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extended discussions with his siblings and out of a sense of family responsibility,” became the president of both corporations and tried to make them profitable. He couldn’t make a profit renting the duplexes, even though he left his job to devote full time to the effort, and finally after a two-year struggle managed to sell the duplexes individually. At this point, the sole source of income for the corporations was the interest on the notes from thesesales. The IRS assessed the personal holding company tax on the two corporations—Mr. Long had used realtors to help him sell the units, so the corporations “did not hold the duplexes primarily for sale to customers in the ordinary course of their trade or business.” Therefore, the IRS argued, the interest the corporations received on the notes from the sales of the buildings should be considered interest incomefor the purpose of applying the personal holding company provisions. Mr. Long and his siblings argued that their businesses “are not the type of corporation Congress had in mind when it passed the personal holding company provisions and . . . are precisely the kind of company Congress intended to exempt . . .” However, the Tax Court agreed with the IRS, pointing out that “the rules prescribed by the personal holding company provisions are strictly mechanical, and apply even tothose corporations that become personal holding companies accidentally without the slightest intent ofreducing taxation.” The Ninth Court of Appeals reversed the Tax Court’s ruling, finding “factors sufficiently compelling to sway the balance” toward Mr. Long’s contention that the duplexes were held for sale “in the ordinary course of business.” Therefore, according to § 543(b)(3), the income to the corporations should be considered “rent.” ADDITIONAL LECTURE RESOURCESolutions to Research Problems start on page 3-12
Figure 3.1Three-Tier Tax SystemIs Adjusted Current Earnings Greater Than Pre-adjustment AMTI? This figure is from Zachry and Gallun, “Corporate Alternative Minimum Tax: The Impact of the Current Earnings Adjustment,” Oil & Gas Tax Quarterly, September, 1989, p. 134. Calculate Taxable IncomeCalculate AMTI by Adjusting Taxable Income as Required by § 56 and § 58 and Increasing Taxable Income by § 57 Tax Preference Items Calculate Adjusted Current Earnings by Adjusting AMTI as Required (Many of the Adjustments Based on Earnings and Profits Adjustments)Increase AMTI by 75% of the Excess of Adjusted Current Earnings Over AMTI (pre-adjustment) Decrease AMTI by 75% of the Excess of AMTI (pre- adjustment) Over Adjusted Current Earnings to Extent of Net Previous Increases NoYes