to be used for the year (i.e., tentative minimum tax liability is greater than regular tax liability). 26

In applying this rule, the taxpayer maintains a single investment tax credit account for both regular and minimum tax purposes. The amount of remaining investment tax credit carryovers is reduced, for both regular and minimum tax purposes, by the amount by that such credits are allowed for the taxable year (without regard to whether the taxpayer is liable for the regular or the minimum tax).

The allowance of the additional investment tax credit does not affect the computation of the minimum tax credit. For example, where regular tax liability exceeds tentative minimum tax liability, no minimum tax credit arises by reason of the reduction of regular tax liability, net of investment tax credits, to less than 100 percent of tentative minimum tax liability, in as much as there is no minimum tax imposed in that year.

For example, assume that a corporation has a regular tax liability of $10 million and a tentative minimum tax liability of $4 million. The corporation can use up to $7 million of investment tax credits, reducing its net tax liability to $3 million. This net liability does not give rise to any minimum tax credit in future years since there is no minimum tax imposed by section 55 in that year. In addition, since investment tax credits are used before minimum tax credits, and since minimum tax credits cannot reduce regular tax liability to less than the tentative minimum tax liability, the corporation cannot use any minimum tax credits from prior taxable years (assuming that it has available at least $6 million of investment tax credits.)27

Where the tentative minimum tax liability exceeds regular tax liability, the allowance of the additional investment tax credit does not result in a corresponding reduction in the amount of the minimum tax credit allowable in later years. The reason for this rule is that, if the minimum tax credit was treated, instead, as reduced in consequence of the use of investment tax credits to offset minimum tax liability, each $1 of benefit to a taxpayer by reason of the special rule for investment tax credits could, in subsequent years, give rise to a $2 increase in tax liability (by reducing both the available minimum tax credits and the investment tax credit carryforward by $1).

Assume that a corporation has a regular tax liability of zero and a tentative minimum tax liability of $4 million. The corporation can use up to $1 million of investment tax credits, reducing its net tax liability to $3 million. The corporation's adjusted net minimum tax for the year is $4 million and therefore the minimum tax credit allowable in future years is increased by $4 million in the event that all of its preferences are deferral preferences, since the adjusted minimum tax is measured without regard to the use of the investment tax credit.

26 A technical correction may be appropriate to clarify the computation of the credit limitation (under section 38(c)(3)) where the taxpayer has both regular investment tax credits and other credits included in the general business credit.

27 In the absence of sufficient other tax credits, the corporation could use minimum tax credits arising by reason of the adjusted net minimum tax imposed in prior taxable years to reduce its net tax liability to not less than $4 million.

Assume that instead the corporation has a regular tax liability of $3.5 million and a tentative minimum tax liability of $4 million. The corporation can use up to $1 million of investment tax credits, reducing its net tax liability to $3 million. The corporation's adjusted net minimum tax for the year is $500,000 and therefore the minimum tax credit allowable in future years is increased by that amount, in the event that all of its preferences are deferral prefer

ences.

Allowance of the regular investment tax credit is further limited by the rule, described more fully below, generally preventing the use of such credits, along with foreign tax credits and net operating losses, to reduce the otherwise applicable minimum tax liability (i.e. the amount determined under section 55(b)(1)(A) without regard to the net operating deduction) by more than 90 percent. Thus, for example, assume that a taxpayer would have no regular tax liability, and a tentative minimum tax liability of $10 million, in the absence of foreign tax credits, net operating losses, and investment tax credits. As described below, foreign tax credits and net operating losses could not be used to reduce the net tentative minimum tax liability to less than $1 million. To the extent that such losses and foreign tax credits did not so reduce minimum tax liability, investment tax credits could then be used (to the extent allowable consistently with the rules described above) to reduce such liability to $1 million.

Treatment of income eligible for section 936 credit

In the case of a corporation that is eligible for the possessions tax credit under section 936, alternative minimum taxable income (including the preference for book income or adjusted current earnings) shall not include any amount which meets the requirements of section 936(a)(1)(A) or (B).28 A corporation that qualifies for the section 936 credit may nonetheless be subject to the minimum tax with respect to income not qualifying for the credit.

8. Net operating losses

Under the Act, special rules apply for net operating losses. These rules generally are the same as the prior law rules with respect to the alternative minimum tax for individuals, except that, as described more fully below, the net operating loss deduction may not exceed 90 percent of the taxpayer's alternative minimum taxable income for the year (determined without regard to the NOL deduction).

For purposes of the alternative minimum tax, net operating loss deductions are determined by using a separate computation of alternative minimum tax net operating losses and loss carryovers. Generally, this computation takes into account the differences between the regular tax base and the alternative minimum tax base.

28 As discussed above, a dividend paid by a section 936 corporation to its parent corporation may be included in alternative minimum taxable income, by increasing the amount of the par ent's adjusted net book income or adjusted current earnings. In such a case, a certain amount of foreign taxes paid with respect to such dividends and paid by the 936 corporation that are treated as paid by the parent (under the principles of section 902) are allowed to be taken as a foreign tax credit for alternative minimum tax purposes.

The amount of the net operating loss (under section 172(c)) for any taxable year, for purposes of the alternative minimum tax, generally is computed in the same manner as the regular tax net operating loss, with two exceptions. First, the items of tax preference arising in that year are added back to taxable income (or, as with depreciation, adjustments relating to those items are made). Second, for individuals, only those itemized deductions (as modified under section 172(d)) allowable in computing alternative minimum taxable income are taken into account. In computing the amount of deduction for years other than the year of the loss (i.e., carryover years), the recomputed loss is deducted from the alternative minimum taxable income (as modified under section 172(b)(2)(A)) in the carryover year (whether or not the taxpayer is subject to the minimum tax in that year).2

29

Where, in the case of a corporation, an NOL arises in a taxable year beginning after December 31, 1986, and is carried to another taxable year, the NOL must be reduced by the corporation's taxable income for any taxable year beginning before 1987 to which the NOL was carried back under the regular tax system, notwithstanding that the alternative minimum tax was not applicable in those years. Thus for example, assume that a corporation had an alternative minimum tax NOL of $100 in calendar year 1987, and had taxable income (before application of NOL carrybacks from taxable years beginning after 1986) of $25 in 1984, $40 in 1985 and $10 in 1986. That corporation's minimum tax NOL deduction in 1988 attributable to the loss in 1987 would be $25 ($100 NOL reduced by the $75 of taxable income).

As an example of the functioning of the rule, if in year one a taxpayer has $20,000 of income and $35,000 of deductions in computing taxable income, of which $10,000 are preference items or adjustments, the alternative minimum tax net operating loss for the year is $5,000. Thus, in any subsequent (or prior) year to which the loss may be carried, a $5,000 net operating loss deduction is allowed to reduce altenative minimum taxable income.

Assume that, in year two, the taxpayer has $20,000 of alternative minimum taxable income (without regard to the net operating loss deduction). The taxpayer reduces his or her alternative minimum taxable income to $15,000 by the minimum tax net operating loss deduction. The net operating loss deduction for the regular tax is not affected by this computation (i.e., the taxpayer has a loss carryover of $15,000 from year one to be used under the regular tax). For corporations, a transition rule generally allows, for purposes of the alternative minimum tax, all pre-effective date regular tax net operating losses to be carried forward as minimum tax NOLS to the first taxable year for which the tax, as amended under the Act, applies (and to subsequent years until used up). For individuals, prior law is retained with respect to the calculation of alternative minimum tax net operating losses for such years.

An adjustment is required in the case of a corporation that, as of the end of the last taxable year beginning before January 1, 1987,

29 Net operating losses that are not allowed in a particular taxable year because they exceed 90 percent of alternative minimum taxable income for the year may be carried over to other taxable years, in accordance with the rules of section 172(b).

had a deferral of add-on minimum tax liability for a year prior to 1987, under section 56(b), due to certain net operating losses. For such a corporation, no add-on minimum tax liability will be imposed after 1986, but the alternative minimum tax net operating loss carried to the first taxable year of the corporation beginning after December 31, 1986, is reduced by the amount of the preferences that gave rise to the liability.

In light of the parallel nature of the regular tax and minimum tax systems, any limitations applying for regular tax purposes to the use by a consolidated group of NOLS or current year losses (e.g., section 1503) apply for minimum tax purposes as well. Moreover, an election under section 172(b)(3)(C) to relinquish the carryback period applies for both regular tax and minimum purposes. 9. Limitation on the use of foreign tax credits, net operating losses, and investment tax credits

Under the Act, limitations apply to prevent the use of foreign tax credits and regular investment tax credits to offset more than 90 percent of the tentative minimum tax liability (determined without regard to the NOL deduction). Moreover, as described above, the alternative minimum tax net operating loss deduction may not exceed 90 percent of the taxpayer's alternative minimum taxable income for the year determined without regard to the net operating loss deduction.

Foreign tax credits cannot exceed the excess of the pre-foreign tax credit tentative minimum tax over 10 percent of such amount (determined without regard to the NOL deduction). For example, assume that in 1987 a corporation has $10 million of alternative minimum taxable income. În the absence of net operating losses or foreign tax credits, the taxpayer's tentative minimum tax liability would equal $2 million. Accordingly, the alternative minimum tax foreign tax credit cannot exceed the amount by which the taxpayer's pre-foreign tax credit tentative minimum tax exceeds $200,000. Regular investment tax credits are likewise subject to a rule preventing their use, in conjunction with foreign tax credits, to offset more than 90 percent of minimum tax liability (determined without regard to the NOL deduction). Under this rule, 10 percent of the taxpayer's tentative minimum tax liability (as determined without regard to net operating losses and foreign tax credits) functions, in effect, as a floor, limiting the use of otherwise allowable investment tax credits. Notwithstanding the general rule for regular investment tax credits described above (or any narrower transition rule applying to the use of such credits in relation to the minimum tax), such credits cannot be used in a taxable year to the extent that they would reduce the amount of tax payable by the taxpayer (whether under the regular tax or the minimum tax) to less than this floor.3 30

For example, assume that a corporation has $10 million of preNOL alternative minimum taxable income for the year, a $7 million net operating loss deduction, $350,000 of minimum tax foreign

30 A technical correction may be needed so that the statute properly reflects this intent. Such a correction was included in H.Con.Res. 395 as passed by the House and Senate in the 99th Congress.

tax credits, and $200,000 of regular investment tax credits. In the absence of the net operating loss deduction, foreign tax credits and regular investment tax credits, tentative minimum tax liability would equal $2 million. The NOL deduction, the foreign tax credit and the investment tax credit cannot reduce the net income tax imposed to less than 10 percent of this amount, or $200,000. Net operating losses and foreign tax credits can be used in full, and reduce tentative minimum tax liability to $250,000 (20 percent of $3 million, reduced by the $350,000 foreign tax credits). Assuming that regular tax liability is less than tentative minimum tax liability, only $50,000 of regular investment tax credits can be used (giving rise to an investment tax credit carryforward of $150,000). 31 10. Regular tax elections

In the case of certain expenditures that would give rise to a minimum tax preference if treated under the rules generally applying for regular tax purposes, the taxpayer may make a "normative election," i.e., elect to have the minimum tax rule for deducting the expenditure apply for regular tax purposes. The expenditures to which this rule applies are the following: circulation expenditures, research and experimental expenditures, intangible drilling costs, and mining development and exploration expenditures. 32 Elections can be made "dollar-for-dollar"; thus, for example, a taxpayer who incurs $100,000 of intangible drilling costs with respect to a single well may elect normative treatment for any portion of that amount.

To the extent that such an election applies, the item to which it applies is treated for all purposes, under both the regular and the minimum tax, pursuant to the election. No other deduction is allowed for the item to the extent that such an election applies.

An election made under this rule may be revoked only with the consent of the Secretary. Elections may be made at such time and in such manner as the Secretary by regulations prescribes. In the case of a partnership or S corporation, an election can be made separately by any partner (or shareholder) with respect to such individual's allocable share of any expenditure.

11. Other rules

The Act also contains certain miscellaneous rules affecting the application of the alternative minimum tax. For example, corporations are required to make estimated tax payments with respect to liability under the alternative minimum tax.

Rules are also provided with respect to the application of Code sections suspending losses, such as sections 465, 704(d), 1366(d), and other sections specified in regulations. Since deductions, or the basis of property, relevant to the application of these sections may differ for regular and minimum tax purposes, respectively, it is

31 In the absence of this rule, the general transitional rule for investment tax credits would permit the taxpayer to use investment tax credits in the amount of $62,500, i.e., 25 percent of tentative minimum tax liability (as determined after the use of net operating losses and foreign tax credits).

32 As described in title II of this part, normative elections are also allowed with respect to depreciation.