Intangible Drilling Cost Preference Exception Not Available When AMTI Is Negative

By Noah S. Baer, J.D., LL.M., Washington, D.C.

Editor: Michael Dell, CPA

Special Industries

In Chief Counsel Advice (CCA) 201235010, the IRS determined that the intangible drilling cost preference exception may not be used in tax years when the taxpayer has negative alternative minimum taxable income (AMTI).


Sec. 57(a)(2)(E) allows nonintegrated oil companies to exclude part of their intangible drilling cost (IDC) preference when computing AMTI under Sec. 55. However, this exception from the Sec. 57(a)(2) requirement to include the preference may not exceed 40% of the AMTI for the year, as calculated without regard to the IDC preference exception.


In CCA 201235010, a taxpayer has AMTI of negative $100 before the IDC preference and has an IDC preference of $80, which will increase AMTI to negative $20 if taken into account. The taxpayer is not an integrated oil company and contends that it may use the IDC preference exception and report AMTI of negative $100. The taxpayer does not think that the 40% AMTI reduction limitation should apply when the AMTI is negative and, therefore, the full IDC preference should be used.


In the CCA, the IRS determined that a provision intended to reduce AMTI may not be used to create an AMT net operating loss. Congress enacted Sec. 57(a)(2)(E) to enable nonintegrated oil companies to use certain oil and gas incentives that are normally subject to the AMT. A taxpayer with AMTI of $0 or negative AMTI does not have an AMT liability and so is not in need of this type of AMT relief. Further, the IRS demonstrated that a literal application of Sec. 57(a)(2)(E) would actually result in an increase to AMTI—negative $20 times 40% is negative $8, so the taxpayer’s AMTI could not be reduced by more than negative $8. Negative $20 minus negative $8 is negative $12.


Several taxpayers have taken the position that, based on a strict technical reading of Sec. 57(a)(2)(E)(ii), negative AMTI should be adjusted by the full amount of the IDC preference amount since the 40% cap no longer applies. The IRS has concluded that this position conflicts with Congress’s intent to reduce the AMTI burden on certain taxpayers and that the Sec. 57 AMTI relief was not meant to increase negative AMTI.


Michael Dell is a partner with Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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