AMT is included in the accuracy-penalty underpayment

Plain-English summary

Chief Counsel's advice concludes that alternative minimum tax is included when calculating the “underpayment” used to determine an accuracy-related penalty. The memorandum interprets IRC § 6664 and Treas. Reg. § 1.6664-2, which define the relevant income tax imposed under subtitle A. Because AMT under IRC § 55 is a subtitle A tax, it is included in the underpayment calculation. The advice therefore agrees that the Service correctly included the corporation's AMT liability when computing its penalty.

Ruling snapshot

• Question: Does a corporation's alternative minimum tax liability count toward the IRC § 6664 underpayment used for an accuracy-related penalty?
• Outcome: Advice given
• Key authorities: IRC §§ 55, 6662, and 6664; Treas. Reg. § 1.6664-2

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 201220029
Release Date: 5/18/2012
CC:PA:01: ---------------
POSTN-150045-11

UILC: 6664.01-00

date: February 10, 2012

to:   David P. Fuller
      Trial Attorney (SL) (Los Angeles)
      (Large Business & International)

from: Elizabeth G. Chirich
Branch Chief
(Procedure & Administration)

subject: Calculating Accuracy-Related Penalty-Definition of "Underpayment"

      This Chief Counsel Advice responds to your request for assistance dated December 2,
      2011. This advice may not be used or cited as precedent.

      LEGEND

      T              ---------------------------------------------

      CTY            -------------

      State          -------------

      Y1             Tax Year Ended ---------------

      Y2             Tax Year Ended ---------------

      Y3             Tax Year Ended ---------------

      ($N1)          ---------------

      $N2            ---------------

      $N3            ---------------

POSTN-150045-11 2

$N4 ---------------

$N5 --------------

$N6 -------------

ISSUE

Whether the calculation of “underpayment,” as defined in I.R.C. § 6664, includes a
taxpayer’s liability for alternative minimum tax (AMT) under I.R.C. § 55?

CONCLUSION

Yes

FACTS

T is a C corporation with offices in CTY, State, and is the parent corporation of seven
subsidiaries. The Service is currently examining T’s income tax returns for taxable
years Y1, Y2 and Y3. The Service is considering making a number of adjustments to
the income reported by T for each of the taxable years, including an adjustment
pursuant to I.R.C. § 162(m), which pertains to the disallowance of a business expense
deduction for excess employee remuneration.1

A member of the Service’s exam team reviewing T’s returns has questioned one aspect
of the calculations made by a tax-computation specialist from the Service’s Office of
Appeals, specifically whether the tax-computation specialist has correctly calculated the
accuracy-related penalty for T’s taxable year Y1 by including T’s liability for AMT. Your
question is thus whether the “underpayment,” on which the accuracy-related penalty
under I.R.C. § 6662 is based, takes into account a taxpayer’s liability for AMT under
I.R.C. § 55.

In other words, which is the correct way to calculate the penalty?

   apply the appropriate regular tax rate to the understatement of income caused by
    the 162(m) item, then apply the 20% penalty to the resulting underpayment of
    regular tax (i.e. the change in AMT does not figure into the calculation of
    “underpayment”); or

   include the taxpayer’s liability for AMT as part of the calculation of
    “underpayment” (which is what the tax-computation specialist did) and apply the
    accuracy-related penalty to the total underpayment

1
That section disallows a deduction to a publicly held corporation to the extent employee remuneration
for a covered employee for a taxable year exceeds 1 million dollars.

POSTN-150045-11 3

Attached to your request is a draft deficiency notice respecting T’s taxable years Y1, Y2
and Y3.2 The last page of this document is labeled as EXHIBIT A, which is a spread
sheet showing the calculations for accuracy-related penalties for each of T’s 3 taxable
years noted above. EXHIBIT A includes columns that show T’s income and tax
liabilities both with and without the adjustment under I.R.C. § 162(m). The third column
of numbers shows the Service’s calculation of an underpayment for tax year Y1 and the
AMT liability is ($N1). Because the schedule shows the AMT amount in parentheses and
hence suggests that this is a negative number, it suggests T owes no AMT for Y1, or
perhaps that T overpaid AMT for Y1. Because of this ambiguity, our office contacted the
tax-computation specialist from Appeals to get clarification on the meaning of the figures
in this column.

The tax-computation specialist from Appeals furnished to our office a separate
schedule, labeled “Schedule 3,” which is an overview of T’s AMT liabilities of T.
Schedule 3 states, in part:

Year Ending Y1 Y2 Y3

Alternative Minimum Tax
Tentative Minimum Tax $N2
Regular Tax after FTC $N3

AMT Before Adjustment                        $N4
Adjustment to AMT                            $N5

Alternative Minimum Tax
-to Schedule 1                               $N6

Schedule 3 reflects that the Service determined T to be liable for AMT for taxable Y1 in

the sum of $N6, and the tax-computation specialist included this as part of the calculation of
“underpayment” for such year.

LAW AND ANALYSIS

The accuracy-related penalty under I.R.C. § 6662 applies to the portion of any
underpayment attributable to: 1) negligence or disregard of rules or regulations; 2) a
substantial understatement of tax; 3) a substantial valuation misstatement; 4) a
substantial overstatement of pension liabilities; or 5) a substantial estate or gift tax

2
It is our understanding that the Service has already issued the deficiency notice for the above periods
using the calculation of the accuracy-related penalty as described in the second bullet above. You
nonetheless request our views on this legal issue.

POSTN-150045-11 4

valuation understatement. Your question implicates the proper method for calculating
an “underpayment,” which is defined in I.R.C. § 6664(a) as:

 (a) Underpayment.
 . . . For purposes of this part, the term “underpayment” means the amount
 by which any tax imposed by this title exceeds the excess of-
     (1) the sum of-
        (A) the amount shown as tax by the taxpayer on his return, plus
        (B) amounts not so shown previously assessed (or collected without
        assessment), over
     (2) the amount of rebates made . . .

The implementing regulation for section 6664 sheds light on the taxes included in the
calculation of an underpayment. This states, in part, as follows:

 § 1.6664-2. Underpayment.—
 (a) Underpayment defined.- In the case of income taxes imposed under
 subtitle A, an underpayment for purposes of section 6662, relating to the
 accuracy-related penalty, and section 6663, relating to the fraud penalty,
 means the amount by which any income tax imposed under this subtitle (as
 defined in paragraph (b) of the section) exceeds the excess of:

 * * *
 (b) Amount of income tax imposed.- For purposes of paragraph (a) of this
 section, the “amount of income tax imposed” is the amount of tax imposed on
 the taxpayer under subtitle A for the taxable year, determined without regard to-
     (1) The credits for tax withheld under sections 31 (relating to tax withheld
     on wages) and 33 (relating to tax withheld at the source on nonresident
     aliens and foreign corporations);

    (2) Payments of tax or estimated tax by the taxpayer;

    (3) Any credit resulting from collection of amounts assessed under
    section 6851 as the result of a termination assessment, or section 6861 as
    a result of a jeopardy assessment; and

    (4) Any tax that the taxpayer is not required to assess on the return (such
    as the tax imposed by section 531 on the accumulated taxable income of
    a corporation). (emphasis added).

 ***

POSTN-150045-11 5

Under this regulation, the taxes imposed on a taxpayer under subtitle A of Title 26 make
up the “amount of income tax imposed” in the definition of an underpayment.3
Because AMT under I.R.C. § 55 is one of the taxes imposed under subtitle A, it is
included as part of the calculation of “underpayment,” upon which the accuracy-related
penalty is based.

Here, Exhibit 3 reflects that the Service determined T’s AMT liability to be $N6 for
taxable year Y1. Although the AMT liability for Y1 is listed as ($N1), a negative number
on EXHIBIT A, we learned from the tax-computation specialist that she expressed the
AMT in this manner because of the differential tax rates between AMT (20%) and the
regular income tax rate (35%).

In light of this explanation and the information included in Schedule 3, the Service
determined AMT against T for Y1. Consequently, our office agrees with your
conclusion. T’s AMT liability for T’s taxable year Y1 is to be included when calculating
the “underpayment” under section 6664 and Treas. Reg. § 1.6664-2; Appeals correctly
computed the underpayment on which the accuracy-related penalty was computed for
Y1.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

None identified

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 622-4910 if you have any further questions.

3
Treas. Reg. § 1.6664-2(a) expresses this definition with the following formula:

“underpayment” = W – (X+Y-Z), where W is the amount of income tax imposed, X is the amount shown
as the tax by the taxpayer on his return, Y is the amount not so shown previously assessed (or collected
without assessment), and Z is the amount of rebates made. A more extensive discussion of these
variables is beyond the scope of this memorandum.