Notes from the Editor
  This periodical is published on a semi-regular basis to inform South Carolina Bar Tax Law Section members of South Carolina tax law developments and other matters of interest to the South Carolina Tax Bar. Because most members already receive ample information regarding federal tax developments, this periodical typically will not focus on federal tax law developments.
   Readers are encouraged to submit information that may be of interest to other Tax Law Section members to the editor, Jeff Z. Brooker III, or any section council members or officers at the e-mail addresses listed in the sidebar. See below for a discussion of recent South Carolina developments and advance notice of upcoming programs co-sponsored by the Tax Law Section.

By Jeff Z. Brooker III, The Brooker Law Firm, PA, Columbia

AMT–it's not just for rich people anymore ...

2006 Guidance for Job Tax Credit
and Fee in Lieu of Tax

2005 Advisory Opinion Index issued

Taxpayers receive refund for 1996 taxes

Taxpayer denied machine exemption for sales taxes

2006-2007 Tax Law Section Council

AMT–it's not just for rich people anymore ...
By: Gail D. Moore, JD, CPA, Greene and Company, LLP  

    What is Alternative Minimum Tax? Alternative Minimum Tax, or AMT, is an alternative to traditional tax calculation that Congress implemented 35 years ago to ensure that wealthy taxpayers with many deductions could not avoid their income tax obligations. More precisely, AMT is “a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax.” Although Congress originally aimed the AMT at wealthy taxpayers, every year AMT affects more middle-income taxpayers.

    When it was created in 1969, the AMT was designed to affect 155 wealthy taxpayers. According to the Internal Revenue Service, 19,000 people owed AMT in 1970, but more than three million people are paying it now. Congress is reevaluating the AMT laws. To that end, the President’s Special Task Force on Tax Reform recently recommended eliminating AMT altogether. Until Congress agrees, however, AMT is something all tax planners must take into consideration.

    Why has the number of people subject to AMT grown? Every year the regular tax brackets are adjusted for inflation and other factors. AMT tax rates and exemptions are not adjusted in line with or as often as regular tax brackets. For example, AMT tax brackets were last adjusted in 2003 and will not be adjusted for 2005. Therefore, each year as taxpayer’s salaries increase with inflation and the economy, they creep closer to the unadjusted AMT levels.

    How does a taxpayer calculate AMT liability? Previously, a taxpayer had to use IRS Form 6251 and endure a complicated set of calculations to determine his alternative tax amount. This year the IRS is providing a new service on its Web site called “AMT Assistant.” The Web address is http://apps.irs.gov/app/amt. Here, a taxpayer can anonymously answer a series of questions to determine if he is responsible for AMT. The IRS estimates a taxpayer can complete the AMT worksheet using this online tool in only five to 10 minutes. A caveat is listed on the Web site about using this tool: the answer a taxpayer receives is only as accurate as the data entered.

     After a taxpayer has figured his AMT, he must compare the alternative tax amount to the income tax amount already determined on the taxpayer’s individual tax return. The taxpayer is responsible for paying the higher amount. Therefore, if the taxpayer’s AMT liability is higher than his income tax liability original determined, the taxpayer must pay the higher AMT taxes.

     What subjects a taxpayer to AMT? Part of what makes planning for AMT so difficult is that it is hard to point to any one factor that will push a taxpayer into or out of AMT. For taxpayers that itemize their deductions, an AMT calculation generally begins with adjusted gross income, less itemized deductions. Then, medical and dental expenses, state and local income and property taxes, home mortgage interest and other miscellaneous deductions are added back to this number. Therefore, families with a second mortgage or high state income taxes could easily be subject to AMT. Taxable income for AMT also may be affected by AMT depreciation adjustments from pass-through entities such as s-corporations or partnerships. It may be increased by the preferential tax treatment of dividends and long-term capital gains. Additionally, the exemptions claimed by a taxpayer are not allowed when calculating AMT. Some other common line items that may subject a taxpayer to AMT are exercising stock options and tax-exempt interest. Each of these items is generally not taxable for regular income tax purposes but is taxable for AMT purposes.

     There is some good news. Prior to determining AMT liability, there is an AMT exemption. In 2003, the exemption increased to $58,000 for joint filers; $40,250 for unmarried persons; and $29,000 for those married filing separately. However, this exemption is reduced by 25 cents for each dollar of AMT taxable income above $150,000 for couples ($112,500 for singles and $75,000 for married filing separate status). This number is not adjusted for inflation, which is one reason why more people owe the AMT every year.

     More good news: if you are not liable for alternative minimum tax this year, but you paid alternative minimum tax in previous years, you may be eligible to take a special credit against your regular tax for AMT taxes paid in previous years. The bottom line: consult your tax advisor regarding AMT, because it is not just for rich people anymore.

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2006 Guidance for Job Tax Credit and Fee in Lieu of Tax
     In Information Letter 06-01, January 13, 2006, the S.C. Department of Revenue ranked the counties of South Carolina for purposes of taxpayers determining (1) the potential Job Tax Credit (Credit) and (2) the Fee in Lieu of Tax (FILOT) (for property tax reduction). The Credit and FILOT are designed to encourage development and investment in depressed economic areas of the state. Information Letter 06-01 may be reviewed at www.sctax.org/NR/rdonlyres/7319F217-2B63-4D57-953B-59EC0FEA250B/0/IL061.pdf.

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2005 Advisory Opinion Index issued
    On December 30, 2005, the Department of Revenue issued Information Letter 05-35, containing the current Advisory Opinion Index. Tax Counsel may refer to this document as the index of advisory opinions of the Department of Revenue since 1987. It may be viewed at www.sctax.org/NR/rdonlyres/F5DAB865-22DB-4525-8E40-0875615407DE/0/IL0535.pdf.

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Taxpayers receive refund for 1996 taxes
    The Department of Revenue issued an administrative order that denied taxpayers’ claim for a refund on their 1996 income taxes and assessed income taxes, interest and penalties for the 1997 and 1998 tax years. The taxpayers’ presented two major issues: 1) whether taxpayers timely protested the Department’s denial of their refund request and assessment of taxes and 2) whether taxpayers timely requested a refund of 1996 personal income taxes. After notice to all the parties, a hearing was conducted on March 11, 2004, in Columbia with the parties present and represented. The Administrative Law Court concluded that the taxpayers were entitled to the credits sought. www.scaljd.net/decision.asp?id=1545

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Taxpayer denied machine exemption for sales taxes
    Taxpayer filed a claim for a refund of sales taxes based upon the contention that it was a construction contractor of prestress concrete building materials eligible to pay sales taxes on its purchases of raw materials. The S.C. Department of Revenue issued a Final Agency Determination agreeing that the taxpayer should be classified as a construction contractor and allowed the proposed sales tax treatment. However, the Department further determined that the petitioner was not entitled to the sales tax exemption available to manufacturers for purchases of machinery under S.C. Code Ann. § 12-36-2120(17) (2000) and, accordingly, reduced the refund claim by the sales taxes owed as a result of the taxpayer’s tax-free purchases of machines. Prior to its refund request, the taxpayer was taxed as a manufacturer. As a manufacturer, the taxpayer paid sales taxes based upon the fair market value of its prestress concrete building materials at the time of its use pursuant to Section 12-36-110(d)(1). The taxpayer was also allowed as a manufacturer to use the machine exemption for its machinery used substantially in manufacturing. The taxpayer thereafter sought the sales tax advantage of being recognized as a contractor for purposes of its construction contracts so that it could instead pay sales taxes on its purchase of raw materials. By carving out more than 80 percent of its business to be characterized as a construction contractor, the taxpayer fell below the Hercules standard for the substantial use of its machinery during the refund period. Having been recognized as a construction contractor for this use, the taxpayer was forced by the Administrative Law Court to accept the sales tax consequences that come along with the benefits of the taxpayer’s contractor designation. www.scaljd.net/decision.asp?id=1741

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2006-2007 Tax Law Council

 The following nominations have been made for the Tax Law Section Council for FY2006-07. In accordance with Article IV, Section 4 of the Section bylaws,

    No later than February 15 preceding the annual meeting, not less than ten (10) members of the Section in good standing may file by registered mail with the Chairman of the Section a nominating petition, which may be in parts, duly signed, with the signatures and printed names and addresses, making nominations for one or more of the offices of Chairman Elect, Vice Chairman, Secretary and the Section Delegate to the House of Delegates, such Council members as are due to be elected. All such petitions shall be accompanied with the written consent of any person so nominated. Nominations shall be considered closed on February 16th of each year.

Officers
Chairperson: Jeff Z. Brooker III, Columbia

Chairperson-Elect: Maurice D. Holloway, Greenville

Vice Chairperson: J. Tod Hyche, Greenville

Secretary: James F. Reames III (Rick), Columbia

Section Delegate: Randy E. Fisher, Greenville

Immediate Past Chairperson: Paul M. Lynch, Charleston

Council Members
John H. Muench (exp. 2007)
Florence

Virginia “Ginny” M. Shuman (exp. 2007)
Charleston

Steven E. Craig (exp. 2008)
Charleston

George “Gem” McDowell Jr. (exp. 2008)
Myrtle Beach

Robert E. August (exp. 2009)
Greenville

Timothy C. Thompson (exp. 2009)
Darlington

Nominating petitions must be received no later than February 16th and should be sent to Tara Smith, S.C. Bar, P.O. Box 608, Columbia, SC 29202. If you have any questions, contact Tara Smith at tara.smith@scbar.org or (803) 799-6653, ext. 146

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Articles needed

    If you are interested in submitting an article for the next Section newsletter, please send your submissions to Jeff Brooker at jbrooker@brookerlawfirm.com or to Tara Smith at tara.smith@scbar.org before June 30, 2006.

    For additional information on the Tax Law Section, please log onto the Section Web site at www.scbar.org/member/sections/Tax-Section.asp.

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