000. Pursuant to paragraph (b)(2) of this section, the
limitation on the amount treated as items of tax preference is
computed as follows:
Items
of tax preference computed with regard to § 1.57-4(b)(1) (per
example (3))
$150,000
Less:
Lesser of capital gains deduction ($60,000) or amount of reduction
in carryover due to its disallowance ($50,000)
50,000
Limitation
100,000
Thus, the minimum tax computed under section 56 would be 10 percent
of $70,000 (items of tax preference of $100,000 less the minimum
tax exemption of $30,000). Example 5.The taxpayer has the following
items of income and deduction for the taxable year 1970 without
regard to any net operating loss deduction:
Gross income (all
from business):
Ordinary
$50,000
Net section
1201 gain
40,000
$90,000
Deductions:
Capital gains
deduction
20,000
Medical
expenses ($4,100 actually paid but allowable only to the extent in
excess of 3 percent of adjusted gross income of $70,000)
2,000
Other itemized
deductions
40,000
62,000
Taxable income (before net operating loss deduction)
28,000
In addition, the taxpayer has an item of tax preference of $35,000
resulting from qualified stock options. In 1973, the taxpayer has a
net operating loss of $60,000 (no portion of which is attributable
to excess tax preferences pursuant to § 1.56A-2) which is carried
back to 1970 resulting in no taxable income in 1970. In order to
determine the amount of the 1973 net operating loss which remains
as a carryover to 1971, the 1970 taxable income is redetermined, in
accordance with section 172(b)(2) and the regulations thereunder,
as follows:
Gross
income
$90,000
Deductions:
Capital gains
deduction disallowed
Medical
expenses ($4,100 actually paid but allowable only to the extent in
excess of 3 percent of adjusted gross income of $90,000)
$1,400
Other itemized
deductions
40,000
$41,400
Taxable income
for section 172(b)(2)
48,600
The limitation on the amount treated as items of tax preference is
computed as follows:
Items of tax
preference:
Capital
gains
$20,000
Stock
options
35,000
55,000
Less:
Lesser of capital gains deduction ($20,000) or amount of reduction
in carryover due to its disallowance ($20,600)
(20,000)
Limitation
35,000
Thus, the minimum tax for 1970 under section 56 would be 10 percent
of $5,000 (items of tax preference of $35,000 less the minimum tax
exemption of $30,000). Example 6.Assume the same facts as in
example (5) except that the 1973 net operating loss was $45,000. In
this case, the $20,600 increase in the 1970 taxable income as
redetermined, results in a decrease of $17,000 (i.e., the
remaining 1973 net operating loss after an initial decrease of
$28,000 resulting from the 1970 taxable income before
redetermination). The limitation on the amount treated as items of
tax preference is computed as follows:
Items
of tax preference computed without regard to this section
$55,000
Less:
Lesser of capital gains deduction ($20,000) or amount of reduction
in carryover due to its disallowance ($17,000)
(17,000)
Limitation
38,000
Thus, the minimum tax for 1970 under section 56 would be 10 percent
of $8,000 (items of tax preference of $38,000 less the minimum tax
exemption of $30,000). Example 7.The taxpayer has the following
items of income and deduction for 1973 without regard to any net
operating loss deduction:
Gross income (all
from business):
Ordinary
$100,000
Net section
1201 gains
120,000
$220,000
Deductions:
Items of tax
preference:
Excess
amortization of certified pollution control facilities
45,000
Capital gains
deduction
60,000
105,000
Other business
deductions
75,000
$180,000
Taxable income (before net operating loss deduction)
40,000
In 1972, the taxpayer had a net operating loss of $70,000 which is
carried forward to 1973; $20,000 of this net operating loss is
attributable to excess tax preferences. In order to determine the
amount of the 1972 net operating loss which remains as a carryover
to 1974, the 1973 taxable income is redetermined, in accordance
with section 172(b)(2) and the regulations thereunder, as follows:
Gross
income
$220,000
Deductions:
Capital gains deduction
Disallowed
Business deductions
120,000
Taxable income per section 172(b)(2)
100,000
In this case, the $60,000 increase in the 1972 taxable income as
redetermined and the $30,000 decrease in the amount of the 1973 net
operating loss remaining as a carryover to 1974 (i.e., the
remaining 1972 net operating loss after an initial decrease of
$40,000 resulting from the 1973 taxable income before
redetermination) is entirely attributable to the disallowance of
the capital gains deduction. The limitation on the amount treated
as items of tax preference is computed as follows:
Items
of tax preference computed without regard to this section:
Capital gains
$60,000
Excess amortization of certified pollution control facilities
45,000
105,000
Less:
Lesser of capital gains deduction (60,000) or amount of reduction
in carryover due to its disallowance ($30,000)
(30,000)
75,000
Plus:
Amount of reduction of carryover (due to disallowance of capital
gains deduction) attributable to excess tax preferences
20,000
Limitation
95,000
[T.D. 7564, 43 FR 40476, Sept. 12, 1978, as amended by T.D. 8138,
52 FR 15309, Apr. 28, 1987]