                        T.C. Memo. 2006-256



                      UNITED STATES TAX COURT


     DANNY HOLLOWAY AND PATTI BAIN HOLLOWAY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20881-04.               Filed November 28, 2006.


     Danny and Patti Bain Holloway, pro sese.

     Elke B. Esbjornson, for respondent.


                        MEMORANDUM OPINION


     HOLMES, Judge:   Everyone agrees that Danny and Patti

Holloway are entitled to a credit on their 2002 income tax for an

investment in “closed loop biomass projects.”   The question is

whether that credit should be the $34,500 they claim or only a

much smaller amount (less than $4,000) that the Commissioner is

willing to allow them after taking into consideration the

alternative minimum tax.
                                - 2 -

                             Background

     The Holloways’ claim to a tax credit is an indirect one.      In

2002, Danny Holloway owned 100 percent of Holloway, Inc., an S

Corporation.    Holloway, Inc. was in turn a member of a limited

liability company named Mopass V.    In 2002, Mopass reported a

“Section 29 Tax Credit”1 of $34,500 on the Schedule K-1 that it

sent to Holloway, Inc.    Holloway, Inc. then reported the credit

as an “Enhanced Oil Recovery Credit” under section 43 on the

schedule K-1 that it sent to Danny Holloway.2   The Holloways

timely filed their 2002 joint tax return, and claimed not only

the full $34,500 credit under section 29 or 43 from Mopass via

Holloway, Inc., but also an adoption credit under section 23.

     The IRS first sent the Holloways a math error notice,

claiming the Holloways miscalculated the amount of their section

29 or 43 credit.3   Unlike a notice of deficiency, a math error


     1
       All section references are to the Internal Revenue Code in
effect for the 2002 tax year. The Code’s sec. on tax credits and
the alternative minimum tax are among the most often revised, and
the “credit for producing fuel from a nonconventional source” was
moved from section 29 to section 45K by the Energy Policy Act of
2005, Pub. L. 109-58, sec. 1322(a)(1), 119 Stat. 594, 1011
(effective Aug. 8, 2005).
     2
       The enhanced oil recovery credit is allowed (in 2002 as
today) by section 43. Neither party explained how Mopass’s
section 29 credit metamorphosed into a section 43 credit by the
time it reached the Holloways, but as we explain below, the
amount of the allowable credit is the same regardless of the
section it’s claimed under.
     3
         The Commissioner sends a math error notice when he finds
                                                     (continued...)
                               - 3 -

notice is not directly appealable to the Tax Court.    However, a

taxpayer may request an abatement of the increased liability

within 60 days, which the Commissioner must grant.    If the

Commissioner still thinks he was right, he must send a notice of

deficiency to the taxpayer.   The normal rules for petitioning

this Court for redetermination of that deficiency then kick in.

See sec. 6213(b)(2).

     Instead of demanding an abatement and waiting for a notice

of deficiency, the Holloways posted a cash bond and then

submitted a written protest requesting a review of the math error

notice.4   While reviewing the protest, the Commissioner looked

into the Holloways’ adoption credit.   Discovering that the

Holloways were claiming the credit for Danny Holloway’s expenses

in adopting his stepchildren--a use specifically disallowed by

section 23(d)(1)(C)--the Commissioner sent the Holloways a notice


     3
      (...continued)
there was a “mathematical or clerical error” on a tax return.
See sec. 6213(b)(1), (g)(2). The Code’s definition of what
counts as a math error includes errors in calculating statutory
limits on the kind of credits that the Holloways claimed. See
sec. 6213(g)(2)(E).
     4
       If a taxpayer disagrees with the Commissioner’s proposed
tax liability but wants to prevent interest from accruing, he may
remit all or a portion of the proposed liability (plus interest
due) as a deposit in the nature of a cash bond rather than a
payment. Rev. Proc. 84-58, 1984-2 C.B. 501. Such a deposit
doesn’t earn interest, isn’t subject to a claim for credit or
refund as an overpayment, and must be returned to the taxpayer on
request at any time before assessment. Id. sec. 4.02(1), 1984-2
C.B. at 502.
                                - 4 -

of deficiency disallowing that credit.    The Holloways consented

to an assessment of the math error change, and their deposit was

used to pay it 90 days after the Commissioner sent them the

notice of deficiency.    See Rev. Proc. 84-58, sec. 4.02(3), 1984-2

C.B. 501, 502.   The Holloways responded by timely filing a

petition for redetermination of their 2002 tax.

     The parties stipulated nearly all the facts in the case, but

there was a brief trial in Dallas (though the Holloways were

residents of Oklahoma when they filed their petition).    After the

trial, the Holloways conceded that they were not entitled to the

adoption credit.

                             Discussion

     The Commissioner initially challenged this Court’s

jurisdiction because the only issue remaining for us to decide is

the amount of the Holloways’ credit under section 29 or 43, which

he had adjusted with a math error notice instead of a notice of

deficiency.   But, as he now recognizes, once the Holloways

properly “petitioned the Tax Court to redetermine the asserted

deficiency, the Tax Court acquired jurisdiction to decide the

entire gamut of possible issues that controlled the determination

of the amount of tax liability for the year in question.”

Russell v. United States, 592 F.2d 1069, 1072 (9th Cir. 1979);

see sec. 6512(a).    We therefore agree with the parties that we

have jurisdiction.
                              - 5 -

     The heart of this case involves the effect of the

alternative minimum tax on the Holloways’ tax credit.    And

because the record is unclear on whether the Holloways are

claiming a credit under section 29 or 43, we’ll look at both.

     We begin with a brief summary of the alternative minimum tax

and its relation to either kind of credit.   As we explained in

Day v. Commissioner, 108 T.C. 11, 14 (1997), the purpose of the

alternative minimum tax was to make sure that taxpayers pay some

tax regardless of the tax breaks--like the ones in sections 29

and 43--generally available elsewhere in the Code.   The

alternative minimum tax works by eliminating favorable treatment

for some of these breaks.

     The starting point in this complicated scheme is calculating

a taxpayer’s alternative minimum tax income.   Alternative minimum

tax income begins with regular income tax income, but adjusts it

(usually upward) by recalculating or eliminating certain losses,

exclusions, and deductions listed in sections 56-58.    Sec.

55(b)(2).

     The next step is to calculate the “tentative minimum tax.”

This is done by taking the alternative minimum tax income and

subtracting a defined exemption amount,5 then multiplying the

resulting figure by the alternative minimum tax rate and


     5
       The exemption amount begins to phase out once the
alternative minimum tax income reaches a certain threshold
amount. Sec. 55(d)(3).
                                - 6 -

subtracting available foreign tax credits.     Sec. 55(b)(1)(A).

     Once the tentative minimum tax is calculated, the third step

is to determine the adjusted regular tax6 for purposes of the

alternative minimum tax.   The adjusted regular tax is a

taxpayer’s regular tax increased by any nonrefundable credits

taken, other than foreign tax credits or personal nonrefundable

credits.   Sec. 55(c).

     This adjusted regular tax is then compared to the tentative

minimum tax.   If the tentative minimum tax is larger, any excess

over the adjusted regular tax is due as an additional tax for

that year.   Sec. 55(a).   If the tentative minimum tax is less, no

additional tax is owed but available business credits are limited

to the excess of the adjusted regular tax over the tentative

minimum tax,7 with the ability to carry any remaining credits

back one year and forward up to twenty years.     Sec. 39.

     To summarize,

     !     Start with a taxpayer’s regular income tax income;

     !     Adjust it by recalculating or eliminating certain
           losses, exclusions, or deductions;

     !     Reduce it by an exemption amount;



     6
       We will refer to the “regular tax” defined in section
55(c) as “adjusted regular tax” to distinguish this term from the
“regular tax” defined in section 26(b).
     7
       See sec. 38(c)(1). The actual limitation calculation is
much more complex, but for our purposes, this simplified
explanation will do.
                                 - 7 -

       !    Multiply that amount by the alternative minimum tax
            rate;

       !    Subtract available foreign tax credits.

       Result: a taxpayer’s tentative minimum tax.    Then

       !    Calculate the regular tax liability;

       !    Add back in nonrefundable credits (other than foreign
            tax credits and personal nonrefundable credits);

       !    Compare the resulting adjusted regular income tax to
            the tentative minimum tax;

       !    If the tentative minimum tax is greater than the
            adjusted regular income tax, then add the difference to
            the amount of tax due for the year;

       !    If the adjusted regular income tax is greater than the
            tentative minimum tax, then limit the amount of
            business tax credits to the difference and allow any
            leftover credit to be carried back one year or forward
            to later years.

       As if this weren’t complicated enough, there is also

something called the “minimum tax credit,” which, despite its

name, is not a credit against a taxpayer’s alternative minimum

tax but against his regular income tax.    The minimum tax credit

is essentially the unused portion of certain deductions, such as

depreciation, as calculated under the alternative minimum tax,

plus certain other unused credits as defined in the Code.     See

sec. 53(b), (d)(1).    Like the business tax credits above, the

minimum tax credit can be used only to the extent that the

adjusted regular income tax is greater than the tentative minimum

tax.    Sec. 53(c).   Any unused portion of the minimum tax credit

is carried forward to future tax years until it is used up.     See

sec. 53(b).
                                - 8 -

     The minimum tax credit and the alternative minimum tax

limitation on business credits are both applicable to this case

because, depending on which credit the Holloways are claiming,

one or the other will apply.   The section 29 credit (now the

section 45K credit) was one of the additional credits included in

the minimum tax credit in 2002.   Sec. 53(d)(1)(B)(iii).   If the

Holloways’ credit were a section 29 credit, any part of it

greater than the excess of their adjusted regular income tax over

their tentative minimum tax would become part of their minimum

tax credit.   Id.   If their credit were a section 43 credit, it

would be the alternative minimum tax’s limits on business

credits, as described above, that would apply and limit it.

     But whether their credit fed into the minimum tax credit or

the general business tax credit part of the whole alternative

minimum tax scheme, the Holloways would first have to calculate

their tentative minimum tax and adjusted regular income tax for

the 2002 tax year to determine how much credit is available to

them.   It was their failure to do this that caused the

Commissioner’s computers to spit out a math error notice--and the

Holloways do not contest the Commissioner’s arithmetic.    They

concede that without a special rule that reduces their tentative

minimum tax, the Commissioner is correct and they are limited in

the amount of credit they can take.     However, they point to three

sections of the Code which they believe apply to their situation:
                               - 9 -

sections 26(a)(1), 38(c)(4), and 55(e)(1).   Any one of these

three sections would, if applicable, allow them the full use of

their credit in 2002.

     Section 26(a)(2).   This section works by setting the

tentative minimum tax as zero in the case of certain credits.

This allows the favored credits to offset both regular and

alternative minimum tax liability for certain years, including

2002.   But the section applies only to credits “allowed by this

subpart.”   “This subpart” refers to subpart A of subtitle A,

chapter 1, subchapter A, part IV, which lists various credits,

but it does not include either section 29 or 43 credits.

Recognizing this, the Holloways argue that the phrase “allowed by

this subpart” doesn’t mean just the credits specifically listed

in that subpart, but includes as well other credits that, like

the listed credits, are also personal and nonrefundable.     They

then argue that their credit became a nonrefundable personal

credit when it passed to them through Holloway, Inc.   But simply

calling a credit a “nonrefundable personal credit” by analogy

doesn’t make it allowable under Subtitle A, Chapter 1, Subchapter

A, Part IV, Subpart A--the only subpart to which section 26(a)(2)

applies.

     Section 38(c)(4).   Like section 26(a)(2), this section works

by setting the tentative minimum tax as zero in the case of

certain credits, essentially allowing them to be used to reduce
                               - 10 -

the alternative minimum tax.   Unfortunately for the Holloways,

this section wasn’t added to the Code in its present form until

2004, and applies only to tax years ending after October 22,

2004.8   Even if it were effective for the 2002 tax year, it

applies to only certain tax credits, and neither the section 29

nor 43 credit is among them.   Sec. 38(c)(4)(B) (2006).

     Section 55(e)(1).   This section eliminates alternative

minimum tax liability for corporations with gross receipts under

$7.5 million.   But it applies only to corporations subject to

taxation.   Holloway, Inc. is an S Corporation, and so doesn’t pay

taxes itself.   Its taxable income is also generally calculated as

if it were an individual, not a regular corporation.   Sec.

1363(a) and (b).   This special rule just doesn’t apply to it.

     We therefore hold that the Commissioner was correct in

allowing the Holloways to take only a portion of their credit,

and so


                                    Decision will be entered

                               for respondent.




     8
       American Jobs Creation Act of 2004, Pub. L. 108-357, sec.
711(a), (c), 118 Stat. 1418, 1557-1558.
