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I.R.C. § 53.
SEC. 53 CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY. (a) Allowance of credit. There shall be allowed as a credit against the tax imposed by this chapter [26 USCS §§ 1 et seq.] for any taxable year an amount equal to the minimum tax credit for such taxable year. (b) Minimum tax credit. For purposes of subsection (a), the minimum tax credit for any taxable year is the excess (if any) of (1) the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over (2) the amount allowable as a credit under subsection (a) for such prior taxable years. (c) Limitation. The credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of-- (1) the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part [26 USCS §§ 21 et seq., 27 et seq., 38 et seq., 46 et seq., and 51 et seq.], over (2) the tentative minimum tax for the taxable year. (d) Definitions. For purposes of this section-- (1) Net minimum tax. (A) In general. The term "net minimum tax" means the tax imposed by section 55 [26 USCS § 55]. (B) Credit not allowed for exclusion preferences. (i) Adjusted net minimum tax. The adjusted net minimum tax for any taxable year is (I) the amount of the net minimum tax for such taxable year, reduced by the amount which would be the net minimum tax for such taxable year if the only adjustments and items of tax preference taken into account were those specified in clause (ii).

(II)

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(ii) Specified items. The following are specified in this clause (I) the adjustments provided for in subsection (b)(1) of section 56 [26 USCS § 56], and

(II) the items of tax preference described in paragraphs (1), (5), and (7) of section 57(a) [26 USCS § 57(a)]. (iii) Special rule. The adjusted net minimum tax for the taxable year shall be increased by the amount of the credit not allowed under section 30 [26 USCS § 30] solely by reason of the application of section 30(b)(3)(B) [26 USCS § 30(b)(3)(B)]. (iv) Credit allowable for exclusion preferences of corporations. In the case of a corporation (I) the preceding provisions of this subparagraph shall not apply, and (II) the adjusted net minimum tax for any taxable year is the amount of the net minimum tax for such year increased in the manner provided in clause (iii). (2) Tentative minimum tax. The term "tentative minimum tax" has the meaning given to such term by section 55(b) [26 USCS § 55(b)].

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I.R.C. § 55(a)-(d).
SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED. (a) General rule. There is hereby imposed (in addition to any other tax imposed by this subtitle [26 USCS § 1 et seq.]) a tax equal to the excess (if any) (1) the tentative minimum tax for the taxable year, over (2) the regular tax for the taxable year. (b) Tentative minimum tax. For purposes of this part [26 USCS § 55 et (1) Amount of tentative tax. (A) Noncorporate taxpayers. (i) In general. In the case of a taxpayer other than a corporation, the tentative minimum tax for the taxable year is the sum of-- (I) 26 percent of so much of the taxable excess as does not exceed $ 175,000, plus (II) 28 percent of so much of the taxable excess as exceeds $ 175,000. The amount determined under the preceding sentence shall be reduced by the alternative minimum tax foreign tax credit for the taxable year. (ii) Taxable excess. For purposes of this subsection, the term "taxable excess" means so much of the alternative minimum taxable in come for the taxable year as exceeds the exemption amount. (iii) Married individual filing separate return. In the case of a married individual filing a separate return, clause (i) shall be applied by substituting "$ 87,500" for "$ 175,000" each place it appears. For purposes of the preceding sentence, marital status shall be determined under section 7703 [26 USCS § 7703]. (B) Corporations. In the case of a corporation, the tentative minimum tax for the taxable year is (i) 20 percent of so much of the alternative minimum taxable in come for the taxable year as exceeds the exemption amount, reduced by (ii) the alternative minimum tax foreign tax credit for the taxable year. seq.]

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(2) Alternative minimum taxable income. The term "alternative minimum taxable income" means the taxable income of the taxpayer for the taxable year (A) determined with the adjustments provided in section 56 [26 USCS §56] and section 58 [26 USCS § 58], and (B) increased by the amount of the items of tax preference described in section 57 [26 USCS § 57]. If a taxpayer is subject to the regular tax, such taxpayer shall be subject to the tax imposed by this section (and, if the regular tax is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of the preceding sentence). (3) Maximum rate of tax on net capital gain of noncorporate taxpayers. The amount determined under the first sentence of paragraph (1)(A)(i) shall not exceed the sum of (A) the amount determined under such first sentence computed at the rates and in the same manner as if this paragraph had not been enacted on the taxable excess reduced by the lesser of (i) the net capital gain; or (ii) the sum of (I) the adjusted net capital gain, plus (II) the unrecaptured section 1250 [26 USCS § 1250] gain, plus (B) 5 percent (0 percent in the case of taxable years beginning after 2007) of so much of the adjusted net capital gain (or, if less, taxable excess) as does not exceed an amount equal to the excess described in section 1(h)(1)(B) [26 USCS §1(h)(1)(B)], plus (C) 15 percent of the adjusted net capital gain (or, if less, taxable excess) in excess of the amount on which tax is determined under subparagraph (B), plus (D) 25 percent of the amount of taxable excess in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph. Terms used in this paragraph which are also used in section 1(h) [26 USCS § 1(h)] shall have the respective meanings given such terms by section 1(h) [26 USCS § 1(h)] but computed with the adjustments under this part [26 USCS §§ 55 et seq.]. (c) Regular tax.

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(1) In general. For purposes of this section, the term "regular tax" means the regular tax liability for the taxable year (as defined in section 26(b) [26 USCS § 26(b)]) reduced by the foreign tax credit allowable under section 27(a) [26 USCS § 27(a)], the section 936 credit allowable under section 27(b) [26 USCS § 27(b)], and the Puerto Rico economic activity credit under section 30A [26 USCS § 30A]. Such term shall not include any increase in tax under section 45(e)(11)(C), 49(b) or 50(a) [26 USCS §45(e)(11)(C), 49(b) or 50(a)] or subsection (j) or (k) of section 42 [26 USCS § 42]. (2) Coordination with income averaging for farmers and fishermen. Solely for purposes of this section, section 1301 [26 USCS § 1301] (relating to averaging of farm and fishing income) shall not apply in computing the regular tax liability. (3) Cross references. For provisions providing that certain credits are not allow able against the tax imposed by this section, see sections 26(a), 30(b)(3), 30B(g)(2), 30C(d)(2), and 38(c) [26 USCS §§ 26(a), 30(b)(3), 30B(g)(2), 30C(d)(2), and 38(c)]. (d) Exemption amount. For purposes of this section (1) Exemption amount for taxpayers other than corporations. In the case of a tax payer other than a corporation, the term "exemption amount" means (A) $ 45,000 ($ 62,550 in the case of taxable years beginning in 2006) in the case of (i) a joint return, or (ii) a surviving spouse, (B) $ 33,750 ($ 42,500 in the case of taxable years beginning in 2006) in the case of an individual who (i) is not a married individual, and (ii) is not a surviving spouse, (C) 50 percent of the dollar amount applicable under paragraph (1)(A) in the case of a married individual who files a separate return, and (D) $ 22,500 in the case of an estate or trust. For purposes of this paragraph, the term "surviving spouse" has the meaning given to such term by section 2(a) [26 USCS § 2(a)], and marital status shall be determined under section 7703 [26 USCS § 7703]. (2) Corporations. In the case of a corporation, the term "exemption amount" means $ 40,000.

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(3) Phase-out of exemption amount. The exemption amount of any taxpayer shall be reduced (but not below zero) by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds-(A) $ 150,000 in the case of a taxpayer described in paragraph (1)(A) or (2), (B) $ 112,500 in the case of a taxpayer described in paragraph (1)(B), and (C) $ 75,000 in the case of a taxpayer described in subparagraph (C) or (D) of paragraph (1). In the case of a taxpayer described in paragraph (1)(C), alternative minimum taxable income shall be increased by the lesser of (i) 25 percent of the excess of alternative minimum taxable income (determined without regard to this sentence) over the minimum amount of such income (as so determined) for which the exemption amount under paragraph (1)(C) is zero, or (ii) such exemption amount (determined without regard to this paragraph). ***

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I.R.C. § 56(a)(4), (b)(1), (b)(3), (d)(1)-(2)(A).
SEC. 56 ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.

(a) Adjustments applicable to all taxpayers. In determining the amount of the alternative minimum taxable income for any taxable year the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax): *** (4) Alternative tax net operating loss deduction. The alternative tax net operating loss deduction shall be allowed in lieu of the net operating loss deduction allowed under section 172 [26 USCS § 172]. *** (b) Adjustments applicable to individuals. In determining the amount of the alternative minimum taxable income of any taxpayer (other than a corporation), the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax): (1) Limitation on deductions. (A) In general. No deduction shall be allowed (i) for any miscellaneous itemized deduction (as defined in section 67(b) [26 USCS § 67(b)]), or (ii) for any taxes described in paragraph (1), (2), or (3) of section 164(a) [26 USCS § 164(a)] or clause (ii) of section 164(b)(5)(A) [26 USCS § 164(b)(5)(A)]. Clause (ii) shall not apply to any amount allowable in computing adjusted gross income. (B) Medical expenses. In determining the amount allowable as a deduction under section 213 [26 USCS § 213], subsection (a) of section 213 [26 USCS § 213] shall be applied by substituting "10 percent" for "7.5 percent". (C) Interest. In determining the amount allowable as a deduction for interest, subsections (d) and (h) of section 163 [26 USCS § 163] shall apply, except that-*** (E) Standard deduction and deduction for personal exemptions not

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allowed. The standard deduction under section 63(c) [26 USCS § 63(c)], the deduction for personal exemptions under section 151 [26 USCS § 151], and the de duction under section 642(b) [26 USCS § 642(b)] shall not be allowed. (3) Treatment of incentive stock options. Section 421 [26 USCS § 421] shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option (as defined in section 422 [26 USCS § 422]). s [sic S]ection 422(c)(2) shall apply in any case where the disposition and the inclusion for purposes of this part [26 USCS §§ 55 et seq.] are within the same taxable year and such section shall not apply in any other case. The adjusted basis of any stock so acquired shall be determined on the basis of the treatment prescribed by this paragraph. *** (d) Alternative tax net operating loss deduction defined. (1) In general. For purposes of subsection (a)(4), the term "alternative tax net operating loss deduction" means the net operating loss deduction allowable for the taxable year under section 172 [26 USCS § 172], except that (A) the amount of such deduction shall not exceed the sum of-(i) the lesser of-(I) the amount of such deduction attributable to net operating losses (other than the deduction described in clause (ii)(I)), or (II) 90 percent of alternative minimum taxable income determined without regard to such deduction and the deduction under section 199 [26 USCS § 199], plus (ii) the lesser of (I) the amount of such deduction attributable to the sum of carrybacks of net operating losses from taxable years ending during 2001 or 2002 and carryovers of net operating losses to taxable years ending during 2001 and 2002, or (II) alternative minimum taxable income determined with out regard to such deduction and the deduction under section 199 [26 USCS § 199] reduced by the amount determined under clause (i), and (B) in determining the amount of such deduction

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(i) the net operating loss (within the meaning of section 172(c) [26 USCS § 172(c)]) for any loss year shall be adjusted as provided in paragraph (2), and (ii) appropriate adjustments in the application of section 172(b)(2) [26 USCS § 172(b)(2)] shall be made to take into account the limitation of subparagraph (A). (2) Adjustments to net operating loss computation. (A) Post-1986 loss years. In the case of a loss year beginning after December 31, 1986, the net operating loss for such year under section 172(c) [26 USCS § 172(c)] shall (i) be determined with the adjustments provided in this section and section 58 [26 USCS § 58], and (ii) be reduced by the items of tax preference determined under section 57 [26 USCS § 57] for such year. An item of tax preference shall be taken into account under clause (ii) only to the extent such item increased the amount of the net operating loss for the taxable year under section 172(c) [26 USCS § 172(c)]. ***

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I.R.C. § 57(a)(1), (5), (7), (b).
SEC. 57 ITEMS OF TAX PREFERENCE. (a) General rule. For purposes of this part [26 USCS § § 55 et seq.], the items of tax preference determined under this section are-- (1) Depletion. With respect to each property (as defined in section 614 [26 USCS § 614]), the excess of the deduction for depletion allowable under section 611 [26 USCS § 611] for the taxable year over the adjusted basis of the property at the end of the taxable year (determined without regard to the depletion deduction for the taxable year). Effective with respect to taxable years beginning after December 31, 1992, this paragraph shall not apply to any deduction for depletion computed in accordance with section 613A(c) [26 USCS § 613A(c)].
***

(5) Tax-exempt interest. (A) In general. Interest on specified private activity bonds reduced by any deduction (not allowable in computing the regular tax) which would have been allowable if such interest were includible in gross income. (B) Treatment of exempt-interest dividends. Under regulations prescribed by the Secretary, any exempt-interest dividend (as defined in section 852(b)(5)(A) [26 USCS § 852(b)(5)(A)]) shall be treated as interest on a specified private activity bond to the extent of its proportionate share of the interest on such bonds received by the company paying such dividend. (C) Specified private activity bonds. (i) In general. For purposes of this part [26 USCS §§ 55 et seq.], the term "specified private activity bond" means any private activity bond (as defined in section 141 [26 USCS § 141]) which is issued after August 7, 1986, and the interest on which is not includible in gross income under section 103 [26 USCS § 103]. (ii) Exception for qualified 501(c)(3) bonds. For purposes of clause (i), the term "private activity bond" shall not include any qualified 501(c)(3) bond (as defined in section 145 [26 USCS § 145]). (iii) Exception for refundings. For purposes of clause (i), the term "private activity bond" shall not include any refunding bond (whether a current or advance refunding) if the refunded bond (or in the case of a series of refundings, the original bond) was issued before August 8, 1986.

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(iv) Certain bonds issued before September 1, 1986. For purposes of this subparagraph, a bond issued before September 1, 1986, shall be treated as issued before August 8, 1986, unless such bond would be a private activity bond if-- (I) paragraphs (1) and (2) of section 141(b) [26 USCS § 141(b)] were applied by substituting "25 percent" for "10 percent" each place it appears, (II) paragraphs (3), (4), and (5) of section 141(b) [26 USCS §141(b)] did not apply, and (III) subparagraph (B) of section 141(c)(1) [26 USCS § 141(c)(1)] did not apply. *** (7) Exclusion for gains on sale of certain small business stock. An amount equal to 7 percent of the amount excluded from gross income for the taxable year under section 1202 [26 USCS § 1202]. (b) Straight line recovery of intangibles defined. For purposes of paragraph (2) of subsection (a)-- (1) In general. The term "straight line recovery of intangibles", when used with respect to intangible drilling and development costs for any well, means (except in the case of an election under paragraph (2)) ratable amortization of such costs over the 120-month period beginning with the month in which production from such well begins. (2) Election. If the taxpayer elects with respect to the intangible drilling and development costs for any well, the term "straight line recovery of intangibles" means any method which would be permitted for purposes of determining cost depletion with respect to such well and which is selected by the taxpayer for purposes of subsection (a)(2).

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I.R.C. § 151(d).
SEC. 151 ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS
***

(d) Exemption amount [Caution: For provision that, for taxable years beginning in 2006, the personal exemption amount under this subsection is $ 3,300, and for phaseout of personal exemption for such tax years, see § 3.17 of Rev. Proc. 2005-70, which appears as 26 USCS § 1 note.]. For purposes of this section (1) In general. Except as otherwise provided in this subsection, the term 'exemption amount' means $ 2,000. (2) Exemption amount disallowed in case of certain dependents. In the case of an individual with respect to whom a deduction under this section is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's tax able year begins, the exemption amount applicable to such individual for such individual's taxable year shall be zero. (3) Phaseout. (A) In general. In the case of any taxpayer whose adjusted gross income for the taxable year exceeds the threshold amount, the exemption amount shall be reduced by the applicable percentage. (B) Applicable percentage. For purposes of subparagraph (A), the term 'applicable percentage' means 2 percentage points for each $ 2,500 (or fraction thereof) by which the taxpayer's adjusted gross income for the taxable year exceeds the threshold amount. In the case of a married individual filing a separate return, the preceding sentence shall be applied by substituting '$ 1,250' for '$ 2,500'. In no event shall the applicable percentage exceed 100 percent. (C) Threshold amount. For purposes of this paragraph, the term 'threshold amount' means-(i) $ 150,000 in the case of a joint return or a surviving spouse (as defined in section 2(a) [26 USCS § 2(a)]), (ii) $ 125,000 in the case of a head of a household (as defined in section 2(b) [26 USCS § 2(b)]), (iii) $ 100,000 in the case of an individual who is not married and who is not a surviving spouse or head of a household, and

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(iv) $ 75,000 in the case of a married individual filing a separate return. For purposes of this paragraph, marital status shall be determined under section 7703 [26 USCS § 7703]. (D) Coordination with other provisions. The provisions of this paragraph shall not apply for purposes of determining whether a deduction under this section with respect to any individual is allowable to another taxpayer for any taxable year. (E) Reduction of phaseout. (i) In general. In the case of taxable years beginning after December 31, 2005, and before January 1, 2010, the reduction under subparagraph (A) shall be equal to the applicable fraction of the amount which would (but for this subparagraph) be the amount of such reduction. (ii) Applicable fraction. For purposes of clause (i), the applicable fraction shall be determined in accordance with the following table: For taxable years 2006 and 2007 2008 and 2009 The applicable beginning in calendar year fraction is 2/3 1/3

(F) Termination. This paragraph shall not apply to any taxable year begin ning after December 31, 2009. (4) Inflation adjustments. (A) Adjustment to basic amount of exemption. In the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1) shall be increased by an amount equal to-- (i) such dollar amount, multiplied by (ii) the cost-of-living adjustment determined under section 1(f)(3) [26 USCS § 1(f)(3)] for the calendar year in which the taxable year begins, by substituting "calendar year 1988" for "calendar year 1992" in subparagraph (B) thereof. (B) Adjustment to threshold amounts for years after 1991. In the case of any taxable year beginning in a calendar year after 1991, each dollar amount contained in paragraph (3)(C) shall be increased by an amount equal to-- (i) such dollar amount, multiplied by

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(ii) the cost-of-living adjustment determined under section 1(f)(3) [26 USCS § 1(f)(3)] for the calendar year in which the taxable year be gins, by substituting "calendar year 1990" for "calendar year 1992" in subparagraph (B) thereof. ***

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I.R.C. § 172(b)(2), (c), (d).
SEC. 172 NET OPERATING LOSS DECUCTION. *** (b) Net operating loss carrybacks and carryovers. *** (2) Amount of carrybacks and carryovers. The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the "loss year") shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other tax able years shall be the excess, if any, of the amount of such loss over the sum of the tax able income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall be computed-(A) with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and (B) by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter, and the taxable income so computed shall not be considered to be less than zero. *** (c) Net operating loss defined. For purposes of this section, the term "net operating loss" means the excess of the deductions allowed by this chapter [26 USCS §§ 1 et seq.] over the gross income. Such excess shall be computed with the modifications specified in subsection (d). (d) Modifications. The modifications referred to in this section are as follows: (1) Net operating loss deduction. No net operating loss deduction shall be allowed. (2) Capital gains and losses of taxpayers other than corporations. In the case of a taxpayer other than a corporation-- (A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and (B) the exclusion provided by section 1202 [26 USCS § 1202] shall not be allowed.

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(3) Deduction for personal exemptions. No deduction shall be allowed under section 151 [26 USCS § 151] (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed. (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter [26 USCS §§ 1 et seq.] which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence-(A) any gain or loss from the sale or other disposition of (i) property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167[26 USCS § 167], or (ii) real property used in the trade or business, shall be treated as attributable to the trade or business; (B) the modifications specified in paragraphs (1), 2(B), and (3) shall be taken into account; (C) any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) [26 USCS § 165(c)] shall be treated as attributable to the trade or business; and (D) any deduction allowed under section 404 [26 USCS § 404] to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) [26 USCS § 401(c)(1)] shall not be treated as attributable to the trade or business of such individual. (5) Computation of deduction for dividends received, etc. The deductions allowed by sections 243 [26 USCS § 243] (relating to dividends received by corporations), 244 [26 USCS § 244] (relating to dividends received on certain preferred stock of public utilities), and 245 [26 USCS § 245] (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) [26 USCS § 246(b)] (relating to limitation on aggregate amount of deductions); and the deduction allowed by section 247 [26 USCS § 247] (relating to dividends paid on certain preferred stock of public utilities) shall be computed without regard to subsection (a)(1)(B) of such section. (6) Modifications related to real estate investment trusts. In the case of any taxable year for which part II of subchapter M [26 USCS §§ 856 et seq.] (relating to real estate investment trusts) applies to the taxpayer-(A) the net operating loss for such taxable year shall be computed by

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taking into account the adjustments described in section 857(b)(2) [26 USCS § 857(b)(2)] (other than the deduction for dividends paid described in section 857(b)(2)(B) [26 USCS § 857(b)(2)(B)]); and (B) where such taxable year is a "prior taxable year" referred to in paragraph (2) of subsection (b), the term "taxable income" in such paragraph shall mean "real estate investment trust taxable income" (as defined in section 857(b)(2) [26 USCS § 857(b)(2)]). (7) Manufacturing deduction. The deduction under section 199 [26 USCS § 199] shall not be allowed. ***

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I.R.C. § 421(b).
SEC. 421 GENERAL RULES
***

(b) Effect of disqualifying disposition. If the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of section 422(a) or 423(a) except that there is a failure to meet any of the holding period requirements of section 422(a)(1) or 423(a)(1) [26 USCS § 422(a)(1) or 423(a)(1)], then any increase in the income of such individual or deduction from the income of his employer corporation for the taxable year in which such exercise occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year of such individual or of such employer corporation in which such disposition occurred. No amount shall be required to be deducted and withheld under chapter 24 [26 USCS § § 3401 et seq.] with respect to any increase in income attributable to a disposition described in the preceding sentence. ***

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I.R.C. § 422(a)(1).
SEC. 422 INCENTIVE STOCK OPTIONS (a) In general. Section 421(a) [26 USCS § 421(a)] shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an incentive stock option if-(1) no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 1 year after the transfer of such share to him, and ***

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I.R.C. § 1211.
SEC. 1211 LIMITATION ON CAPITAL LOSSES (a) Corporations. In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges. (b) Other taxpayers. In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of-(1) $ 3,000 ($ 1,500 in the case of a married individual filing a separate return), or (2) the excess of such losses over such gains.

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General Explanation of the Tax Reform Act of 1986, Part 7, 429-439 (May 4, 1987).
MAY 4, 1987

PUBLIC LAW 99-514; 99th CONGRESS, H.R. 3838 (Part 7 of 19 Parts); JCS-10-87 {429} TITLE VII - MINIMUM TAX PROVISIONS Minimum Tax on Corporations and Individuals (Secs. 701-702 of the Act and secs. 53 and 5559 of the Code) n1 n1 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 501; H.Rep. 99-426, pp. 302-328; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1101; S.Rep. 99-313, pp. 515-540; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 250-284 (Conference Report). Prior Law Corporate minimum tax Under prior law, corporations paid a minimum tax on certain tax preferences. The tax was in addition to the corporation's regular tax. The amount of the minimum tax was 15 percent of the corporation's tax preferences, to the extent that the aggregate amount of these preferences exceeded the greater of the regular income tax paid or $10,000 (Code sec. 56). Tax preference items The tax preference items included in the base for the minimum tax for corporations were: (1) For real property, the excess of accelerated over straight-line depreciation, applying the useful life or recovery period prescribed for regular tax purposes (in the case of property eligible for ACRS, 19 years); (2) For certified pollution control facilities, the excess of 60-month amortization over the amount of depreciation otherwise allowable; (3) In the case of certain financial institutions, the excess of the bad debt deductions over the amount of those deductions computed on the basis of actual experience; (4) Percentage depletion to the extent in excess of the adjusted basis of the property; and (5) 18/46 of the corporation's net capital gain.

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For personal holding companies, accelerated depreciation on leased personal property, mining exploration and development costs, circulation expenditures, research and experimental expenditures, and excess intangible drilling costs were also preferences. When a corporation had a regular tax net operating loss attributable to minimum tax preference items in excess of $10,000, no immediate add-on minimum tax liability was incurred with respect to those preference items. Minimum tax liability was incurred with respect to those preference items when the "preferential" portion of the net operating loss was used to offset regular taxable income, treating this portion as used only after nonpreferential net operating losses had been exhausted. {430} Cutback in certain preferences In addition to imposing an add-on minimum tax, prior law (sec. 291) imposed a cutback in the use of certain corporate tax preferences for regular tax purposes. Adjustments were made to the corporate minimum tax to prevent the combination of that tax and the cutback provision from unduly reducing the tax benefit from a preference. The cutback applied, with differing percentage reductions, to the following items: (1) certain excess depletion for coal and iron ore, (2) the portion of bad debt reserves deducted by financial institutions that exceeded deductions allowable under the experience method, (3) certain interest deductions of financial institutions that were allocable to purchasing or holding certain tax-exempt obligations, (4) a foreign sales corporation's (FSC) exempt foreign trade income, (5) the reduction of recapture, under section 1250, for depreciation deductions relating to real estate, (6) for pollution control facilities, the excess of the amortization deductions allowed over the depreciation deductions that would otherwise apply, (7) intangible drilling cost deductions of integrated oil companies, and (8) the expensing of mineral exploration and development costs. Individual minimum tax Under prior law, individuals were subject to an alternative minimum tax which was payable, in addition to all other tax liabilities, to the extent that it exceeded the individual's regular tax owed. n2 The tax was imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of the exemption amount. However, the amount so determined was reduced by the foreign tax credit and the refundable credits. n2 A taxpayer's regular tax meant the taxes imposed by chapter 1 of the Code (other than the alternative minimum tax, the investment credit recapture tax (sec. 47), the taxes applicable in some instances for annuities (sec. 72(m)(5)(B) and 72(q)), lump sum distributions from qualified pension plans (sec. 402(e)), individual retirement accounts (sec. 408(f)), and certain trust distributions (sec. 667(b)), reduced by all nonrefundable credits including the foreign tax credit. Alternative minimum taxable income generally was equal to regular tax adjusted gross income, as increased by certain tax preferences and decreased by the alternative tax itemized deductions. The exemption amount, which was subtracted from alternative minimum taxable income before applying the 20 percent rate, was $40,000 for joint returns, $20,000 for married individuals filing separately, and $30,000 for single returns. Tax preference items

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The tax preference items that were added to the adjusted gross income base for purposes of the alternative minimum tax on individuals were: (1) Dividends excluded from gross income under section 116, which permitted individuals to exclude dividends received in an amount not to exceed $100 ($200 for a joint return); (2) For real property, the excess of accelerated over straight-line depreciation, applying the useful life or recovery period prescribed for regular tax purposes (in the case of property eligible for ACRS, 19 years); {431} (3) For leased personal property, the excess of accelerated depreciation over depreciation calculated under the straight-line method, with the latter being determined, in the case of property eligible for ACRS, by applying useful lives or recovery periods of five years for three-year property, eight years for five-year property, 15 years for 10-year property, and 22 years for 15-year public utility property; (4) For certified pollution control facilities, the excess of 60-month amortization over the amount of depreciation otherwise allowable; (5) For mining exploration and development costs (other than those relating to an oil or gas well) that were expensed, the excess of the deduction claimed over that allowable if the costs had been capitalized and amortized ratably over a 10-year period; (6) For circulation expenditures (relating to newspapers, magazines and other periodicals) that were expensed, the excess of the deduction claimed over that allowable if the amounts had been capitalized and amortized ratably over a three-year period; (7) For research and experimentation expenditures that were expensed, the excess of the deduction claimed over that allowable if the amounts had been capitalized and amortized ratably over a 10-year period; (8) Percentage depletion to the extent in excess of the adjusted basis of the property; (9) For net capital gains, the portion (i.e., 60 percent) deducted from gross income under section 1202, except that gain from the sale or exchange of the taxpayer's principal residence was not taken into account; (10) For incentive stock options, the excess of the fair market value received through the exercise of an option over the exercise price; and (11) For intangible drilling costs (relating to oil, gas, and geothermal properties) that were expensed, the amount by which the excess portion of the deduction (i.e., the excess of the deduction claimed over that allowable if the costs had been capitalized and amortized ratably over a 10-year period) exceeded the amount of net oil and gas income. For certain of these preferences, individuals could elect for regular tax purposes to take a deduction ratably over 10 years (three years in the case of circulation expenditures) and thereby to avoid treatment of the item subject to the election as a minimum tax preference. The preferences, in addition to circulation expenditures, with respect to which such an election could be made were research and experimental expenditures, intangible drilling and development costs, and mining exploration and development costs. In addition, the ACRS provisions themselves allowed certain similar elections. n3 In general, a principal reason for making such an election was to preserve for later years the value of an otherwise preferential deduction that would not benefit the taxpayer in the year

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{432} when the election was made, because the taxpayer was subject to the alternative minimum tax. n3 Moreover, in the case of intangible drilling costs, a taxpayer (other than a limited partner or a passive subchapter S shareholder) could elect to forego the expense deduction and claim five-year ACRS and the investment tax credit instead. A taxpayer making this election was not subject to the minimum tax on these items. Alternative tax itemized deductions Certain of the itemized deductions allowable in calculating regular taxable income were allowable as well for purposes of calculating alternative minimum taxable income. The alternative tax itemized deductions were: (1) Casualty or theft losses, and gambling losses to the extent not in excess of gambling gains; (2) Charitable deductions, to the extent allowable for regular tax purposes; (3) Medical deductions, to the extent in excess of 10 percent of adjusted gross income; (4) Qualified interest expenses, which were limited to (a) qualified housing interest (i.e., interest incurred to acquire, construct, or rehabilitate a primary residence or other qualified dwelling used by the taxpayer), plus (b) other interest expenses deducted by the taxpayer, but only to the extent not in excess of qualified net investment income for the year; n4 and (5) Deductions for estate tax attributable to income in respect of a decedent. n4 Since this limitation applied only to itemized deductions for interest expenses, it generally had no effect on interest deductions that were claimed "above-the-line," such as business interest and interest attributable to the production of rents and royalties. Interest to carry limited partnership interests and S corporation stock was treated as an itemized deduction, however. Other regular tax itemized deductions, such as those for state and local taxes paid and for certain investment expenses, were not allowed for minimum tax purposes. Credits and NOLs In calculating minimum tax liability, no nonrefundable credits were allowed except for the foreign tax credit. The limitation on the foreign tax credit applying for regular tax purposes (which, in general, prevented use of the credit to offset a greater percentage of one's tax liability than the percentage of taxable income that is foreign source income) applied for minimum tax purposes as well, but was recalculated to reflect the percentage of minimum taxable income coming from foreign sources. Credits that did not benefit the taxpayer due to the imposition of minimum tax liability could be carried back or forward to other taxable years. Individuals with net operating losses were allowed to deduct such losses against alternative minimum taxable income. However, for years beginning after 1982 the losses were computed, for minimum tax purposes, by reducing the regular tax net operating losses by the amount of the items of tax preference.

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Reasons for Change Congress concluded that the minimum tax should serve one overriding objective: to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions, and credits. Although these provisions may provide incentives for worthy goals, they become counterproductive {433} when taxpayers are allowed to use them to avoid virtually all tax liability. The ability of high-income taxpayers to pay little or no tax undermines respect for the entire tax system and, thus, for the incentive provisions themselves. In addition, even aside from public perceptions, Congress concluded that it is inherently unfair for high-income taxpayers to pay little or no tax due to their ability to utilize tax preferences. In particular, Congress concluded that both the perception and the reality of fairness have been harmed by instances in which corporations paid little or no tax in years when they reported substantial earnings, and may even have paid substantial dividends, to shareholders. Even to the extent that these instances may reflect deferral, rather than permanent avoidance, of corporate tax liability, Congress concluded that they demonstrated a need for change. Congress viewed the minimum taxes under prior law as not adequately addressing the problem, principally for two reasons. First, the corporate minimum tax, as an add-on rather than an alternative tax, was not designed to define a comprehensive income base. Second, the prior law minimum taxes did not sufficiently approach the measurement of economic income. By leaving out many important tax preferences, or defining preferences overly narrowly, the individual and corporate minimum taxes permitted some taxpayers with substantial economic incomes to report little or no minimum taxable income and thus to avoid all liability. Certain of the tax preferences under prior law applied only to individuals, or only to individuals and personal holding companies. Congress concluded that, in most cases where both individuals and corporations can benefit from a preference for regular tax purposes, the preference should be included in minimum taxable income by both. With regard to the preference relating to the expensing of research and experimentation expenditures, however, Congress concluded that, for incentive reasons, corporations, including personal holding companies, should not be required to treat such expensing as a preference. At the same time, Congress concluded that such expensing should continue to be treated as a preference for individuals, because of the use of such expensing in tax shelters. With respect to certain items that constituted tax preferences, at least for some taxpayers, under prior law, Congress concluded that the previous definitions of the preferences were inadequate. In the case of accelerated depreciation on real and personal property, Congress concluded that the useful lives of items of real and personal property generally are longer than the useful lives applying under prior law for minimum tax purposes. Thus, application of such useful lives gave rise to mismeasurement of economic income. At the same time, for incentive reasons, Congress concluded that in most cases taxpayers should not be required to use the straightline method for minimum tax purposes, so long as the method used is not more preferential than that generally applying for regular tax purposes. With respect to intangible drilling costs, Congress concluded that taxpayers should not be permitted to use the preference to offset all net oil and gas income before being required to include it in the minimum tax base. However, for incentive reasons relating to the {434} financial hardships currently being experienced by the oil and gas industry, Congress concluded that the preference

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should not be includable in minimum taxable income in full; i.e., the net income offset should be retained in part. In addition, Congress concluded that certain items, not presently treated as preferences, must be added to the minimum tax base in order for it to serve its intended purpose of requiring taxpayers with substantial economic incomes to pay some tax. The items as to which Congress reached this determination include tax-exempt interest on newly issued private activity bonds (other than those issued on behalf of a section 501(c)(3) organization), use of the completed contract method of accounting, untaxed appreciation deducted with respect to charitable contributions of appreciated property, use of the installment method by certain taxpayers, and the use of tax-favored capital construction funds by shipping companies. In order to prevent individuals with substantial economic incomes from avoiding liability through the use of tax shelters, Congress concluded that the use of net losses from passive business activities should be limited for minimum tax purposes under rules similar to those applying for regular tax purposes. Both specific minimum tax preferences and limitations on the use of passive losses were considered necessary to ensure that individuals with substantial economic incomes would pay tax whether they used preferences to offset tax on income from a single business activity, or used losses from one activity to offset income from another. In the case of farming losses of individuals not materially participating in the farming business, Congress concluded that an additional and stricter rule should apply for minimum tax purposes, preventing any loss with respect to a passive farming activity from offsetting other income of the taxpayer prior to disposition. Congress concluded that such a rule was needed, in addition to the general passive loss rules applying for regular and minimum tax purposes, in light of the harm to taxpayers active in the farming business that has resulted from the proliferation of tax shelter farming activities exploiting the competitive cost advantage of passive investors who can use tax losses derived from farming to offset unrelated income. With respect to corporations, Congress concluded that the goal of applying the minimum tax to all companies with substantial economic incomes cannot be accomplished solely by compiling a list of specific items to be treated as preferences. In order to achieve both real and apparent fairness, Congress concluded that there must be a reasonable certainty that, whenever a company publicly reports significant earnings, that company will pay some tax for the year. For the years from 1987 through 1989, Congress concluded that this goal should be accomplished by means of a preference based upon financial statement or book income reported by the taxpayer pursuant to public reporting requirements or in disclosures made for nontax reasons to regulators, shareholders, or creditors. Congress concluded that it was particularly appropriate to base minimum tax liability in part upon book income during the first three years after enactment of the Act, in order to ensure that the Act will succeed in restoring public confidence in the fairness of the tax system. {435} For taxable years beginning after 1989, Congress concluded that the book income preference should be replaced by the use of a broad-based system that is specifically defined by the Internal Revenue Code. Congress intended that this system should generally be at least as broad as book income, as measured for financial reporting purposes, and should rely on income tax principles in order to facilitate its integration into the general minimum tax system.

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Congress concluded that the definition of earnings and profits applying for certain regular tax purposes (and amended in several respects by the Act) provided an appropriate starting point in this regard. However, Congress concluded that the definition of earnings and profits required adjustment, for minimum tax purposes, in the interest both of clarification and of conformity to policy objectives of the Internal Revenue Code, including the minimum tax and the book income preference in particular. Clarification regarding the meaning of earnings and profits, for this statutory purpose, was viewed as necessary due to the lack of legal authorities resolving numerous issues regarding the scope of earnings and profits under present law. In all cases where such clarification is provided, Congress intended that no inference be drawn regarding the scope of earnings and profits under present law or for other statutory purposes. Moreover, Congress concluded that guidance was needed regarding the treatment of items arising prior to the effective date of the preference, both to assist taxpayers that have not previously computed earnings and profits on an annual basis and in order to conform the preference more closely to the scope of the book income preference, which applies to property placed in service prior to the effective date. Congress viewed it as inappropriate to permit taxpayers to claim deductions for purposes of the preference that are duplicative of deductions claimed for regular or minimum tax purposes in years when the preference did not apply. In general, Congress concluded that conforming the measurement of earnings and profits to the policy purposes of the Internal Revenue Code requires disallowing deductions that are disallowed for regular tax purposes (e.g., bribes). In addition, in light of the purpose of the preference to include income that otherwise would escape current taxation, Congress concluded that (on a cumulative basis) the income base for the preference should never be narrower than that otherwise applying for minimum tax purposes. In certain circumstances where income is defined more broadly for financial reporting purposes than for any tax purposes, Congress concluded that financial reporting definitions should apply, in order to prevent the avoidance of taxation by companies that report earnings to regulators, shareholders, or creditors. A further change that Congress viewed as necessary relates to the use of investment tax credits to offset minimum tax liability. In general, under the Act as well as prior law, incentive credits are not permitted to offset such liability, since their allowance would be inconsistent with the goal of taxing economic income. In the case of investment tax credits, however, Congress concluded that some transitional relief was desirable, in order to assist corporations whose investment tax credits might otherwise expire unused due to the newly enacted corporate minimum tax. {436} In addition, Congress concluded that a change was necessary with regard to the use of net operating losses, foreign tax credits, and investment tax credits to avoid all U.S. tax liability. Absent a special rule, a U.S. taxpayer with substantial economic income for a taxable year potentially could avoid all U.S. tax liability for such year so long as it had sufficient such credits and losses available. While Congress viewed allowance of the foreign tax credit and net operating loss deduction, along with the transitional relief relating to the investment tax credit, as generally appropriate for minimum tax purposes, it was considered fair to mandate at least a nominal tax contribution from all U.S. taxpayers with substantial economic income. Finally, Congress concluded that it was desirable to change the underlying structure of the minimum tax in certain respects. In particular, to the extent that tax preferences reflect deferral,

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rather than permanent avoidance, of tax liability, some adjustment was considered necessary with respect to years after the taxpayer has been required to treat an item as a minimum tax preference, and potentially to incur minimum tax liability with respect to the item. Absent such an adjustment, taxpayers could lose altogether the benefit of certain deductions that reflect costs of earning income. Explanation of Provisions 1. Overview The Act repeals the prior law add-on minimum tax for corporations beginning in 1987, creates a new alternative minimum tax on corporations, and expands the alternative minimum tax on individuals. Corporations. - Generally, the tax base for the alternative minimum tax on corporations is the taxpayer's taxable income, n5 increased by the taxpayer's tax preferences for the year and adjusted by determining the tax treatment of certain items in a special manner which negates the deferral of income resulting from the regular tax treatment of those events. The resulting amount, called alternative minimum taxable income, then is reduced by an exemption amount and is subject to tax at a 20-percent rate. The amount so determined may then be offset by the minimum tax foreign tax credit, and to a limited extent by investment tax credits. These rules are designed to ensure that, in each taxable year, the taxpayer generally must pay tax equalling at least 20 percent of an amount more nearly approximating its economic income (above the exemption amount). The exemption amount is $40,000, reduced (but not below zero) by 25 percent of the amount by which alternative minimum taxable income exceeds $150,000. n5 Where a corporation's tax base is measured by something other than taxable income, such as unrelated business taxable income, real estate investment trust taxable income, or life insurance company taxable income, alternative minimum taxable income is determined using that tax base. A technical correction may be appropriate to clarify this result. The net minimum tax, or amount of minimum tax due, is the amount by which the tax computed under this system (the tentative {437} minimum tax) exceeds the taxpayer's regular tax. n6 Although the minimum tax is, in effect, a true alternative tax, in the sense that it is computed by applying an alternative rate to an alternative income base and then paying it if and only if it exceeds the regular tax, technically the taxpayer's regular tax continues to be imposed, and the net minimum tax is added on. n6 A taxpayer's regular tax means the regular tax liability as defined in section 26(b) reduced by the foreign tax credit. It does not include the tax on lump sum distributions under section 402(e) or the recapture taxes under sections 42 and 47. In addition, it is intended that the regular tax be reduced for this purpose by the possessions tax credit under section 27(b) since income eligible for the credit is not in the minimum tax base. A technical correction will be needed to achieve this result. Individuals. - The structure for the alternative minimum tax on individuals generally is the same as under prior law, except that adjustments are made to reflect the fact that certain deferral preferences (such as accelerated depreciation) cannot be treated simply as add-ons if total income is to be computed properly over time. n7 For such preferences, the minimum tax deduction may in some

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instances exceed the regular tax deduction (e.g., in the later years of an asset's life), thus ensuring that basis will be fully recovered under both the regular and the minimum tax systems. The alternative minimum tax on individuals differs from that applying to corporations in several respects. For example, the rate is 21 percent and there are some differences between the preferences applying to individuals and those applying to corporations. In addition, certain itemized deductions that individuals can claim for regular tax purposes are not allowable under the minimum tax. While the exemption amounts for individuals under prior law generally are retained, they are reduced (but not below zero) by 25 percent of the amount by which alternative minimum taxable income exceeds $150,000 ($75,000 for married taxpayers filing separately and trusts, and $112,500 for single taxpayers). n7 As a technical matter, alternative minimum taxable income is computed by making adjustments to taxable income, rather than adjusted gross income, as under prior law, in order to conform the structure of the individual minimum tax with the corporate minimum tax. Minimum tax credit. - When a taxpayer pays alternative minimum tax, the amount of such tax paid (i.e., the net minimum tax) is allowed as a credit against the regular tax liability of the taxpayer in subsequent years. However, this credit (known as the minimum tax credit) cannot be used to reduce tax below the tentative minimum tax in subsequent years. The minimum tax credit applies only to minimum tax liability incurred due to deferral preferences (such as accelerated depreciation), i.e., preferences for which the timing, rather than the amount over time, of a deduction or inclusion gives rise to its treatment as a tax preference. Normative elections. - Taxpayers generally may elect to have the minimum tax treatment of certain expenditures apply for regular tax purposes. When an election is made, no preference is added or treated as an adjustment for minimum tax purposes. Incentive credits. - Nonrefundable credits (such as the investment tax credit) generally cannot be used to reduce regular tax liability to less than the tentative minimum tax. Credits that cannot be used by the taxpayer due to the effect of the alternative minimum tax can be carried over to other taxable years under the rules generally applying to credit carryovers. In order to provide transition {438} relief, corporations are permitted to use regular investment tax credits to offset up to 25 percent of minimum tax liability. Separate computation of foreign tax credits and net operating losses for minimum tax purposes. - In general, foreign tax credits and net operating losses are allowed for minimum tax purposes under rules similar in effect to those applying for regular tax purposes. As under the prior law alternative minimum tax on individuals, the amounts of these items are separately computed for regular and alternative minimum tax purposes, respectively. Thus, the amount of such credits or losses accruing to or used by the taxpayer in a particular year may differ under the two systems. Limitation on use of credits and losses to offset minimum tax liability. - Under the Act, net operating losses, foreign tax credits, and investment tax credits cannot be used to offset, in the aggregate, more than 90 percent of the minimum tax liability that otherwise would be imposed (disregarding the reduction of such liability by the amount of the taxpayer's regular tax liability). Structure of minimum tax as an alternative system. - For most purposes, the tax base for the new alternative minimum tax is determined as though the alternative minimum tax were a separate and

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independent income tax system. Thus, for example, where a Code provision refers to a "loss" of the taxpayer from an activity, for purposes of the alternative minimum tax the existence of a loss is determined with regard to the items that are includable and deductible for minimum tax, not regular tax, purposes. n8 n8 However, "structural" issues such as whether there has been a taxable event, or whether a particular nonrecognition provision applies, generally are determined identically for regular tax and minimum tax purposes (disregarding, e.g., the situation where a nonrecognition applies only to gains, or only to losses, and a gain or loss, as the case may be, exists only for regular tax, or only for minimum tax, purposes). In certain instances, the operation of the alternative minimum tax as a separate and independent tax system is set forth expressly in the Code. With respect to the passive loss provision, for example, section 58 provides expressly that, in applying the limitation for minimum tax purposes, all minimum tax adjustments to income and expense are made and regular tax deductions that are items of tax preference are disregarded. In other instances, however, where no such express statement is made, Congress did not intend to imply that similar adjustments were not necessary. Thus, for example, for minimum tax purposes it was intended that section 1211 (limiting capital losses) be computed using minimum tax basis, that section 263A (requiring the capitalization of certain depreciation deductions to inventory) apply with regard to minimum tax depreciation deductions, and that section 265 (relating to expenses of earning tax-exempt income) apply with regard only to items excludable from alternative minimum taxable income. n9 n9 Due to the complexity and additional recordkeeping burdens that may result in some cases from such alternative computations, the Treasury may find it appropriate to prescribe regulations that ease compliance. Congress intended that the Treasury have some flexibility in prescribing regulations in this area, to the extent consistent with the intended substantive results. {439} 2. Preferences and adjustments applying to both individuals and corporations Depreciation Depreciation on real and personal property to which the new ACRS system applies (generally, property placed in service after 1986) is calculated by using the alternative depreciation system, as described in the depreciation section of this explanation. Generally alternative depreciation is calculated using the applicable ADR midpoint life (forty years in the case of real property). n10 Instead of making an adjustment for each item of property in the amount (if any) by which the regular tax deduction exceeds the normative deduction (as under prior law), the alternative depreciation deduction is substituted for the regular tax ACRS deduction. The principal effect of this system is that it permits "netting", that is, to the extent that an alternative deduction relating to an item of property exceeds the regular tax deduction for that year, a negative adjustment to regular taxable income results. n11

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n10 The alternative depreciation system system applies with respect to property leased by a taxable entity to a tax-exempt entity, property placed in service outside of the United States, in measuring depreciation for purposes of determining earnings and profits, and under an election to use the system for regular tax purposes. n11 Alternative deductions typically exceed ACRS deductions in the later years of the useful life of an item of property for which ACRS is allowed; i.e., at such time the ACRS deduction typically is understated because it has been overstated in prior taxable years. For minimum tax purposes, as oppose