                       127 T.C. No. 9



                UNITED STATES TAX COURT



 JONATHAN N. AND KIMBERLY A. PALAHNUK, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 12015-05.                Filed October 11, 2006.



     In 2000, P acquired stock through his exercise of
an incentive stock option (ISO) within the meaning of
sec. 422(b), I.R.C. P realized no income or loss on
the exercise for purposes of computing Ps’ 2000 taxable
income but realized $2,086,009 of income for purposes
of computing Ps’ 2000 alternative minimum taxable
income (AMTI). In 2001, P sold the stock and realized
on the sale a regular tax capital gain of $148,461 and
an alternative minimum tax (AMT) capital loss of
$1,937,547. During 2001, P also realized $153,625 of
capital losses unrelated to any ISO. Ps calculated
their 2001 taxable income by including $3,000 of their
regular tax capital loss resulting from all of the
sales. Ps argue that they may calculate their 2001
AMTI by reducing their 2001 taxable income by the
$2,086,009 difference (as rounded) between the $148,461
regular tax capital gain and $1,937,547 AMT capital
loss attributable to the stock related to the ISO. Ps
argue alternatively that their 2001 AMTI is calculated
by reducing their 2001 taxable income by the $151,461
                                  -2-

     difference between the $148,461 regular tax capital
     gain and $3,000 of their 2001 AMT capital loss.
          Held: Pursuant to secs. 56(b)(3) and 1211(b),
     I.R.C., Ps’ 2001 AMTI is calculated by computing their
     2001 AMT capital loss by using the AMT adjusted basis
     of the stock related to the ISO and the $153,625 of
     capital losses on the other sales, and adjusting Ps’
     2001 taxable income by the difference between the 2001
     regular tax capital loss included in the calculation of
     that taxable income and Ps’ 2001 AMT capital loss up to
     a maximum of $3,000. Because Ps included a $3,000
     capital loss in computing their 2001 taxable income and
     are allowed the same amount as a 2001 AMT capital loss,
     Ps’ adjustment to their 2001 taxable income is zero.



     Don Paul Badgley, Brian G. Isaacson, and Duncan C. Turner,

for petitioners.

     Julie L. Payne, for respondent.



                              OPINION


     LARO, Judge:   This case is before the Court for decision

without trial.   See Rule 122.1   Petitioners petitioned the Court

to redetermine respondent’s determination of a $155,305

deficiency in their 2001 Federal income tax.    The deficiency

stems from respondent’s disallowance of an adjustment that

petitioners made in calculating their 2001 alternative minimum

taxable income (AMTI).   We decide whether the calculation of

petitioners’ 2001 AMTI includes an adjustment for the difference


     1
       Rule references are to the Tax Court Rules of Practice and
Procedure. Section references are to the applicable versions of
the Internal Revenue Code. Dollar amounts are rounded.
                                -3-

between the 2001 regular tax capital gain and 2001 alternative

minimum tax (AMT) capital loss that were attributable to the sale

of stock purchased through the exercise of an incentive stock

option within the meaning of section 422(b) (ISO).2     We hold that

petitioners’ 2001 AMTI is calculated by adjusting their 2001

taxable income by the difference between the regular tax capital

loss included in the computation of their 2001 taxable income and

the $3,000 AMT capital loss that is allowed for 2001 under

section 1211(b).

                            Background

     All facts were stipulated or contained in the exhibits

submitted therewith.   We find the facts accordingly.    Petitioners

are husband and wife, and they filed a joint 2001 Form 1040, U.S.

Individual Income Tax Return (2001 return).   They resided in

Hauppauge, New York, when their petition was filed.

     During 2000 and 2001, Jonathan N. Palahnuk (petitioner) was

employed by Metromedia Fiber Network, Inc. (Metromedia).     On

February 23, 1998, he and Metromedia entered into an agreement

(petitioner’s ISO) that allowed him to purchase shares of

Metromedia class A common stock at a set price.   Petitioner’s ISO

qualified as an ISO under section 422(b).


     2
       We consider petitioners to have conceded any allegation of
error asserted in their petition that they did not adequately
pursue in their posttrial brief. See Harbor Cove Marina Partners
Pship. v. Commissioner, 123 T.C. 64, 66 (2004); Davis v.
Commissioner, 119 T.C. 1 n.1 (2002).
                                  -4-

     On March 15, 2000, petitioner exercised petitioner’s ISO and

purchased some Metromedia shares at a total cost of $99,949.     On

that date, the purchased shares had a total fair market value of

$2,185,958.     Petitioner realized no income or loss on the

exercise for purposes of computing petitioners’ 2000 taxable

income but realized $2,086,009 of income for purposes of

computing petitioners’ 2000 AMTI.

     In 2001, petitioner sold the Metromedia shares for $248,410

and realized a regular tax capital gain of $148,461 (shares’

selling price of $248,410, less the shares’ exercise cost of

$99,949) and (as rounded) a $1,937,547 AMT capital loss (shares’

selling price of $248,410, less the shares’ AMT adjusted basis of

$2,185,958).3    Unrelated to any ISO, petitioner during 2001 also

realized capital losses totaling $153,625.

     On their 2001 return, petitioners included a $3,000 capital

loss in calculating their 2001 taxable income as $561,161 and

calculating their regular tax liability as $191,457.     Although

petitioners were not subject to the AMT in 2001, they computed

their 2001 AMTI to ascertain the amount of the section 53 credit

for prior year minimum tax liability that they could claim in



     3
       A statement attached to petitioners’ 2001 return reports
that the selling price of the shares totaled $248,972 and that
the resulting gain was $149,024 ($248,972 - $99,948). While
petitioners acknowledge in their posttrial brief that the
resulting gain was $148,461, they do not explain this
discrepancy.
                                  -5-

2001.    Petitioners calculated their 2001 AMTI on 2001 Form 6251,

Alternative Minimum Tax--Individuals, by reporting a negative

$1,929,509 adjustment on line 9 of that form and by reporting two

other unrelated adjustments in the total amount of $5,999.4        They

reported that their AMTI was negative $1,362,349 (taxable income

of $561,161 + negative $1,929,509 + $5,999) and that their 2001

tentative minimum tax and 2001 AMT were both zero.      For 2000,

petitioners’ AMT equaled $588,066.      Petitioners adjusted that

amount by $46,553 to reflect a net minimum tax on exclusion items

and claimed on their 2001 return that they had a $541,513 minimum

tax credit that could be applied to 2001 and later years.

Petitioners applied $191,457 of this credit to their 2001 regular

tax liability of $191,457, thus reducing that liability to zero,

and claimed the $350,056 balance as a minimum tax carryover to

2002.

        Respondent determined that petitioners were not entitled to

the negative $1,929,509 adjustment.      Accordingly, respondent

determined, petitioners’ 2001 AMTI was $567,160 (negative

$1,362,349 + $1,929,509) and their resulting 2001 tentative

minimum tax was $155,305.    Further, respondent determined,



     4
       We are unsure of the specifics of the negative $1,929,509
adjustment. Petitioners claim in their posttrial brief that they
are entitled to a negative adjustment of $2,086,009, or in other
words, the difference (as rounded) between the 2001 regular tax
capital gain of $148,461 and the 2001 AMT capital loss of
$1,937,547.
                                    -6-

petitioners had no 2001 net minimum tax on exclusion items and a

$588,066 minimum tax credit ($541,513 + $46,553) that was

available for 2001 and later years.       Respondent determined that

petitioners could apply $36,152 of that credit to 2001 (regular

tax liability of $191,457 - 2001 tentative minimum tax of

$155,305) and carry over the $551,914 balance to later years.

                                Discussion

        The Internal Revenue Code imposes upon taxpayers an AMT in

addition to all other taxes imposed by subtitle A.       See sec.

55(a); Allen v. Commissioner, 118 T.C. 1, 5 (2002).       The AMT is

imposed upon a taxpayer’s AMTI, which is an income base broader

than the usual base of taxable income applicable to Federal

income taxes in general.       See Allen v. Commissioner, supra at 5.

In order to compute AMTI, an individual must first compute his or

her taxable income and then alter that amount (by way of an

adjustment or an increase) to reflect the items described in the

remainder of part VI, subchapter A, chapter 1, subtitle A (part

VI).5       Id. at 10.




        5
       Part VI includes five sections, numbered and titled as
follows:

        SEC. 55.    Alternative Minimum Tax Imposed;
        SEC. 56.    Adjustments in Computing Alternative Minimum
                    Taxable Income;
        SEC. 57.    Items of Tax Preference;
        SEC. 58.    Denial of Certain Losses; and
        SEC. 59.    Other Definitions and Special Rules.
                                 -7-

     One item described in part VI is ISOs.   Specifically,

section 56(b)(3) provides that “Section 421 shall not apply to

the transfer of stock acquired pursuant to the exercise of an

incentive stock option * * *.    The adjusted basis of any stock so

acquired shall be determined on the basis of the treatment

prescribed by this paragraph.”   Under section 421, an individual

who exercises an ISO is not taxed on the exercise but is taxed

when he or she sells the resulting stock.   See sec. 421(a).

Thus, pursuant to sections 56(b)(3) and 421(a), petitioners were

required to recognize the following income or loss on the

exercise of petitioner’s ISO in 2000 and the sale of the

resulting stock in 2001:   For 2000, zero and income of $2,086,009

for regular tax and AMT purposes, respectively; for 2001, a

capital gain of $148,461 and a capital loss of $1,937,547 for

regular tax and AMT purposes, respectively.

     Petitioners assert that section 56 entitles them to deduct a

net operating loss for 2001 equal to the $2,086,009 difference

(as rounded) between the 2001 regular tax capital gain of

$148,461 and the 2001 AMT capital loss of $1,937,547.   To this

end, petitioners argue, the $2,086,009 difference is an AMT net

operating loss within the meaning of section 56(d)(2)(A)(i) and

allowing such a deduction comports with legislative intent,

equity, and policy.   In Merlo v. Commissioner, 126 T.C. 205

(2006), the Court recently rejected similar arguments made by the
                                -8-

taxpayers there.   We do likewise here for the same reasons stated

in Merlo.6   Accord Montgomery v. Commissioner, 127 T.C.

(2006); Spitz v. Commissioner, T.C. Memo. 2006-168.

     Alternatively, petitioners argue, they may compute their

2001 AMTI by subtracting from their 2001 taxable income the

$151,461 difference between the $148,461 regular tax capital gain

for 2001 and the $3,000 allowable AMT capital loss for 2001.

According to petitioners, this difference is a net operating loss

negative adjustment that reduces their 2001 taxable income.

While we agree with petitioners that the difference between a

regular tax capital gain or loss and an AMT capital gain or loss

must be taken into account in calculating a taxpayer’s AMTI, we

disagree with petitioners that the difference in this case is a

net operating loss for the same reasons set forth in Merlo v.

Commissioner, supra.   Accord Montgomery v. Commissioner, supra;

Spitz v. Commissioner, supra.   For the reasons stated below, we

also disagree with petitioners that $151,461 is the difference

that must be taken into account in computing their 2001 AMTI.

     In Allen v. Commissioner, supra at 10, we explained that an

individual calculates AMTI by first computing regular taxable

income and then making the necessary alterations to reflect the



     6
       Petitioners acknowledge in their posttrial brief that this
issue was decided adversely to them in Merlo v. Commissioner, 126
T.C. 205 (2006).
                                -9-

items described in part VI.   Thus, petitioners must calculate

their 2001 AMTI by adjusting their 2001 taxable income to reflect

the mandate of section 56(b)(3) that their AMTI be computed using

their AMT adjusted basis in the stock acquired through the

exercise of petitioner’s ISO rather than their regular tax

adjusted basis in that stock.   In other words, given that

petitioners computed their 2001 taxable income by factoring in a

$3,000 capital loss, petitioners’ adjustment under section

56(b)(3) must reflect the substitution of that $3,000 capital

loss with the $3,000 allowable portion of their 2001 AMT capital

loss (discussed below).

     Petitioners calculate their 2001 AMTI by reducing their

taxable income by the $148,461 regular tax capital gain

attributable to petitioner’s ISO (rather than the $3,000 capital

loss factored into the computation of their 2001 taxable income).

We do not do similarly.   In addition to the sales underlying the

$148,461 capital gain, petitioners had other sales of capital

assets during 2001.   Although those other sales were unrelated to

petitioner’s ISO, they are nevertheless sales that entered into

the calculation of petitioners’ 2001 regular tax capital loss

and, hence, must necessarily enter into the calculation of

petitioners’ adjustment under section 56(b)(3).   Considering all

of the sales together, petitioner realized a regular tax capital

loss of $5,164 (the sum of the non-ISO losses of $153,625 and the
                               -10-

regular tax ISO gains of $148,461) and an AMT capital loss of

$2,091,170 (the sum of the non-ISO losses of $153,625 and the AMT

ISO losses of $1,937,547).   The recognition of both the regular

tax capital loss and the AMT capital loss is limited to $3,000,

see sec. 1211(b); see also Merlo v. Commissioner, supra (section

1211(b) limits an individual’s annual deduction of an AMT capital

loss to $3,000), which, in turn, means that petitioners’

adjustment under section 56(b)(3), representative of the

difference between the recognized losses for regular tax and AMT

purposes, is zero as determined by respondent.

     We sustain respondent’s determination.   In so doing, we have

considered all of petitioners’ arguments and conclude that those

arguments not discussed herein are without merit.


                                         Decision will be entered

                         for respondent.
