Hello all I have a pretty specific question about IDC treatment with AMT.
Background:I had an unusual earnings year, I was laid off from a job with a pretty large severance package and then held two more jobs during the year. The result is that I am going owe about 30k in taxes, even with a credit for SS overpayment, and will likely get hit with a tax underpayment penalty.
Solution: My solution is to make an investment in December in an O&G AFE drilling fund. The fund invests directly into O&G wells. Investors come in as a General Partners (GP) and by definition materially participate in the activities of the fund. Per 26 CFR § 1.263(c)-1 and § 1.612-4 & 26 USC § 469(c)(3)(A) IDCs are 100% deductible against ordinary income and capital gains as well as being allowed to offset active income. The fund targets 85% of the investment as IDC, so it's a good way for me to gain an investment and eliminate or substantially reduce my tax bill for the year at the same time.
Question/Concern: My question is around how the IDC deduction in this case is handled for AMT. What I believe is that because I am a GP and the fund is not an " integrated oil" company that the IDC has an exclusion from being as a AMT Preference Item. In other words, the IDC deduction would not be added back to my taxable income for AMT calculation purposes. THis is huge, because if this is not the case, it effectively eliminates the tax benefit of investing in the fund. SO my questions are:
1) AM I right that in this case as a GP and given the fund is not an integrated oil company that my IDC would be excluded from AMT calculations?
2) Will Turbotax be able to properly handle this?
Data/Findings: From my research :
The instructions from form 6251 seems to confirm this that IDCs in this case would to be factored into the AMT calculation :
Exception. The preference for IDCs from oil and gas wells doesn’t apply to taxpayers who are independent
producers (that is, not integrated oil companies as defined in section 291(b)(4)). However, this benefit may be
limited. First, figure the IDC preference as if this exception didn’t apply. Then, for purposes of this exception, complete Form 6251 through line 3, including the IDC preference and treating line 2f as if it were zero, and combine lines 1 through 3. If the amount of the IDC preference exceeds 40% of the total of lines 1 through 3 (figured as described in the preceding sentence), enter the excess on line 2t (your benefit from this
exception is limited). Otherwise, don’t enter an amount on line 2t (your benefit from this exception isn’t limited).
The following is in the Tax code
Under § 57(a)(2)(E)(i), non-integrated oil companies, as defined in
§ 291(b)(4), may ignore all or a portion of their IDC preference in computing AMTI (the
IDC preference exception). The reduction in AMTI by reason of the IDC preference
exception for any taxable year may not exceed 40 percent of the AMTI for the year
determined without regard to IDC preference exception.
I also found this memo with this example below : https://www.irs.gov/pub/irs-wd/1235010.pdf
The following examples demonstrate the application of the IDC preference exception:
Example 1: Taxpayer A, prior to applying the IDC preference exception, has AMTI of
$350, which includes an IDC preference of $150. A is not an integrated oil company.
As noted above, A may use the IDC preference exception to reduce AMTI by 40 percent
of the AMTI for the year determined without regard to the IDC preference exception. A
can thus reduce its AMTI by $140 ($350 x .40). A’s AMTI for the year is $210 ($350
minus the IDC preference exception reduction of $140).
