Common use of Alternative Minimum Tax Clause in Contracts

Alternative Minimum Tax. The Code imposes an alternative minimum tax in order to assure that taxpayers may not reduce their tax below a minimum level through certain "tax preference items." In general, the alternative minimum tax liability of a noncorporate taxpayer is calculated by (1) adding together the taxpayer's adjusted gross income and the taxpayer's tax preference items, (2) adding and subtracting certain other specified items, and (3) then subtracting the applicable exemption of $40,250 for single taxpayers, $58,000 for married taxpayers filing joint returns, $29,000 for married taxpayers filing separate returns, or $22,500 for estates and trusts. Married taxpayers filing separate returns must also add to that total an amount equal to the lesser of (a) 25% of the sum determined under clauses (1) and (2) above, in excess of $191,000, or (b) $29,000. The total amount determined in the preceding two sentences (the "Taxable Excess") is then taxed at the following rates: all taxpayers other than married individuals filing separate returns are taxed at 26% of the first $175,000 of the Taxable Excess and at 28% of any additional Taxable Excess, reduced by any applicable foreign tax credit; while married individuals filing separate returns are taxed at 26% of the first $87,500 of the Taxable Excess and at 28% of any additional Taxable Excess, reduced by any applicable foreign tax credit. These rates are subject, however, to the 15% maximum tax rate on long-term capital gains (and qualified dividends). The taxpayer must then pay the greater of the alternative minimum tax or the regular income tax. Generally, no tax credits (other than the foreign tax credit) are allowable against the alternative minimum tax. Under the Code, the exemptions listed in clause (3) above are phased out where alternative minimum taxable income exceeds $150,000 ($112,500 for single persons and $75,000 for estates, trusts and married persons filing separately). Alternative minimum tax preference items and adjustments which only result in a deferral of tax rather than a permanent reduction may give rise to a credit against regular tax payable by Investors in future years. Although an investment in the fund is unlikely to cause an individual Investor to report preference items, the intangible drilling deductions ("IDC") allocated to such Investor by the Fund may increase his or her alternative minimum taxable income ("AMTI"). A taxpayer who is not an integrated oil company may not reduce AMTI by more than 40 percent of the AMTI that would otherwise be reportable had the taxpayer been subject to the "excess IDC" tax preference. That tax preference is generally the amount by which (a) the excess of the actual IDC deduction over the deduction which would have been allowable if the costs were capitalized and taken ratably over 10 years (or in accordance with cost depletion) is greater than (b) 65 percent of the taxpayers income from oil, gas and geothermal properties. Any portion of the IDC taken under the 60-month amortization election may be excluded from the foregoing calculation. An adjustment that may increase or decrease alternative minimum taxable income is depreciation attributable to personal property placed in service after 1986 that differs from the amount available under the 150 percent declining balance method. The applicability of the alternative minimum tax must be determined by each individual Investor based upon the operations of the Fund and his personal tax situation. In many circumstances, the federal (and state) minimum tax provisions will substantially eliminate the value of intangible drilling deductions for individual taxpayers. Accordingly, any potential investor in the Fund should consult his own tax advisor to determine the tax consequences to him personally of the alternative minimum tax.