Don't Mess With Taxes

Talk about timing. Just as the alternative minimum tax 2007 patch was signed into law yesterday, a Tax Court ruling (129 T.C. No. 18) was issued requiring a married couple to include qualified dividends in the calculation of their AMT liability.

Below are the case facts, per the opinion issued by Judge Michael B. Thornton.

On their 2005 tax return, Tobias and Gertrude Weiss reported $24,376 in qualified dividends -- you know, those earnings that get the preferred capital gains tax rates. But they didn't include that amount in $265,408 that they reported as taxable income, and upon which they figured tax due of $68,809.

Instead, the Weisses separately computed $3,656 tax due on the qualified dividends (15 percent of $24,376) and then noted on that this was "Qualified Dividend Tax" on line 45 of their Form 1040, the place where they should have entered any AMT amount.

The IRS treated this as a "math error" -- and apparently there were a couple of those, judging by the various figures listed in the Tax Court document. Taking that and other "math errors" into account, the IRS recalculated the Weisses regular taxable income, AMT taxable income and determined that the couple still owed Uncle Sam slightly more than $6,000.

Mr. and Mrs. Weiss countered that they correctly reported their qualified dividends and that the IRS was wrong in saying that amount should be included in the calculation of their AMT.

Not so fast, said the IRS. The couple was "mistaken that qualified dividends may be disregarded in the calculation of alternative minimum tax." And while qualified dividends do receive special treatment, argued the IRS, "this special treatment does not mean that qualified dividends may be disregarded altogether in calculating alternative minimum tax."

The Weisses "erroneously omitted their qualified dividends from gross income, which contributed to an understatement of their [alternative minimum tax income], which gave rise to a deficiency … ."

Judge Thornton agreed with the IRS, noting that "Whatever ambiguity might be found in Form 1040 and its instructions in this regard … cannot affect the operation of the tax statutes or petitioners' obligations thereunder."

In other words, tax form instructions are not an authoritative source of tax law.

Hmmm. That assessment of IRS documentation seems to be the ultimate disclaimer and enough to drive all us immediately and directly into the arms of the nearest tax attorney!