Paul L. Caron

Friday, June 22, 2007

Tax Court Applies AMT to Nurse with $121k Salary; Rejects Argument that Congress Did Not Intend AMT to Apply to "Nonwealthy Working Class"

In Kamara v. Commissioner, T.C. Summ. Op. 2007-103 (6/21/07), the Tax Court rejected a taxpayer's argument that Congress did not intend the AMT to apply to the "nonwealthy working class":

Respondent determined a deficiency in petitioner’s 2003 Federal income tax in the amount of $4,176. The issue for decision is whether petitioner is liable for the AMT for the 2003 taxable year....

On the return petitioner indicated his status as head of household and claimed his parents as dependents. In 2003, petitioner worked as a licensed practical nurse [and] reported $121,309 in Form W-2, Wage and Tax Statement, wages on his return. ... [P]etitioner does not challenge respondent’s calculation of his AMT liability and agrees that the calculation was in accordance with the Internal Revenue Code. Petitioner’s objection is simply that respondent erred in applying the AMT to petitioner. He asserts that Congress did not intend for the AMT to apply to taxpayers like him, who are in the nonwealthy working class. He believes he should not be subject to the AMT since he works two jobs, night shifts, weekends, and overtime to support his family. Petitioner also points out that he did not claim any tax preferences that are targets of the AMT. ...

Petitioner provides no authority to support his position. His arguments are based on criticisms of the AMT in newspaper articles and his misreading of Internal Revenue Service Publication 17, Your Federal Income Tax. These are not authoritative sources of Federal tax law. ...Furthermore, petitioner’s arguments have been previously rejected by this Court. As set forth in the statute, the AMT does apply to lower-income taxpayers, not just the wealthy. ...  Although tax preferences play a part in the computation of the AMT, a taxpayer may still be liable for the AMT even if he claimed no tax preferences. ...

We are not unsympathetic to petitioner’s concerns about the AMT’s reach. This Court has stated:

The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected.

Speltz v. Commissioner, 124 T.C. 165, 176 (2005), aff'd, 454 F.3d 782 (8th Cir. 2006). Congress enacted the AMT provisions, and we have no authority to disregard them.

See also Clare v. Commissioner, T.C. Summ. Op. 2007-104 (6/21/07):

Petitioners reported adjusted gross income of $405,807, including a long-term capital gain of $342,263, on their 2002 Federal Income Tax return. They computed tax on the capital gain at the maximum capital gains tax rate for 2002, 20%. They did not, however, compute or report AMT. ...

[P]etitioners maintain that the AMT, as applied to them, is inherently unfair because Congress never intended the tax to apply to taxpayers “in [their] situation.” ... [W]e begin by addressing the event which triggered application of the AMT; in this case, the sale of petitioners’ farm property. Since petitioners apparently did not purchase another residence within 12 months, they were required to report and accordingly, pay tax on, the proceeds from the sale as long term capital gain. While we sympathize with the fact that petitioners are middle-income taxpayers who, without the proceeds of sale, would not otherwise be subject to the AMT, we cannot change the facts, nor the statute, to provide them with equitable relief. The triggering event in this case was a one-time sale, making petitioners subject to the AMT. It is simply beyond the purview of this Court to decide otherwise. We also remind petitioners that this Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the AMT.

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TAX COURT HITS NURSE WITH ALTERNATIVE MINIMUM TAX, Rejects Argument that Congress Did Not Intend AMT to Apply to "Nonwealthy Working Class." I think the AMT creep could wind up being a big issue if it's not addressed soon.... [Read More]

Tracked on Jun 22, 2007 7:03:18 AM

» AMT Creep from Find The Boots
Try as you may to "soak the rich", these "progressive" taxes always hurt the poor and middle class much worse than the rich. [Read More]

Tracked on Jun 22, 2007 8:10:35 AM


"While I agree that the tax code is too complicated, I fail to understand how anyone whose annual income is over 100,000 can avoid calling themselves wealthy..."

Many people (such as young professionals) who earn in the low seven figures are saddled with massive student debt. If we have families, we can expect to pay about $600/month copayment for health insurance. Many of the jobs that pay around $100,000 are in seriously expensive areas.

The bottom line is that this $115,000-earning professional is living in a 900 sq.ft. two-bedroom apartment under the John Wayne Airport flight path, driving a 1999 Saturn and trying to figure how in the hell he is going to keep paying his stepson's UCI tuition.

But yeah, I feel rich. Go ahead and tax me to the gills. I'm sure I won't even notice it.

Posted by: Thomas | Jun 22, 2007 11:30:55 AM

The idea that the AMT is a stealth flat tax is unfounded. The AMT dates from 1978, when it was enacted as a replacement for a 1969 minimum income tax. It exists because of Congress responding to media muckraking about "rich people" not paying income tax. In the original 1969 legislation, it was a matter of 155 people with high incomes paying no income tax. The successive versions of AMT have never actually solved this "problem"; there are still some high-income people who pay zero income tax and zero AMT. Even the AMT itself isn't "flat" since the Democrats (Bill Clinton and the two chambers of Congress) in 1993 raised the rate and created two tax bands of 26% for incomes under $175,000 and 28% for incomes over that. Whatever Senator Packwood may have said he wanted in 1986 has little to do with reality before or since.

Posted by: CJ | Jun 22, 2007 11:16:03 AM

America - home of the richest poor people in history.

Posted by: Jeff | Jun 22, 2007 10:50:53 AM

The AMT is working as designed: it disproportionately taxes Democrats, who disproportionately support higher taxes. Tax fairness at its best!

Posted by: Anthony | Jun 22, 2007 10:32:35 AM

Just a side comment, but I believe that people in the 55th percentile and below pay basically no federal income tax. Individual circumstances may vary, but the fact remains that a huge percentage of American voters are completely sheltered from the consequences of any tax system. This, of course, makes them very receptive to pandering ideas like "soak the rich!" which turns out to be anyone making over $100K.

Posted by: Mike | Jun 22, 2007 10:09:17 AM

A class to which I aspire some day!

Yes, and when you do, please stop by again and tell us how fabulously wealthy you feel. I suspect you may be in for a bit of a disappointment as you still answer the cattle-call to board a 30 year old, smelly airliner rather than your plush new Gulfstream V. The AMT was purportedly created to address the Rockefellers of the world, not the RNs cleaning bed pans.

Posted by: Hogarth | Jun 22, 2007 8:38:27 AM

JTB: RTFA: "he works two jobs, night shifts, weekends, and overtime"

Betcha he doesn't spend time reading blogs and pontificating. Now get off your lazy @$$ and get to work.

Posted by: Robert Schwartz | Jun 22, 2007 8:37:30 AM

"While I agree that the tax code is too complicated, I fail to understand how anyone whose annual income is over 100,000 can avoid calling themselves wealthy..."

Sir, like many you are confusing income with wealth. They are NOT the same. Income is earnings for services performed. Wealth is the accumulation of net reserves after income minus expenses and taxes paid. Our tax system treats mostly income not wealth. One need only remember the Heinz-Kerry flap of a couple of years ago to know this is so.

Wealth as defined in the tax code is treated entirely different and generally by other means other than those envisioned in the 16th Amendment. The collections just fall under the same umbrella govt. agency.

Posted by: JohnMc | Jun 22, 2007 8:35:56 AM

At an FBA tax meeting a few years ago, one of the speakers was on the Senate Finance Committee staff during the 1986 reform. He claimed that the lack of AMT indexing was on purpose. Senator Packwood wanted a flat tax, and this was a way to back into a flat tax.

Posted by: Anthony | Jun 22, 2007 8:08:41 AM

A $100K income might just barely get you a mortgage on a two-bedroom condo around here, if you don't mind not buying a new car for a few years. It's hardly 'wealthy'.

I certainly don't think 'everyone' understood the flat-tax intent of the AMT in 1986, perhaps it was interpreted as such in some quarters. I'll have to see if I can find that article.

People at the bottom of the income distribution not only don't itemize, they usually don't pay any income tax either.

Posted by: JEM | Jun 22, 2007 8:04:06 AM

Um, JTB:

Where, exactly, do you live? What is the median home price in your economy? Do you live in a state that taxes income (some do not)? What is your sales tax? Do you pay property tax? Do you pay local income tax?

$100,000 a year in Tallahasse, Fla. is pretty good money.
$100,000 a year in Manhattan, NY is lower-middle class.

To claim that $100,000/yr. makes a person wealthy reveals a lack of knowledge of economics.

Posted by: justsomecommenter | Jun 22, 2007 7:41:40 AM

It's important to note that the covert purpose of the AMT was to move us to a flat tax system. There's an article by Professor Graetz from the 1980s which makes the point explicitly. So here we see the system working as intended, gradually sweeping in people as low as, I would guess, the 85th income percentile. (Since people at the very bottom of the income distribution generally don't itemize or have tax preferences, the number of taxpayers being squeezed into a flat tax system is getting pretty big.)

Of course, if you don't like the covert flat tax plan, that's a different issue. The Tax Court is quite right, however, not to take account of occasional disingenuous rhetoric from congressmen, since everyone understood in 1986 that the AMT would operate as a back door to a flat tax.

Posted by: y81 | Jun 22, 2007 7:25:52 AM

While I agree that the tax code is too complicated, I fail to understand how anyone whose annual income is over 100,000 can avoid calling themselves wealthy...

I don't argue that they are not "just simple working people"; but when the average salary is under 40,000, a person who makes three times that IS wealthy.

A class to which I aspire some day!

Posted by: jtb | Jun 22, 2007 7:22:32 AM