sharply contrasts with the situation in First Chicago Corp., in which the taxpayer's use of foreign tax credits against RIT was not subject to an initial limitation. First Chicago Corp. v. Commissioner, 88 T.C. at 665. The instant case is also readily distinguishable from Breakell v. Commissioner, 97 T.C. 282, 286-287 (1991), affd. in part, revd. in part and remanded without published opinion 996 F.2d 1231 (11th Cir. 1993), in which this Court held that preference items should be reduced by certain itemized deductions in calculating the taxpayers' AMT. In Breakell, the Court was concerned that if this were not done, the taxpayers would be subject to the AMT on an amount that "in no way produced a tax benefit." Id. at 287. Furthermore, the taxpayers' net operating loss deduction therein was not eligible to be carried over to a subsequent taxable year. Id. at 284. In contrast, as already discussed, the Days currently benefited from their tax preference items and may also indefinitely carry over liberated section 29 credits to subsequent taxable years due to section 53.

(5) APPLICATION WITH OTHER CREDITS.-The credit allowed by subsection (a) for any taxable year shall not exceed the excess (if any) of— (A) the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27 and 28, over (B) the tentative minimum tax for the taxable year.

SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.

(a) ALLOWANCE OF CREDIT.-There shall be allowed as a credit against the tax imposed by this chapter for any taxable year an amount equal to the minimum tax credit for such taxable year.

(b) MINIMUM TAX CREDIT.-For purposes of subsection (a), the minimum tax credit for any taxable year is the excess (if any) of

(1) the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over

(2) the amount allowable as a credit under subsection (a) for such

prior taxable years.

(c) LIMITATION.-The credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of—

(1) The regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over

(2) the tentative minimum tax for the taxable year.

(d) DEFINITIONS.-For purposes of this section

(1) NET MINIMUM TAX.—

(A) IN GENERAL.-The term “net minimum tax” means the tax imposed by section 55.

(B) CREDIT NOT ALLOWED FOR EXCLUSION PREFERENCES.

(i) ADJUSTED NET MINIMUM TAX.-The adjusted net minimum tax for any taxable year is—

(I) the amount of the net minimum tax for such taxable year, reduced by

(II) the amount which would be the net minimum tax for such taxable year if the only adjustments and items of tax preference taken into account were those specified in clause (ii) and if section 59(a)(2) did not apply.

(ii) SPECIFIED ITEMS.-The following are specified in this clause— (I) the adjustments provided for in subsection (b)(1) of section 56, and

(II) the items of tax preference described in paragraphs (1), (5), and (7) of section 57(a).

(iii) SPECIAL RULE.-The adjusted net minimum tax for the taxable year shall be increased by the amount of the credit not allowed under section 29 (relating to credit for producing fuel from a nonconventional source) solely by reason of the application of section 29(b)(6)(B) or not allowed under section 28 solely by reason of the application of section 28(d)(2)(B), or not allowed under section 30 solely by reason of the application of section 30(b)(3)(B).

(iv) CREDIT ALLOWABLE FOR EXCLUSION PREFERENCES OF CORPORATIONS.-In the case of a corporation—

(I) the preceding provisions of this subparagraph shall not apply, and

(II) the adjusted net minimum tax for any taxable year is the amount of the net minimum tax for such year increased by the amount of any credit not allowed under section 29 solely by reason of the application of section 29(b)(5)(B) or not allowed under section 28 solely by reason of the application of section 28(d)(2)(B).

(2) TENTATIVE MINIMUM TAX.—The term "tentative minimum tax” has the meaning given to such term by section 55(b).

SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.

(a) GENERAL RULE.-There is hereby imposed (in addition to any other tax imposed by this subtitle a tax equal to the excess (if any) of— (1) the tentative minimum tax for the taxable year, over

(2) the regular tax for the taxable year.

(b) TENTATIVE MINIMUM TAX.-For purposes of this part

(1) IN GENERAL.-The tentative minimum tax for the taxable year is— (A) 20 percent (21 percent in the case of a taxpayer other than a corporation) of so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount, reduced by

(B) the alternative minimum tax foreign tax credit for the taxable year.

(2) ALTERNATIVE MINIMUM TAXABLE INCOME.-The term "alternative minimum taxable income" means the taxable income of the taxpayer for the taxable year

(A) determined with the adjustments provided in section 56 and section 58, and

(B) increased by the amount of the items of tax preference described in section 57.

If a taxpayer is subject to the regular tax, such taxpayer shall be subject to the tax imposed by this section (and, if the regular tax is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of the preceding sentence).

(c) REGULAR TAX.

(1) IN GENERAL.-For purposes of this section, the term "regular tax” means the regular tax liability for the taxable year (as defined in section 26(b)) reduced by the foreign tax credit allowable under section 27(a) and the section 936 credit allowable under section 27(b). Such term shall not include any tax imposed by section 402(e) and shall not include any increase in tax under section 47 or subsection (j) or (k) of section 42. (2) CROSS REFERENCES.

For provisions providing that certain credits are not allowable against the tax imposed by this section, see sections 26(a), 28(d)(2), 29(b)(5), and 38(c).

(d) EXEMPTION AMOUNT.-For purposes of this section

(1) EXEMPTION AMOUNT FOR TAXPAYERS OTHER THAN CORPORATIONS.— In the case of a taxpayer other than a corporation, the term "exemption amount" means

(A) $40,000 in the case of

(i) a joint return, or

(ii) a surviving spouse,

(B) $30,000 in the case of an individual who

(i) is not a married individual, and

(ii) is not a surviving spouse, and

(C) $20,000 in the case of—

(i) a married individual who files a separate return, or

(ii) an estate or trust.

For purposes of this paragraph, the term "surviving spouse" has the meaning given to such term by section 2(a), and marital status shall be determined under section 7703.

SEC. 57. ITEMS OF TAX PREFERENCE.

(a) GENERAL RULE.-For purposes of this part, the items of tax preference determined under this section are

(1) DEPLETION.—***

(2) INTANGIBLE DRILLING COSTS.- * **

*

*

(6) APPRECIATED PROPERTY CHARITABLE DEDUCTION.

INTERNATIONAL MULTIFOODS CORPORATION AND AFFILIATED COMPANIES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 11643-92.

Filed January 29, 1997.

P was in the business of franchising the right to operate Mister Donut shops in the United States and abroad. On Jan. 31, 1989, P sold its Asian and Pacific Mister Donut business operations for $2,050,000. Pursuant to the agreement, P transferred its franchise agreements, trademarks, Mister Donut System, and goodwill for each of the Asian and Pacific countries in which P had existing franchise agreements, as well as its trademarks and Mister Donut System for those Asian and Pacific countries in which it had registered trademarks but did not have franchise agreements. In the purchase agreement, P allocated $1,930,000 of the sale price to goodwill and a covenant not to compete. On its 1989 Federal income tax return, P reported the income allocated to these assets as foreign source income for purposes of computing P's foreign tax credit limitation under sec. 904(a), I.R.C. R determined that the goodwill and covenant not to compete were inherent in P's franchisor's interest. R further determined that the sale of P's franchisor's interest produced U.S. source income under sec. 865(d)(1), I.R.C. Held: The goodwill inherent in the Mister Donut business in Asia and the Pacific was embodied in, and inseverable from, P's franchisor's interest and trademarks that were conveyed to D. The income attributable to the sale of P's franchisor's interest and trademarks constitutes U.S. source income under sec. 865(d)(1), I.R.C. Held, further, P's covenant not to compete, which prohibited P from carrying on any business similar to Mister Donut or disclosing any part of the Mister Donut System in specified Asian and Pacific countries, possessed independent economic significance and is severable from P's franchisor's interest and trademarks. Held, further: P has not shown that more than $300,000 of the sale price should be allocated to the covenant not to compete. R concedes that any amount allocated to the covenant constitutes foreign source income. Held, further, A pro rata portion of P's selling expenses must be allocated to the sale of the covenant not to compete. Sec. 862(b), I.R.C.

David R. Brennan, John K. Steffen, Susan B. Grupe, and Nathan P. Zietlow, for petitioner.

Jack Forsberg, for respondent.

RUWE, Judge: Respondent determined deficiencies in petitioner's Federal income taxes as follows:

TYE

2/28/87 ...

2/29/88 ...

Deficiency

$2,962,380

3,592,402

Petitioner paid these deficiencies following receipt of its notice of deficiency and then filed a petition with this Court claiming an overpayment of income tax for each year. On December 6, 1993, petitioner filed a motion for leave to amend petition in order to claim an increased overpayment of income tax for its taxable year ended February 28, 1987, resulting from, among other things, an alleged foreign tax credit carryback from its taxable year ended February 28, 1989, in the amount of $952,015. On January 28, 1994, this Court granted petitioner's motion in part and allowed petitioner to claim an increased overpayment of income tax resulting from the alleged foreign tax credit carryback from its 1989 taxable year.

Allowance of this foreign tax credit carryback depends upon our resolution of the issue we confront today. We must decide what portion, if any, of the gain realized by petitioner on the sale of the Asian and Pacific operations of Mister Donut of America, Inc. (Mister Donut), petitioner's wholly owned subsidiary, to Duskin Co. (Duskin) on January 31, 1989, constitutes foreign source income for purposes of computing petitioner's foreign tax credit limitation pursuant to section 904(a).1

1 At trial, the parties addressed an additional issue: whether the loss realized by petitioner on the sale of the stock of Paty S.A.-Produtos Alimenticios, Ltda. (the Paty stock loss issue), constitutes a foreign source loss for purposes of computing petitioner's foreign tax credit limitation under sec. 904(a). On July 8, 1996, the Internal Revenue Service issued proposed regulations involving the allocation of losses realized on the disposition of stock. Under the regulations, petitioner would be able to elect retroactively to source its Paty stock loss in the United States. See sec. 1.865-2(a)(1), (e)(2)(i), Proposed Income Tax Regs., 61 Fed. Reg. 35696, 3569835699 (July 8, 1996). On July 19, 1996, respondent filed a motion to sever the Paty stock loss issue and hold it in abeyance pending the filing of a status report by respondent in February 1997 regarding the finalization of the relevant regulations. Respondent's motion to sever issue will be granted.