AMT credits: A refundable carryforward...subject to limitation?

Interplay of refundable AMT credits and section 383

With its extensive changes and immediate effects, the December 2017 enactment of the Tax Cuts and Jobs Act (the “Act”) has taxpayers seeking guidance on the Act’s potential impact to their businesses. Uncertainty results from the interaction of certain new provisions of the tax law with unchanged provisions. One example of this uncertainty is the question of whether alternative minimum tax (AMT) credits remain subject to potential limitation under section 383 of the Tax Code now that the AMT credits have been made “refundable” – i.e., capable of generating refunds for taxpayers without overall taxable income for the year.

Non-refundable AMT credit under prior law

Prior to the Act, section 55 generally imposed the AMT on corporate taxpayers. A corporation paying AMT received a “minimum tax credit” (AMT Credit). The corporation would carry the AMT Credit forward to future years, when it would apply the AMT Credit to reduce its taxable income under section 53. The maximum amount of AMT Credit claimable each year was the excess (if any) of the corporation’s regular (non-AMT) federal income tax liability over its computed AMT amount (a/k/a its “tentative minimum tax”).    

Refundable AMT credit under the Act

Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after Dec. 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50 percent of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. 

AMT Credit after an ownership change

AMT Credit carryforwards, like net operating loss (NOL) carryforwards, are a corporate tax attribute, and generally remains available for use regardless of who owns the corporation. After an ownership change as defined under section 382(g) (Ownership Change), however, use of NOL carryforward is subject to limitation under section 382(a). Prior to the Act, AMT Credit carryforwards were similarly subject to limitation under section 383 after an Ownership Change. These limitations are intended to discourage profitable corporations from shopping around to purchase corporations whose value is in their tax attributes.

Because taxpayers can claim refundable tax credits regardless of whether they do or do not have overall taxable income or tax liability for the year, refundable credits were not subject to limitation under section 383 prior to the Act. 

Limitation question – a collision of two worlds

Now that the AMT Credit is refundable, is it still subject to the section 383 credit limitation? This question results in a collision of two worlds under the tax rules, and the answer is not completely clear.

In the absence of a change in law such as that made by the Act, refundable credits by nature do not carryover, and as such would never be subject to a limitation such as section 383. But because AMT Credits were generated in prior years and carried over, the Act creates somewhat of a hybrid. The AMT Credit rules now involve both carryovers and refundable credits.  Further, a corporation’s carryovers may already have been subject to limitations on utilization prior to the Act’s enactment. 

While one could argue that making the AMT credit refundable implies that legislators did not want to subject the credit to income restrictions for taxpayers that had previously paid it, to allow an AMT credit without limitation would seem to thwart the purpose of sections 382 and 383 to discourage trafficking in NOLs and credits. 

Section 383 contains provisions addressing its application to AMT Credit carryforwards. It instructs that the limitation amount is based on taxable income, to the extent that taxable income does not exceed the section 382 limitation amount. This limitation computation method made sense under prior law, when taxable income was a prerequisite to claiming the AMT Credit. Now that the AMT Credit is refundable, taxable income is no longer required to claim it, and basing a section 383 limitation for AMT Credits on how much taxable income a corporation generates seems inappropriate. The Act did not amend section 383 or section 53 to address this puzzling interaction. 

As amended, section 53(e)(3) states that “[f]or purposes of [the Tax Code] (other than this section)” the AMT Credit should be treated as a refundable credit. Section 383 in turn, refers to “any unused [AMT Credit]…under section 53.” These references now seem circular. So what is their result?

In attempting to apply the existing rules, it not easy to see how the section 383 credit limitation as currently defined could apply to limit the AMT Credit’s refundability. However, it is also fair to say that refunding of a credit in excess of a prior section 383 limitation does not seem to fall within the intent of sections 382 and 383. 

The IRS considered a refundable AMT Credit in a 2011 Chief Counsel Advice (CCA 201126029), and concluded that the section 383 limitation did not apply. The CCA addressed refundable AMT Credit that resulted from an election under section 168(k)(4) to accelerate AMT Credit in lieu of claiming bonus depreciation. Applying this CCA’s rationale to the newly refundable AMT Credit under the Act would lead to a taxpayer favorable result, as depicted below in illustration 1. The IRS’ holding in the CCA, however, is based on the rationale that no section 383 limitation should apply to a corporation without regular income tax liability; it remains unclear whether a corporation can apply a similar rationale to claim refundable AMT Credit free of any section 383 limitation if it is reporting taxable income for the year.   

Illustrations

To illustrate the potential results under differing approaches to this AMT Credit issue, consider the following three illustrations. 

Facts:

For all three illustrations, assume corporation XYZ is a calendar year corporation with AMT Credits of $12 million that it generated in 2005-2015 and no other attributes. XYZ underwent an ownership change on Jan. 1, 2017, which resulted in an annual section 382 limitation of $10 million for XYZ. XYZ generates taxable income of zero from 2016 through 2018. 

Illustration 1 – full refundability, apply no section 383 limitation

In 2018, the actual AMT Credit would be refundable to the extent of 50 percent of the AMT Credit carryover of $12 million, or $6 million. The refundable amounts in future years would be $3 million in 2019, $1.5 million in 2020, $750 thousand in 2021 and $750 thousand in 2022.   

Illustration 2 – apply section 383 limitation literally as currently defined

Now what if you attempt to apply the section 383 credit limitation, as currently defined, to XYZ’s refundable credit? To calculate the section 383 credit limitation under section 381(a), you look to Reg. section 1.383-1(c)(6) and first calculate the unutilized section 382 limitation, and then calculate the modified tax liability assuming a deduction were claimed for the unused section 382 limitation. The actual tax is then compared to the modified tax liability and the AMT credit is available to offset the difference. Now let’s apply that to the facts in this case. XYZ has zero taxable income in 2018 and with zero income would have zero tax and therefore even if an additional deduction were claimed the modified tax liability would remain zero. Therefore, the section 383 credit limitation would be zero for 2018. This would leave XYZ with $0 refundable credit if the regulatory definition of the section 383 credit limitation applied. 

Illustration 3 – attempt to reconcile the rules with one another 

Perhaps a third methodology could be implemented in an attempt to reconcile the intent of the section 383 credit limitation with the refundability provision of section 53(e). Since taxable income is not necessary for a refundable credit, the modified taxable income calculation for section 383 purposes arguably should assume enough income existed to allow full utilization of the annual section 382 limitation and then determine the section 383 credit limitation. At the end of 2018, XYZ had a cumulative annual section 382 limitation of $20 million. So, assuming for section 383 purposes that XYZ had $20 million of income (the cumulative section 382 limitation), and reducing that by the $20 million section 382 limitation, you would have modified taxable income of $0. The tax differential would be $4.2 million under the 21 percent corporate rate leading to a section 383 credit limitation and refund of $4.2 million. 

The table below summarizes XYZ’s utilization of the refundable AMT credit applying the method described in illustration 3. 

Summary

Like many areas of the Tax Code impacted by the Act, the interplay of the refundable AMT Credit with previously enacted provisions is not entirely clear. As shown in our illustrations, there are a number of potential outcomes depending on how the law is interpreted, and taxpayers should seek appropriate tax advice when addressing the application of the refundable AMT Credit.