For example, Cancellation of Debt (COD) is recognized as gross income if not explicitly excluded under law. Even imputed income is based on accession to wealth. I cannot think of any instances where gross income, for tax purposes, is not at least marginally based on some event or transaction that occurs outside of the tax law.
Except one.
In §55(b)(2) it states "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."
But then, in complete disregard of the definition in (b)(2), (d)(2) states "In the case of a taxpayer described in paragraph (1)(C) [MFS taxpayer], alternative minimum taxable income shall be increased by the lesser of (i) 25 percent of the excess of alternative minimum taxable income (determined without regard to this sentence) over the minimum amount of such income (as so determined) for which the exemption amount under paragraph (1)(C) is zero, or (ii) such exemption amount (determined without regard to this paragraph)."
In short, a MFS taxpayer may under certain circumstances have up to $42,250 (2017 amount) of completely arbitrary and fictitious income, not based on anything, added to AMT income and then taxed.
It is very hard to find any reference or explanation of this in any professional reference materials. The only place I found an attempt to explain it is here:
"The married-filing-separately (MFS) phase-out does not stop when the exemption reaches zero[...] This is because the MFS exemption is half of the joint exemption, but the phase-out is the full amount, so for MFS filers the phase-out amount can be up to twice the exemption amount, resulting in a 'negative exemption'.
[...] This prevents a married couple with dissimilar incomes from benefiting by filing separate returns so that the lower earner gets the benefit of some exemption amount that would be phased out if they filed jointly. When filing separately, each spouse in effect not only has their own exemption phased out, but is also taxed on a second exemption too, on the presumption that the other spouse could be claiming that on their own separate MFS return. "
If true, this "presumption" is absurd, as it is quite likely the other spouse also has the AMT exemption phased out (especially in a community property state, which I'm guessing represents about one-third of the taxpaying population). In other words, not only is the $84,500 AMT exemption (2017 amount) completely phased out at high incomes for the two married taxpayers filing separately, but an additional $84,500 of income is added to the combined incomes of the married taxpayers - "income" that is not an accession to wealth or even remotely related to any event or transaction outside of the tax law.
If the concern was indeed this presumption that a MFS spouse might not have the exemption phased out sufficiently, why not just require that for MFS filers, the AMT exemption can be no larger than the spouse's exemption? This would be similar to the rule that the standard deduction for a MFS filer whose spouse elects to itemize is zero.
I wonder if this law could be realistically challenged in court, due to
1) contradictory definition of AMT income in §55 as described above -- (b)(2) vs. (d)(2), and
2) no constitutional authority to arbitrarily create taxable income for a taxpayer when it is derived from no source whatsoever and is not an accession to wealth.