The fact and the fantasy of I.R.C. [section] 1202: an illustrative overview and analysis.

Ward, Dan R. ; Metrejean, Cheryl T. ; Ward, Suzanne T. 等

ABSTRACT

Graduate and undergraduate tax courses spend a considerable amount of classroom and research time exploring the capital structure of corporations. Often included in this discussion are topics that relate specifically to small businesses. This is particularly relevant in that Congress has frequently sought to provide incentives to encourage the investment in small businesses. The formation of the Small Business Administration to provide loans and business expertise is one example. Other instances of Congressional incentives to small business investors are manifested in provisions enacted into the Internal Revenue Code (I.R.C.). For example, the creation of the Subchapter S election allows small business owners to obtain the benefits of incorporation without the impact of double taxation on profits. The enactment of I.R.C. [section] 1244 in 1958, designed to partially eliminate the inequities caused by the limitations on capital loss deductions, provides another instance of legislative encouragement to invest in small businesses. A purported major small business investment incentive contained in the current tax law is I.R.C [section] 1202. This provision was intended to provide noncorporate taxpayers with a significant investment incentive by allowing the exclusion of up to 50 percent of the gain on the sale of qualified small business stock (QSBS) if certain requirements are met.

Most textbooks are by necessity limited in not only their discussion and illustration of taxpayer incentives relative to small businesses but whether or not the incentives actually exist. This is particularly true with respect to I.R.C. [section] 1202. The textbook limitation often leaves students confused and uncertain as to how the provisions of I.R.C. [section] 1202 are to be applied and the taxpayer benefits actually achieved. This is even more evident in more complex cases such as where a different interpretation of the gain limitation can affect the amount of the exclusion, when the QSBS was acquired in an I.R.C. [section] 351 exchange involving the contribution of appreciated property by the taxpayer, and the highly negative impact on tax savings that results from the alternative minimum tax (AMT). Teaching the real world tax consequences to taxpayers of I.R.C. [section] 1202 and utilizing more complicated and real-world oriented scenarios provides the tax instructor and students with several benefits. Foremost among these benefits is the ability to further enhance student concepts beyond those contained in the text in a manner that challenges student problem solving and conceptual skills. In addition, the need for tax research and planning is clearly delineated by the tax benefits, or lack thereof, obtained through the understanding and successful application of this Code provision. This paper provides a brief overview of the requirements for QSBS status, the difficulty of interpreting the restrictions on the amount of gain exclusion under I.R.C. [section] 1202, the impact of the alternative minimum tax, and the adjustments necessitated by the appreciated property rule. The application of I.R.C. [section] 1202 is then illustrated through teaching scenarios of progressing difficulty.

THE BASICS OF I.R.C. [section] 1202

To encourage and reward individuals for taking the risk of investing in small businesses, Congress, as part of the Revenue Reconciliation Act of 1993, created a new tax incentive. This incentive, contained in I.R.C. [section] 1202, significantly rewards taxpayers by providing an exclusion of up to 50 percent of the gain on the sale of QSBS held for more than five years (I.R.C. [section] 1202(a)). The gain not excluded is taxed at the capital gains rate of 28 percent (I.R.C. [section] 1(h)(5) and (8)). The effect of this provision is to impose a maximum tax, ignoring the impact of the alternative minimum tax, of 14 percent (50% x the 28% capital gain rate) on the I.R.C. [section] 1202 gain. This rate provides a substantial tax savings over the 20 percent rate that might apply to other types of income received by the taxpayer. However, to obtain these benefits, certain requirements must be met and certain limitations are placed on the maximum amount of the gain to which the exclusion can apply.

Qualified Small Business Stock Eligibility

In order to be considered QSBS, the stock must have been issued by a C corporation after 1993 (I.R.C. [section] 1202(c)(1)) and must have been acquired by the taxpayer at its original issue in exchange for money or other property or as compensation for services provided to the corporation (I.R.C. [section] 1202(b)). In addition, the issuing corporation must have met the active business requirement and the gross assets test.

Meeting the Active Business Requirement

To qualify as QSBS, the issuing corporation must have been engaged in an active trade or business during substantially all of the taxpayer's holding period for the stock (I.R.C. [section] 1202(c)(1)(A)). Furthermore, the issuing corporation must use at least 80 percent of the value of the corporation's assets in the active conduct of a qualified trade or business (I.R.C. [section] 1202(e)(1)(A)). Any trade or business is considered to be qualified unless it is specifically excluded. Activities that are specifically excluded are service providers (such as law, engineering, accounting, etc.), banking, insurance, financing, leasing, investing, farming, extractive, hotels/motels, and restaurants (I.R.C. [section] 1202(e)(3)). The active business requirement is waived for specialized small business investment companies (corporations licensed by the Small Business Administration under Section 301(d) of the Small Business Investment Act of 1958).

Meeting the Gross Assets Test

The issuing corporation's gross assets must be $50 million or less immediately before and after the stock is issued (I.R.C. [section] 1202(d)(1)). Should the issuing corporation's assets exceed $50 million after the issuance of the stock, stock already issued will continue to be QSBS. However, once the $50 million limitation has been exceeded, the corporation will not be permitted to again issue stock that will qualify as QSBS (I.R.C. [section] 1202(d)).

Limitations on the Amount of the I.R.C. [section] 1202 Gain Exclusion As previously noted, 50 percent of a taxpayer's gain on the sale of I.R.C. [section] 1202 stock may be excluded. However, a per-issuer limitation is imposed on the amount of the gain to which the exclusion can be applied. The gain limit is the greater of 10 times the aggregate adjusted basis of the stock or $10 million. This limitation is reduced by the amount of gain excluded by the taxpayer on sales of the corporation's stock in previous years (I.R.C. [section] 1202(b)). The exact wording of the code is, however, quite ambiguous and two distinctly different interpretations are currently in use. A restrictive interpretation would have the code allowing an exclusion of gain up to a maximum of 50 percent of $10 million (resulting in a maximum exclusion of $5 million) or 10 times the aggregate adjusted basis of the stock (resulting in a maximum exclusion of 5 times the adjusted basis of the stock), whichever is greater. A more aggressive interpretation would read the limitation provision to allow a maximum exclusion of $10 million or 10 times the aggregate adjusted basis, whichever is greater. While both approaches are currently used by taxpayers with the restrictive approach being more common, no textbook presents both or even alludes to the existence of an alternative interpretation. To date the Internal Revenue Service has not issued any regulation to clarify the issue.

I.R.C. [section] 1202 AND THE APPRECIATED PROPERTY RULE

The formation of a small business frequently entails the contribution of property, other than money or stock, in exchange for the stock of the newly formed entity. Under I.R.C. [section] 351 a carryover basis is permitted to the corporation and neither the shareholder nor the corporation recognizes a gain on the transaction. Unfortunately, the appreciated property rule can significantly affect the new small business corporation in two ways. First, when determining whether the aggregate gross assets are $50 million or less immediately before and after the issuance of stock, the corporation must use the fair market value of the contributed assets at the time of the contribution--not the carryover basis permitted under I.R.C. [section] 351. Secondly, and perhaps more importantly, for purposes of the I.R.C. [section] 1202 exclusion, if the stock was acquired by transferring appreciated property to the corporation, a separate calculation is required. For I.R.C. [section] 1202 purposes only, the basis of the stock in the hands of the shareholder is deemed to be fair market value of the property at the date of transfer (I.R.C. [section] 1202(i)(1)). For many taxpayers who transfer appreciated property, this will result in the overall gain on the subsequent disposition of the stock being greater than the gain allowed in computing the I.R.C. [section] 1202 exclusion.

THE IMPACT OF THE ALTERNATIVE MINIMUM TAX

Unfortunately, what Congress and the Internal Revenue Service give with one hand, they can take away with the other. This is readily apparent in that, under I.R.C. [section] 57(a)(7), 42 percent of the gain excluded under I.R.C. [section] 1202 is considered a tax preference item under the alternative minimum tax (AMT). The current AMT rates are 26 percent of the first $175,000 of alternative minimum taxable income and 28 percent on amounts in excess of $175,000 (I.R.C. [section] 55(b)(1)(A)). For QSBS whose holding period begins after December 31, 2000, only 28 percent, rather than 42 percent, of the excluded gain is considered a tax preference item (I.R.C. [section] 57(a)(7)).

The negative impact of the AMT on the benefits of I.R.C. [section] 1202 is quite substantial. In many cases the effective tax rate, considering the AMT, rises to 19.9 percent. This is only marginally better than the 20 percent long-term capital gain rate that would apply if the taxpayer did not utilize the provisions of I.R.C. [section] 1202. Thus, for most cases the fantasy of large tax savings is eliminated by the fact of the AMT. For illustrative purposes, it is assumed that the maximum AMT rate of 28 percent applies to all scenarios.

PROGRESSIVE SCENARIOS ILLUSTRATING I.R.C. [section] 1202

The following scenarios will serve to provide progressive illustrations of I.R.C. [section] 1202. The data set of the first scenario will be modified in subsequent scenarios to illustrate the difficulties of determining the amount of the exclusion under I.R.C. [section] 1202 and the application of the appreciated property rule. Each of the scenarios will calculate the tax impact from the sale of the stock with and without the impact of the AMT to illustrate the fantasy to reality effect of the additional tax.

Scenario 1

Gain Is Less Than Exclusion Amount and Appreciated Property Rule Does Not Apply

Jack and Mary Smith started a small business in January of 1997, Cajun Inc. The business, located in Lafayette, Louisiana, was organized as a C corporation. The Smiths received 100 percent of the 10,000 shares, in Cajun Inc. by transferring property that had both basis and fair market value (FMV) of $2,000,000. The transfer qualified as a nontaxable exchange under I.R.C. [section] 351 and the stock is considered qualified small business stock under I.R.C. [section] 1202. The business has been very successful since its incorporation.

In January of 2003, the Smiths received an offer to sell all of their stock in Cajun Inc. for $8,000,000. The Smiths have decided to accept the offer. What are the tax ramifications to the Smiths?

Solution

The Smiths will have a realized gain on the sale of $6,000,000 ($8,000,000 sales price--$2,000,000 adjusted basis in stock). Under I.R.C. [section] 1202, the Smiths can exclude up to 50 percent of the gain on the sale or $3,000,000. The exclusion is calculated by comparing the gain of $6,000,000 to $20,000,000 (the greater of $10,000,000 or $20,000,000 (10 x the adjusted basis of $2,000,00), selecting the smaller and multiplying by 50 percent. Since the gain is below the maximum limitations, the restrictive approach, illustrated above, and the aggressive approach would be the same under either approach. The non-excluded gain of $3,000,000 will be taxed at the long-term capital gains rate of 28 percent. Thus, the Smiths will have a tax liability (ignoring the AMT) on the sale of $840,000 ($3,000,000 gain x 28%) resulting in an effective rate of 14 percent ($840,000/$6,000,000 gain). The minimum tax savings, excluding the AMT, is $360,000 (($6,000,000 x 20%) - $840,000).

Unfortunately, most taxpayers will have their tax liability impacted by the AMT. I.R.C. [section] 57(a)(7) requires that 42 percent of the excluded gain be treated as a tax preference item subject to a maximum AMT rate of 28 percent. Thus, the tax liability of the Smiths could be increased by as much as $352,800 ($3,000,000 exclusion x 42% x 28%) resulting in a total tax liability of $1,192,800 ($840,000 + $352,800). The effect of the AMT would be to reduce the minimum overall tax savings from a fantasy of $360,000 to a fact of $7,200 (($6,000,000 x 20%) $1,192,800) and result in an effective rate of 19.9 percent ($1,192,800/$6,000,000) which is not significantly below the long term capital gain rate of 20 percent that would be available without the existence of I.R.C. [section] 1202. While the AMT preference rate will be reduced from 42 percent to 28 percent for stock whose holding period begins after December 31, 2000. Table 1 presents the preceding analysis in a tabular form.

Scenarios 2A and 2B

Gain Is Greater Than Exclusion Amount and Appreciated Property Rule Does Not Apply

All the facts from Scenario 1 are retained except that the stock is now sold for $25 million. Scenario 2A uses the restrictive interpretation of the limitation which views the I.R.C. [section] 1202 exclusion as being limited to an amount not greater than 50 percent of the greater of $10,000,000 or 10 times the adjusted basis of the stock. Scenario 2B takes the more aggressive interpretation that 50 percent of the I.R.C. [section] 1202 gain, not to exceed $10,000,000 or 10 times the adjusted basis of the stock, can be excluded.

Solution 2A

The Smiths will have a realized gain on the sale of $23,000,000 ($25,000,000 sales price--$2,000,000 adjusted basis in stock). The I.R.C. [section] 1202 exclusion, using a restrictive interpretation, is $10,000,000 (50% of the greater of ten times the adjusted basis of the stock of $20,000,000 or $10,000,000). The non-excluded gain of $13,000,000 will be taxed at two rates. The long-term capital gains rate of 28 percent will apply to an amount equal to the I.R.C. [section] 1202 exclusion, $10,000,000, and the balance of the gain of $3,000,000 will be taxed at 20 percent. Thus, the Smiths will have a tax liability (ignoring the AMT) on the sale of $3,400,000 (($10,000,000 gain x 28%) + ($3,000,000 x 20%) with an effective rate of 14.8 percent ($3,400,000/$23,000,000 gain). The minimum tax savings, excluding the AMT, is $1,200,000 (($23,000,000 x 20%) - $3,400,000).

When the AMT is considered, the tax liability of the Smiths could be increased by as much as $1,176,000 ($10,000,000 exclusion x 42% x 28%) resulting in a total tax liability of $4,576,000 ($3,400,000 + $1,176,000). The effect of the AMT would be to reduce the minimum overall tax savings from $1,200,000 to $24,000 (($23,000,000 x 20 percent) - $4,576,000) and result in an effective rate of 19.9 percent ($4,576,000/$23,000,000). Thus, the AMT reduces the tax savings by $1,176,000.

Solution 2B

While the overall gain on the sale of the stock will remain $23,000,000, using an aggressive interpretation of the 50 percent gain exclusion will result in an exclusion of $11,500,000. This is calculated by excluding 50 percent of the gain or $11,500,000 (50% x $23,000,000) limited by the greater of $10,000,000 or $20,000,000 (10 x $2,000,000 adjusted basis of the stock). This interpretation results in an exclusion of $1,500,000 more than under the restrictive interpretation. The non-excluded gain of $11,500,000 will be taxed at the long-term capital gains rate of 28 percent. Thus, the Smiths will have a tax liability (ignoring the AMT) on the sale of $3,220,000 ($11,500,000 gain x 28%) with an effective rate of 14 percent ($3,220,000/$23,000,000 gain). The minimum tax savings, excluding the AMT, is $1,380,000 (($23,000,000 x 20%) - $3,220,000).

When the AMT is considered, the tax liability of the Smiths could be increased by as much as $1,352,400 ($11,500,000 exclusion x 42% x 28%) resulting in a total tax liability of $4,572,400 ($3,220,000 + $1,352,400). The effect of the AMT would be to reduce the minimum overall tax savings from $1,380,000 to $27,600 (($23,000,000 x 20 percent) - $4,572,400) and result in an effective rate of 19.9 percent ($4,572,400/$23,000,000).

As can be seen from Scenarios 2A and 2B, the aggressive approach does increase the minimum tax savings (before the AMT) from $1,200,000 to $1,380,000. However, with the application of the AMT the tax savings between the two interpretations is reduced to $3,600. The tabular presentations of the two scenarios are contained in Tables 2 and 3.

Scenario 3

Gain Is Less Than Exclusion Amount and Appreciated Property Rule Applies

To illustrate the appreciated property rule, the facts of Scenario 1 will be utilized with the exception that the basis of the contributed property and its FMV will differ. The basis of the contributed property will remain at $2,000,000 but the FMV will now be $4,000,000.

Solution

The Smiths will continue to have a total realized gain on the sale of $6,000,000 ($8,000,000 sales price - $2,000,000 adjusted basis in stock). However, I.R.C. [section] 1202 requires that the FMV of the contributed property, not the adjusted basis, be used to compute the exclusion. As such, the gain for I.R.C. [section] 1202 purposes only is $4,000,000 ($8,000,000 sales price - $4,000,000 FMV of the contributed property). Thus, the Smiths can exclude 50 percent of the I.R.C. [section] 1202 gain on the sale or $2,000,000. This exclusion is below the maximum exclusion limitations (the greater of ten times the adjusted basis of the stock of $20,000,000 or $10,000,000). The non-excluded portion of the gain equal to the exclusion, $2,000,000, will be taxed at the long-term capital gains rate of 28 percent. The remaining $2,000,000 of the gain will be taxed at the long-term capital gains rate of 20 percent. Thus, the Smiths will have a tax liability (ignoring the AMT) on the sale of $960,000 [($2,000,000 gain x 28%) + ($2,000,000 x 20%)] and an effective rate of 16 percent ($960,000/$6,000,000 gain). The minimum tax savings, excluding the AMT, is $240,000 (($6,000,000 x 20%) - $960,000). The gain exclusion is calculated under the restrictive approach but the answer would be the same under the aggressive approach due to the size of the gain.

When the scenario is modified to include the impact of the AMT, 42 percent of the excluded gain of $2,000,000 is treated as a tax preference item subject to a maximum AMT rate of 28 percent. Thus, the tax liability of the Smiths could be increased by as much as $235,200 ($2,000,000 exclusion x 42% x 28%) resulting in a total tax liability of $1,195,200 ($960,000 + $235,200). The effect of the AMT would be to reduce the minimum overall tax savings from $240,000 to $4,800 (($6,000,000 x 20 percent - $1,195,200) and results in an effective rate of 19.9 percent ($1,195,200/$6,000,000). The preceding scenerio is presented in Table 4.

CONCLUSION

I.R.C. [section] 1202 provides a unique vehicle to analyze and compare the fantasy of what appears to be significant tax savings with the reality of the relatively insignificant tax benefits actually obtained. Utilizing these distinctions provides the tax instructor with numerous opportunities to enhance students' problem solving skills and conceptual understanding of the nuances of federal tax law. Through a series of related scenarios, the student can be made aware of not only what is contained in the tax textbook and the Internal Revenue Code but also how the provisions are applied in cases of increasing difficulty. The lack of clarity and guidance in applying many of the provisions in the tax code only further enhances the learning process. Furthermore, teaching the consequences of I.R.C. [section] 1202 provides the opportunity to illustrate the impact of other code sections on tax planning and strategy.

Dan R. Ward, The University of Louisiana at Lafayette

Cheryl T. Metrejean, The University of Mississippi

Suzanne P. Ward, The University of Louisiana at Lafayette

Eddie Metrejean, The University of Mississippi

Table 1
Scenario 1: Gain Is Less Than Exclusion Amount And
Appreciated Property Rule Does Not Apply

Amount Realized $ 8,000,000

Basis of Stock:
 Adj. Basis--[section] 1001 $ 2,000,000
 FMV--[section] 1202 $ 2,000,000
Total Gain Realized $ 6,000,000
Gain Realized--[section] 1202 $ 6,000,000
Gain Subject to [section] 1202 Exclusion:
 Lesser of:
 (a) [section] 1202 Gain $ 6,000,000
 Or
 (b) Greater of:
 (1) $10,000,000 $10,000.000
 Or
 (2) 10 x [section] 1202 Basis $20,000,000
[section] 1202 Exclusion:
 [50% of Smaller of (a) or (b)] $ 3,000,000
Gain Equal to Exclusion Taxed at 28% $ 3,000,000
Tax @ 28% $ 840,000
Gain in Excess of Exclusion Taxed at 20% $ -0-
Tax @ 20% $ -0-
Total Tax Without AMT $ 840,000
Effective Tax Rate:
 ($840,000/$6,000,000) 14 percent
Minimum Tax Saving:
 [($6,000,000 x 20%)-$840,000] $ 360,000
Tax Impact of AMT:
Tax Preference:
 (42% x $3,000,000 Exclusion) $ 1,260,000
AMT Tax (28% x $1,260,000) $ 352,800
Total Tax Including AMT:
 ($840,000 + $352,000) $ 1,192,800
Effective Tax Rate with AMT:
 ($1,192,800/$6,000,000) 19.9 percent
Tax Savings with AMT:
 [($6,000,000 x 20%-$1,192,800) $ 7,200

Table 2
Scenario 2a: Gain Is Greater Than Exclusion Amount And
Appreciated Property Rule Does Not Apply (Restrictive
Interpretation of Exclusion Rule)

Amount Realized $ 25,000,000
Basis of Stock:
 Adj. Basis--[section] 1001 $ 2,000,000
 FMV--[section] 1202 $ 2,000,000
Gain Realized--[section] 1001 $ 23,000,000

Total Gain Realized--[section] 1202 $ 23,000,000
Gain Subject to [section] 1202 Exclusion:
 Lesser of:
 (a) [section] 1202 Gain $ 23,000,000
 Or
 (b) Greater of:
 (1) $10,000,000 $ 10,000.000
 Or
 (2) 10 x [section] 1202 Basis $ 20,000,000
 [section] 1202 Exclusion:
 [50% of Smaller of (a) or (b)] $ 10,000,000
Gain Equal to Exclusion Taxed at 28% $ 10,000,000
Tax @ 28% $ 2,800,000
Gain in Excess of Exclusion Taxed at 20% $ 3,000,000
Tax @ 20% $ 600,000
Total Tax Without AMT $ 3,400,000
Effective Tax Rate:
 ($3,400,000/$23,000,000) 14.8 percent
Minimum Tax Saving:
 [($23,000,000 x 20%) - $3,400,000] $ 1,200,000
Tax Impact of AMT:
Tax Preference:
 (42% x $10,000,000 Exclusion) $ 4,200,000
AMT Tax (28% x $4,200,000) $ 1,176,000
Total Tax Including AMT:
 ($3,400,000 + $1.176,000) $ 4,576,000
Effective Tax Rate with AMT:
 ($4,576,000/$23,000,000) 19.9 percent
Tax Savings with AMT:
 [($23,000,000 x 20% - $4,576,000) $ 24,000

Table 3
Scenario 2b: Gain Is Greater Than Exclusion Amount And Appreciated
Property Rule Does Not Apply (Aggressive Interpretation of
Exclusion Rule)

Amount Realized $25,000,000
Basis of Stock:
 Adj. Basis--[section] 1001 $ 2,000,000
 FMV--[section] 1202 $ 2,000,000
Total Gain Realized $23,000,000
Gain Realized--[section] 1202 $23,000,000
[section] 1202 Exclusion:
 Lesser of:
 (a) 50% of Gain $11,500,000
 Or
 (b) Greater of:
 (1) $10,000,000 $10,000.000
 Or
 (2) 10 x [section] 1202 Basis $20,000,000
[section] 1202 Exclusion $11,500,000
Gain Equal to Exclusion Taxed at 28% $11,500,000
Tax @ 28% $ 3,220,000
Gain in Excess of Exclusion Taxed at 20% $ -0-
Tax @ 20% $ -0-
Total Tax Without AMT $ 3,220,000
Effective Tax Rate:
 ($3,220,000/$23,000,000) 14 percent
Minimum Tax Saving:
 [($23,000,000 x 20%)--$3,220,000] $ 1,380,000
Tax Impact of AMT:
Tax Preference:
 (42% x $11,500,000 Exclusion) $ 4,830,000
AMT Tax (28% x $4,830,000) $ 1,352,400
Total Tax Including AMT:
 ($3,220,000 + $1.352,400) $ 4,572,400

Effective Tax Rate with AMT:
 ($4,572,400/$23,000,000) 19.9 percent
Tax Savings with AMT:
 [($23,000,000 x 20%--$4,572,400] $ 27,600

Table 4
Scenario 3: Gain Is Less Than Exclusion Amount And
Appreciated Property Rule Applies
(Restrictive Approach)

Amount Realized $ 8,000,000
Basis of Stock:
 Adj. Basis--[section] 1001 $ 2,000,000
 FMV--[section] 1202 $ 4,000,000
Total Gain Realized--[section] 1001 $ 6,000,000
Gain Realized--[section] 1202 $ 4,000,000
Gain Subject to[section] 1202 Exclusion:
 Lesser of:
 (a)[section] 1202 Gain $ 4,000,000
 Or
 (b) Greater of:
 (1) $10,000,000 $ 10,000.000
 Or
 (2) 10 x [section] 1202 Basis $ 20,000,000
[section] 1202 Exclusion:
 [50% of Smaller of (a) or (b)] $ 2,000,000
Gain Equal to Exclusion Taxed at 28% $ 2,000,000
Tax @ 28% $ 560,000
Gain in Excess of Exclusion Taxed at 20% $ 2,000,000
Tax @ 20% $ 400,000
Total Tax Without AMT $ 960,000
Effective Tax Rate:
 ($960,000/$6,000,000) 16 percent
Minimum Tax Saving:
 [($6,000,000 x 20%)--$960,000] $ 240,000
Tax Impact of AMT:
Tax Preference:
 (42% x $2,000,000 Exclusion) $ 840,000
AMT Tax (28% x $840,000) $ 235,200
Total Tax Including AMT:
 ($960,000 + $235,200) $ 1,195,200
Effective Tax Rate with AMT:
 ($1,195,200/$6,000,000) 19.9 percent
Tax Savings with AMT:
 [($6,000,000 x 20%--$1,195,200) $ 4,800