1981 U.S. Tax Ct. LEXIS 26">*26
Petitioners recognized capital gain from the sale of property located in the Republic of Ireland. Ireland imposed a tax on such capital gain at a flat rate of 26 percent. Had such gain been taxed at ordinary rates rather than the flat 26-percent rate for capital gains, the tax imposed by Ireland would have been substantially higher.
77 T.C. 1144">*1144 OPINION
Respondent determined a deficiency of $ 8,598 in petitioners' Federal income tax for 1976. The issue is whether certain foreign-source capital gain recognized by petitioners is subject to the minimum tax imposed by section 56. 1
All the facts have been stipulated and are found accordingly.
Petitioners Guy G. Tropeano and1981 U.S. Tax Ct. LEXIS 26">*28 Gloria Tropeano resided in Weston, Mass., when they filed their petition in this case.
In 1976, Guy G. Tropeano (petitioner), was a general partner of North Atlantic Associates (NAA), a limited partnership. During 1976, NAA recognized capital gain from the sale of certain business property located in the Republic of Ireland. Petitioners' distributive share of such capital gain was $ 134,640. The gain recognized by NAA qualified as capital gain under the tax laws of the Republic of Ireland and was taxed by Ireland at a flat rate of 26 percent. In 1976, the rate 77 T.C. 1144">*1145 of tax imposed on individuals by the Republic of Ireland on ordinary income ranged from 26 percent to 77 percent. Had the gain herein been taxed at ordinary rates rather than at the flat 26-percent rate for capital gains, the tax imposed by the Republic of Ireland would have been substantially higher.
Petitioners' distributive share of $ 134,640 in foreign-source capital gain was the only capital transaction reported by petitioners in 1976. For the taxable year 1976, petitioners did not treat one-half of their net capital gain, $ 67,320, as an item of tax preference subject to the minimum tax. In his notice1981 U.S. Tax Ct. LEXIS 26">*29 of deficiency, respondent determined that one-half of such net capital gain is an item of tax preference subject to the minimum tax.
Section 56(a) imposes a minimum tax equal to 15 percent of the amount by which the sum of the items of tax preference exceeds the greater of $ 10,000 or the regular tax deduction for the taxable year (as determined under subsection (c)). Section 57(a)(9)(A) provides that in the case of individuals, an amount equal to one-half of a taxpayer's net capital gain for the taxable year is an item of tax preference.
When foreign-source capital gain is involved, reference must be made to
(2) Capital gains and stock options. -- For purposes of section 56, the items of tax preference set forth in paragraphs (6) and (9) of section 57(a) which are attributable to sources within any foreign country or possession of the United States shall not be taken into account if, under the tax laws of such country or possession -- * * * * (B) in the case of an item set forth in paragraph (9) of section 57(a), preferential treatment is not accorded gain from the sale or exchange of capital assets (or property treated as capital assets).
Thus, foreign-source capital gain does not give rise to an item of tax preference unless it is accorded "preferential treatment" by the foreign country.
The sole issue in this case is whether the capital gain recognized by petitioners was accorded "preferential treatment" by the Republic of Ireland within the meaning of
The last sentence of
In 1971, Congress amended
Petitioners rely on the 1971 amendment for the proposition 77 T.C. 1144">*1147 that the sole and exclusive standard for determining "preferential treatment" under
Congress did not intend to emasculate the original standard for determining1981 U.S. Tax Ct. LEXIS 26">*33 preferential treatment under
it was not the intent of Congress to exclude capital gain * * * income from the minimum tax in situations of this type and that there should be a clarification of the situations in which capital gain * * * income attributable to foreign sources will be subject to the minimum tax. Accordingly, the bill provides that income of these types which is attributable to foreign sources is to be treated as receiving preferential treatment (and, thus, be subject to the minimum tax) if the foreign country imposes no significant amount of tax with respect to those items of income.
The types of situations in which capital gain1981 U.S. Tax Ct. LEXIS 26">*34 income is to be treated as receiving preferential treatment under the bill
It is clear the 1971 amendment was enacted in response to a perceived loophole that capital gains recognized in a foreign country, which imposed an insignificant amount of tax on all types of income, would escape the minimum tax. Since such gains, technically, are not treated preferentially by the foreign country, in that all income is taxed at the same rate, it was suggested that those gains would escape the minimum tax. Hence, the 1971 amendment was enacted to accord such gains "preferential treatment" within the meaning of
Accordingly,
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the taxable year in issue.↩
2.
3. For the same reasons that we rejected petitioners' argument that an "insignificant amount of tax" is the exclusive standard for determining "preferential treatment," we reject petitioners' argument that
