                  T.C. Summary Opinion 2004-97



                     UNITED STATES TAX COURT



             ESTATE OF CLIFFORD C. HAUGEN, DECEASED,
               AND AUDREY A. HAUGEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 6725-03S.            Filed July 26, 2004.


     Audrey A. Haugen, pro se.

     Randall L. Preheim, for respondent.



     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.




     1
          Unless otherwise indicated, section references
hereafter are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules
of Practice and Procedure.
                              - 2 -


     Respondent determined deficiencies of $36,077 and $2,423,

respectively, in petitioners' Federal income taxes for 1998 and

1999.2

     The issues for decision are:   (1) In calculating the taxes

for the years 1998 and 1999 under the income-averaging provisions

of section 1301, whether net operating losses (NOL) for 2 of the

3 base years in the income-averaging computation, which had been

carried back to earlier years and for which income tax refunds

were received as a result of such carrybacks, should be added

back to the net income for such base years due to the tax

benefits realized from the NOL carrybacks,3 and (2) for the year

1998, whether a taxpayer's election to income average under


     2
          Clifford C. Haugen and Audrey A. Haugen were husband
and wife. Mr. Haugen died testate on May 7, 1998, and Mrs.
Haugen was the executrix of her late husband's estate. For the
year 1998, a joint Federal income tax return was filed in the
name of Clifford C. Haugen, Deceased, and Audrey A. Haugen. For
1999, Audrey A. Haugen filed her return as a single person.
Although the record does not reflect the heirs or successors to
Mr. Haugen's estate, the Court assumes, and the parties have not
placed at issue, any question that the heir, successor, or party
at interest regarding Mr. Haugen's estate is petitioner Audrey A.
Haugen. Consequently, the income and expenses for the year 1999,
reported on the 1999 Federal income tax return by Mrs. Haugen,
are presumed to include all interests of Mrs. Haugen's deceased
spouse. For convenience, the Court refers interchangeably to
"petitioner" or "petitioners" to include the interests of
Clifford C. Haugen, deceased, as well as those of Mrs. Haugen.
     3
          The Court's holding on the income-averaging issue for
the 1998 tax year also resolves the sole issue for the 1999 tax
year because one of the base years for 1999 is the year 1996, in
which a NOL was carried back, and a tax refund was received as a
result of the carryback.
                                - 3 -


section 1301 precludes applicability of the alternative minimum

tax under section 55; alternatively, if section 55 is applicable,

whether the "regular tax" in section 55(a)(2), which offsets the

tentative minimum tax under section 55(a)(1), means the tax

calculated under section 1, without the benefit of income

averaging under section 1301.

     This case was submitted fully stipulated under Rule 122.

The agreed facts and the attached exhibits are so found and are

incorporated herein by reference.   At the time of his death, Mr.

Haugen was a resident of Lewistown, Montana.   At the time the

petition was filed, Mrs. Haugen was a legal resident of

Lewistown, Montana.4

     Petitioners were in the cattle ranching business.    They

owned and operated a 7,000-acre cattle ranch near Lewistown,

Montana, for nearly 30 years.   Shortly after Mr. Haugen's death

in 1998, petitioner, Mrs. Haugen, began liquidation of the

business by selling the ranch and the assets used in its

operation.

     A joint Federal income tax return was filed by petitioners

for 1998.    The tax shown on that return was $74,977, based on the

income-averaging provisions of section 1301.   The return included



     4
          Since the facts are not in dispute, the Court decides
this case without regard to which party bears the burden of
proof. Sec. 7491, therefore, is not applicable in this case.
                                 - 4 -


a Schedule J, Farm Income Averaging, for computation of the tax.

The 3 base years in the averaging computation were 1995, 1996,

and 1997.   Two of these years, 1995 and 1996, were years in which

petitioners sustained NOLs.   The NOLs for 1995 and 1996 had been

carried back to prior years, and both NOLs were fully absorbed by

the taxable income of such prior years.    The NOL for 1995 had

been carried back to 1992, and the unabsorbed portion of that NOL

was carried forward to 1993, where the remainder of the 1995 NOL

was fully absorbed.   The 1996 NOL had been carried back to 1993

and was fully absorbed by the net income for 1993.    With respect

to the 1995 carryback, petitioners received income tax refunds of

$23,163 and $3,086, respectively, of their 1992 and 1993 taxes.

With respect to the 1996 carryback, petitioners received a refund

of $17,510 of their 1993 taxes.    Thus, the three refunds from

these carrybacks totaled $43,759.

     Petitioners reported taxable income of $476,055 for the year

1998 and taxable income of $414,742 for 1999.    Appropriate

elections were made to calculate the tax for both years under the

income-averaging provisions of section 1301.    To that end, each

return included a Schedule J.5    For the 1998 tax year, the


     5
          The income-averaging provisions of sec. 1301 apply to
"elected farm income" that is defined generally under sec.
1301(b)(1)(A) as that portion of taxable income for the taxable
year that is attributable to any farming business and that is
specified by the taxpayer as elected farm income. For the year
                                                   (continued...)
                              - 5 -


averaging (base) years were 1995, 1996, and 1997.   For the 1999

tax year, the base years were 1996, 1997, and 1998.

     On Schedule J of the 1998 return, the taxable income of the

3 base years in the income-averaging computation was listed as

follows:


               1995 taxable income ($121,767)
               1996 taxable income ($64,010)
               1997 taxable income $248,208


Petitioners did not eliminate the NOLs on Schedule J of their

1995 and 1996 returns to reflect the carryback of the NOLs to the

years 1992 and 1993.6

     After the 1998 return was filed, petitioners were assessed

$52,607 for the alternative minimum tax under section 55.    That

assessment was later reduced to $30,087.   Thereafter, the

examination division of the IRS made income adjustments to the


     5
      (...continued)
1998, of the $476,055 in taxable income, the elected farm income
was $192,030. For the year 1999, of the $414,742 in taxable
income, the elected farm income was $46,515. Respondent has not
challenged the elected farm income amounts for the 2 years before
the Court, nor does respondent deny petitioners' entitlement to
income averaging.
     6
          In the carryback to 1992 and 1993, the NOLs for 1995
and 1996 were, respectively, $116,767 and $58,910, as sec.
172(d)(3) provides that no deduction for sec. 151 personal
exemptions shall be allowed in the determination of a NOL. The
reductions, therefore, of $5,000 and $5,100, respectively, for
1995 and 1996 from the negative income amounts reported on the
1995 and 1996 returns represent the elimination of the personal
exemptions claimed on the returns.
                                 - 6 -


1998 return totaling $315,587.    Petitioners agreed to those

adjustments but consented only to an assessment of additional tax

of $23,360, based on the same income-averaging amounts on

Schedule J of the original return, without any adjustment for the

NOLs for 1995 and 1996 that had been carried back to earlier

years.   Respondent did not agree or consent to that computation

method using the negative income amounts of the 1995 and 1996

base years.

     Likewise, petitioner's 1999 income tax return was examined

by the IRS, and petitioner agreed to an assessment of additional

tax on income adjustments totaling $71,847.    Petitioner's consent

to this assessment was also based on income averaging and

utilization of the same NOL for 1996 without any adjustment for

the carryback of the 1996 NOL to 1993.    Respondent likewise did

not agree or consent to this computation method.    See supra note

3.

     The second issue is petitioners' disagreement over

respondent's computation of the alternative minimum tax of $4,545

for 1998 under section 55.7   Petitioner contends that where the


     7
          As noted earlier, petitioner agreed to an AMT
assessment of $30,087 for 1998 pursuant to agreed income
adjustments but on a computation of tax under sec. 1301 without
any adjustments to the negative taxable income for 2 of the base
years in the income-averaging computation. The $4,545 AMT
determination for 1998 is based on the same income adjustments
agreed to by petitioner but with a tax computed under sec. 1301
                                                   (continued...)
                               - 7 -


taxpayer elects income averaging under section 1301, such

election precludes applicability of the alternative minimum tax

under section 55.   Alternatively, if section 55 is applicable,

the offset to the tentative minimum tax, the "regular tax",

should be calculated without the benefit of section 1301 income

averaging.

     In summary, the 1998 notice of deficiency determined a

deficiency in tax of $36,077, of which $31,532 relates to section

1301 income averaging, and $4,545 is the alternative minimum tax

under section 55.   The 1999 notice of deficiency determined a

deficiency of $2,423, which relates only to the section 1301

income-averaging computation and the taxable income for 1 of the

base years, 1996.

     Under section 1301, an individual engaged in the trade or

business of farming may elect to compute Federal income tax by

averaging over the prior 3-year period all or a portion of

taxable income attributable to farming.   In general, an

individual who makes the election (1) designates all or a portion

of taxable income attributable to the farming business for an

election year as elected farm income; (2) allocates one-third of

the elected farm income to each of the 3 prior taxable years; and



     7
      (...continued)
in which the NOLs for 2 of the base years in the income-averaging
computation are added back to the income for those years.
                              - 8 -


(3) determines the tax by (a) computing the tax under section 1

for all income that is not elected farm income plus (b) the

increase in the section 1 tax for each of the 3 prior years

caused by including one-third of the elected farm income in each

year.8

     Respondent frames the first issue as "whether a taxpayer

electing farm income averaging can reap a double benefit by

carrying back net operating losses in base years, receiving a tax

benefit therefrom, and then utilize the same negative taxable

income in computing * * * tax liability under farm income

averaging" in subsequent years.   Petitioners, while admitting

receiving income tax refunds attributable to the carryback of

NOLs from 2 of the base years in the section 1301 income-

averaging computation for the years at issue, contend that the


     8
          Sec. 1301 was enacted as part of the Taxpayer Relief
Act of 1997, Pub. L. 105-34, Title 1X, sec. 933(a), 111 Stat.
881, adding sec. 1301. That act was effective for 3 years, 1998,
1999, and 2000. The Omnibus Consolidation and Emergency
Supplemental Appropriations Act of 1999, Pub. L. 103-277, sec.
2011, 112 Stat. 2681-902, made permanent the income-averaging
provisions of sec. 1301. Both statutes limit applicability to
any individual engaged in a farming business and apply only to
electible farm income for the election year and the averagible
farm income for 3 years. An earlier version of sec. 1301 was
repealed by the Tax Reform Act of 1986, Pub. L. 99-514, sec.
151(a), 100 Stat. 2121, for taxable years beginning after Dec.
31, 1986. The earlier version of sec. 1301 was not limited to
farm income and generally applied if the income of the current
year exceeded 140 percent of the taxpayer's average income for
the preceding 3 years by more than $3,000. These are the only
apparent differences between the current sec. 1301 and the
earlier repealed version.
                               - 9 -


Schedule J instructions were followed in the preparation and

filing of the 1998 and 1999 returns.    Petitioner argues that

respondent is erroneously applying internal revenue regulations

for section 1301 that were promulgated after the returns in

question were filed.   Petitioner argues, in effect, that

respondent is retroactively applying internal revenue regulations

to their 1998 and 1999 returns.

     The promulgated internal revenue regulations under section

1301 do prohibit the double benefits realized by petitioners in

carrying back NOLs realized in base tax years in the section 1301

income-averaging process, receiving tax refunds from such

carrybacks, and then using the same NOLs as negative income in

the section 1301 income-averaging computations for later years.

     Respondent contends that, for the 2 base years, 1995 and

1996, in which NOLs were realized and carried back to prior years

and for which tax benefits were received, in determining the tax

for 1998 and 1999 under section 1301, the taxable income of the

base years in that computation in which NOLs were carried back,

should be adjusted by adding back to the income of the base years

the amounts of the carried back NOLs.    For example, the negative

taxable income of petitioners for 1995 was $121,767, of which the

NOL was $116,767.   The $116,767 NOL was carried back to 1992 and

1993, which resulted in tax refunds for 1992 and 1993 taxes.

Because of the tax benefits realized by petitioners from the NOL
                                  - 10 -


carryback, in the income-averaging computation for the 1998 tax,

respondent contends that the taxable income of petitioners for

1995 should be a negative $5,000, representing the dependency

exemptions claimed for 1995 that were not allowed as part of the

NOL.       Instead, petitioners claimed on Schedule J of their 1998

return negative taxable income of $121,767.       The same comparable

figures were used on Schedule J of the 1999 return (which

involved the 1996 carryback year), and respondent argues the same

rule applies for that year as well.9

       Although petitioners contend that they relied on the

instructions for Schedule J in listing negative taxable income of

the base years in their income-averaging computations in

connection with the 1998 and 1999 returns, respondent points out

on brief that petitioners failed to do so.       The line instructions

on Schedules J for 1998 and 1999, including the references for

the listing of taxable income of base years from Form 1040, U.S.

Individual Income Tax Return, clearly stated that, if taxable

income for a carryback year was negative, for income-averaging

purposes on Schedule J, the taxable income for such years should

be zero.       Petitioners, instead, on Schedules J for 1998 and 1999

reported the negative income amounts of the 2 carryback years,


       9
          In the income-averaging computation for 1999, an
additional adjustment is made to the taxable income of the 1996
base year to further account for the use of the 1996 NOL
carryback to a prior year.
                               - 11 -


1995 and 1996.   Respondent acknowledges that the reporting

instructions (requiring negative income amounts of base years to

be listed as zero) were based on temporary regulations for

section 1301 then in effect.   Respondent agrees, however, that,

when the temporary regulations for section 1301 were made final,

the final regulations differed from the temporary regulations

with respect to negative income of base years in income

averaging.   Under the final regulations, taxpayers may list on

Schedule J of their returns negative income realized in the base

years for the averaging computation.

     Respondent acknowledges that the 2000 IRS instructions for

Schedule J, pursuant to the final section 1301 regulations,

state:


     If you had taxable income from farming in 1998 or 1999 and
     your deductions exceeded your gross income for any of the 3
     years preceding those years (base years), your taxable
     income for averaging purposes for a base year may be a
     negative amount. You can use that negative amount instead
     of limiting that amount to zero when figuring your tax using
     Schedule J for 1998 or 1999.


To accommodate taxpayers who filed 1998 and 1999 tax returns and

elected income averaging that included base years with negative

taxable income and such income was listed as zero on Schedule J

of those returns, the year 2000 instructions recommended that

such taxpayers file amended returns for 1998 or 1999 with

Schedules J that would list the negative income of such base
                              - 12 -


years to allow tax refunds as a result of the negative income of

such years in the income-averaging computation.

     Respondent points out that, in the notices of deficiency to

petitioner for 1998 and 1999, respondent has allowed petitioner

the benefit of income averaging and, for the 2 base years having

negative taxable income, 1995 and 1996, has included the negative

income for these 2 years in the income-averaging computation, but

only to the extent that the negative income of such base years

was not part of the NOLs that were carried back to prior years.

In effect, the income-averaging computation by respondent in the

notices of deficiency include only, as negative income, the

exemptions claimed for 1995 and 1996 that were not part of the

NOLs.

     Respondent argues, however, that, when a base year involves

an NOL that is carried back to a earlier year, and a tax benefit

is realized by the taxpayer from that carryback, section 1301 is

not intended to recognize, in the income-averaging process, the

NOL of such base year or years because of the tax benefits

received in the carrybacks.

     Respondent agrees that the internal revenue regulations

issued pursuant to the current version of section 1301 were

published on January 8, 2002, and, therefore, were not in effect

when petitioners filed their 1998 and 1999 income tax returns.
                             - 13 -


The regulations clearly address factual situations such as those

presented in this case that support respondent's position.

     Section 1301(c) provides:


          SEC. 1301(c). Regulations.–-The Secretary shall
     prescribe such regulations as may be appropriate to carry
     out the purposes of this section, including regulations
     regarding--

               (1) the order and manner in which items of income,
          gain, deduction, or loss, or limitations on tax, shall
          be taken into account in computing the tax imposed by
          this chapter on the income of any taxpayer to whom this
          section applies for any taxable year * * * [Emphasis
          added.]


     Section 1.1301-1(d)(2), Income Tax Regs., provides, in

pertinent part:


          (2) Computation in base years. * * * For this purpose,
     all allowable deductions (including the full amount of any
     net operating loss carryover) are taken into account in
     determining the taxable income for the base year even if the
     deductions exceed gross income and the result is negative.
     If the result is negative, however, any amount that may
     provide a benefit in another taxable year is added back in
     determining base year taxable income. Amounts that may
     provide a benefit in another year include--

          (A) The net operating loss (as defined in section
     172(c)) for the base year;

          (B) The net operating loss for any other year to the
     extent carried forward from the base year under section
     172(b)(2); * * * [Emphasis added.]


     The preamble for the final section 1301 regulations stated,

in pertinent part:
                              - 14 -


     a base year's taxable income may be negative but amounts,
     such as a net operating loss or certain capital losses, that
     may be deducted in one or more other taxable years in the
     form of a carryover or carryback must be added back in
     computing negative taxable income. The Schedule J for years
     after 1999 includes worksheets and instructions for
     determining negative taxable income for purposes of the
     income averaging computation. [T.D. 8972, 2002-1 C.B. 443,
     445.]


     These provisions are obviously in accordance with certain

concerns Congress had in the enactment of the present version of

section 1301 to prevent an unfair exploitation in the use of

income averaging.   This concern is reflected in the conference

report on the legislation that became section 1301 from the

following pertinent language of that report:


     It is expected that such regulations will deny the multiple
     application of items that carryover from one taxable year to
     the next (e.g., net operating loss or tax credit
     carryovers). [H. Conf. Rept. 105-220 at 509 (1997), 1997-4
     C.B. (Vol. 2) 1457, 1979.]


     To be sure, the proposed and final regulations on section

1301 had not been released at the time petitioners filed their

1998 and 1999 income tax returns, and petitioners cannot be held

to those regulations.   Nonetheless, the statute and the

legislative history suggest explicitly that Congress did not

intend that taxpayers availing themselves of the benefits of

income averaging under section 1301 should be allowed, in the

averaging computation, to include negative income of base years
                              - 15 -


to the extent such negative income constituted a NOL that was

carried back to prior years and for which refunds were paid to

the taxpayer.   In the Court's view, that was the intent of

Congress as reflected in the aforementioned legislative history.

Adding back the NOL to the income of an averaging base year in

such a situation insures against such a result.

     The fact that regulations on section 1301 had not been

promulgated at the time the 1998 and 1999 returns in this case

were filed does not preclude this Court from interpreting the

intent of Congress and applying the law as so interpreted.    In

Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819, 829

(1984), this Court stated:


          We note, of course, that section 58(h) is phrased in
     terms of directing the Secretary of the Treasury to
     prescribe regulations to carry out the stated legislative
     objective, and that the Secretary, to this day, some 8 years
     after the effective date of these new provisions, has not
     yet promulgated any such regulations. Moreover, we note
     further that he has not even published in the Federal
     Register any proposed regulations in this respect. However,
     the failure to promulgate the required regulations can
     hardly render the new provisions of section 58(h)
     inoperative. We must therefore do the best we can with
     these new provisions. Certainly we cannot ignore them.

           Congress could hardly have intended to give the
     Treasury the power to defeat the legislatively contemplated
     operative effect of such provisions merely by failing to
     discharge the statutorily imposed duty to promulgate the
     required regulations. As already indicated, we must give
     effect to these provisions in the absence of regulations
     * * *
                               - 16 -


The Court, accordingly, sustains respondent on the income-

averaging issue.

     The second issue is the alternative minimum tax under

section 55.   Section 55(a) imposes a tax equal to the excess of

(1) the tentative minimum tax for the taxable year, over (2) the

regular tax for the taxable year.

     Petitioner argues that, if a taxpayer elects income

averaging, that method of computation of the tax is exclusive and

trumps the alternative minimum tax under section 55.     The Court

does not agree with that argument.      In the conference committee

report to the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.

933(a), 111 Stat. 881 (enacting section 1301), the conferees

stated:   "the provision [sec. 1301] does not apply for purposes

of the alternative minimum tax under section 55."     H. Conf. Rept.

105-220 at 508 (1997), 1997-4 C.B. (Vol. 2) 1457, 1978.     The

proposed and final regulations to section 1301 include this same

provision.    The preamble to the final regulations states "There

is no exception in the Code provisions relating to the

alternative minimum tax that would permit the minimum tax to be

computed without regard to the effect of farm income averaging".

T.D. 8972, 2002-1 C.B. 443, 446.    This statement of the law is

consistent with the former version of section 1301 and a

comparable provision imposing a minimum tax on tax preference

income under section 56 of the Tax Reform Act of 1969.     In Riley
                              - 17 -


v. Commissioner, 66 T.C. 141 (1976), the taxpayers had elected

income averaging under the old version of section 1301, and

respondent determined that the taxpayers were additionally liable

for the minimum tax under section 56.   This Court held:


     respondent argues that the tax imposed by section 56 is a
     separate, self-contained provision which is distinct from
     the tax imposed by section 1, and that sections 1301 through
     1305 are, on their face, not applicable to the computation
     of the tax imposed by section 56.

          We agree with respondent. Congress enacted the minimum
     tax on tax preference items in the Tax Reform Act of 1969 in
     order to reduce the scope of certain existing tax
     preferences, including capital gains. The tax imposed by
     section 56 is specifically stated to be "in addition to the
     other taxes imposed by this chapter." Sections 56 through
     58 appear to be a self-contained unit of taxation, whereas
     computation of the tax imposed by section 1 may involve the
     application of several other Code sections. The deductions,
     exclusions, and credits allowed in the computation of
     section 1 tax may not be utilized in the computation of the
     tax imposed by section 56 unless specifically provided.

          Sections 1301 through 1305 do not provide a mechanism
     by which the minimum tax on tax preference income may be
     averaged. Section 1301, on its face, has reference only to
     the tax imposed by section 1. In our opinion, if Congress
     had intended to allow income averaging in the computation of
     section 56 tax, it undoubtedly would have said so. We are
     unwilling to imply such an intent on the part of Congress.
     [Id. at 144.]


The Court, therefore, sustains respondent on this issue.

     Petitioner also argues the meaning of the term "regular" tax

in section 55(a)(2).   As noted earlier, the AMT applies to the

extent (1) the tentative minimum tax exceeds (2) the regular tax.

Respondent determined that the "regular tax" in the AMT
                              - 18 -


computation is the tax that was computed under the income-

averaging provisions of section 1301.    Petitioner contends that

"regular tax" means the tax computed outside the income-averaging

provisions of section 1301 under section 1.    The tax under

section 1 would have been higher than the tax under the income-

averaging provisions of section 1301 and, therefore, would lessen

petitioner's liability for the AMT.    Petitioner's argument was

rejected in Sparrow v. Commissioner, 86 T.C. 929, 934 (1986), and

Walker v. Commissioner, T.C. Memo. 1991-469, affd. without

published opinion 995 F.2d 235 (9th Cir. 1993).    Respondent,

therefore, is sustained on this issue.10

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                           Decision will be entered

                                      for respondent.




     10
          The Court recognizes that the Walker and Sparrow cases
above were both decided under the earlier version of sec. 1301.
The Court is not persuaded that the differences between the
earlier and present versions of sec. 1301 preclude the rationale
of these cases from applying in the instant case.
