## Facts

- Tobias and Gertrude Weiss filed a joint federal income tax return for 2005.
- They reported $24,376 as “qualified dividends,” but did not include that amount in “taxable income” on Form 1040.
- They instead calculated a separate 15% tax of $3,656 on the dividends and added it to the tax computed on the remainder of their taxable income.
- The IRS treated the omission of the dividends from taxable income as a mathematical or clerical error, recomputed the return, and determined taxable income of $315,532.
- The IRS determined a 2005 deficiency of $6,073.
- The taxpayers petitioned the U.S. Tax Court, asserting qualified dividends could be taxed at 15% outside taxable income and outside the alternative minimum tax (AMT) base.
- The case was decided on cross-motions for summary judgment based on undisputed facts and a legal question regarding the interaction of qualified dividend rates and the AMT.

## Issues

1. Whether qualified dividends must be included in “taxable income” and thus in alternative minimum taxable income (AMTI) for AMT computation.
2. Whether I.R.C. § 1(h)(11)’s preferential rate for qualified dividends permits excluding those dividends from taxable income and treating them as a separate component outside the AMT base.

## Decision

- The Tax Court granted summary judgment for the Commissioner.
- The court held that qualified dividends are included in taxable income and therefore included in AMTI for AMT purposes.
- The taxpayers’ method of excluding qualified dividends from taxable income and adding a separate 15% tax was rejected as inconsistent with the Internal Revenue Code.
- The $6,073 deficiency for 2005 was sustained.

## Legal Principles

- Dividends are included in gross income under I.R.C. § 61(a)(7), and taxable income generally equals gross income minus allowed deductions under I.R.C. § 63(a); qualified dividends are not excluded from gross income or taxable income absent an express statutory exclusion.
- I.R.C. § 1(h)(11) provides a maximum rate for qualified dividend income; it alters the rate applied to that income within taxable income, not whether the income is included in the tax base.
- AMT computation begins with regular taxable income and then applies only specified adjustments and preferences to reach AMTI; items included in taxable income remain in AMTI unless a specific statutory AMT adjustment removes them.
- A preferential rate cannot be treated as creating a separate, “off-book” class of income excluded from taxable income or the AMT base without clear statutory authorization.

## Conclusion

The Tax Court held that qualified dividends, though subject to a preferential tax rate, remain part of taxable income and must be included in AMTI for AMT purposes; taxpayers may not exclude qualified dividends from taxable income and compute a separate stand-alone dividend tax to reduce or avoid AMT.


Weiss v. Commissioner, 129 T.C. 175 (2007)