Bulletin No. 2024–42

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2024–42

October 15, 2024

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

REG-112129-23, page 787.

This notice of proposed rulemaking (NPRM) provides rules

that would address the application of the corporate alternative minimum tax (CAMT) that is imposed on the adjusted

financial statement income (AFSI) of certain corporations

based on their applicable financial statement (AFS) for

taxable years beginning after December 31, 2022. The

proposed regulations would provide definitions and gen-

Finding Lists begin on page ii.

eral rules regarding the determination of AFSI. The proposed regulations also would provide guidance regarding

identification of an AFS, various statutory and regulatory

adjustments made in determining AFSI, the determination

of whether a corporation is an applicable corporation subject to the CAMT, including rules for members of a foreign

parented multinational group (FPMG), and the determination

of the CAMT foreign tax credit. The proposed regulations

also would provide guidance on the application of the CAMT

to affiliated corporations filing a consolidated income tax

return.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

October 15, 2024 

Bulletin No. 2024–42

Part IV

Notice of Proposed

Rulemaking

REG-112129-23

Corporate Alternative

Minimum Tax Applicable

After 2022

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This notice of proposed

rulemaking provides proposed regulations that would address the application

of the corporate alternative minimum tax,

which is imposed on the adjusted financial

statement income of certain corporations

based on their applicable financial statements for applicable taxable years beginning after 2022. The proposed regulations

would affect taxpayers that are applicable

corporations, certain taxpayers that own

interests in applicable corporations, and

certain entities in which applicable corporations hold interests. This document also

provides notice of a public hearing on the

proposed regulations.

DATES: Written or electronic comments

on this proposed rule must be received by

December 12, 2024. A public hearing on

these proposed regulations is scheduled to

be held on January 16, 2025, at 10 a.m.

Eastern Time (ET). Requests to speak

and outlines of topics to be discussed at

the public hearing must be received by

December 12, 2024. If no outlines are

received by December 12, 2024, the public hearing will be cancelled. Requests to

attend the public hearing must be received

by 5 p.m. ET on January 14, 2025.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically via the Federal eRulemaking Portal at https://www.regulations.gov

(indicate IRS and REG-112129-23) by

following the online instructions for sub-

Bulletin No. 2024–42

mitting comments. Requests for a public

hearing must be submitted as prescribed

in the “Comments and Requests for a

Public Hearing” section. Once submitted

to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The

Department of the Treasury (Treasury

Department) and the IRS will publish for

public availability any comments submitted to the IRS’s public docket. Send paper

submissions to: CC:PA:01:PR (REG112129-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin

Station, Washington, D.C. 20044.

FOR FURTHER INFORMATION

CONTACT:

Concerning

proposed

§§1.56A-1, 1.56A-9, and 1.56A-23,

except for paragraphs (e) and (f), Madeline Padner at (202) 317-7006, concerning

proposed §§1.56A-2 and 1.56A-3, Frank

Dunham III at (202) 317-7009, concerning proposed §§1.56A-11, 1.56A-12, and

1.59-2, except for paragraphs (e), (f) and

(h), John Aramburu at (202) 317-7006,

concerning proposed §1.56A-17, James

Yu at (202) 317-4718, and concerning

proposed §§1.56A-15 and 1.56A-16,

except for issues related to partnerships,

C. Dylan Durham at (202) 317-7005, each

of the Office of Associate Chief Counsel

(Income Tax and Accounting), and for

issues related to partnerships, Yosef Koppel, Elizabeth Zanet, or Brian Barrett of

the Office of Associate Chief Counsel

(Passthroughs and Special Industries),

at (202) 317-6850; concerning proposed

§1.56A-4, Daren J. Gottlieb at (202) 3176937, concerning proposed §1.56A-6,

Dylan J. Steiner at (202) 317-6934, concerning proposed §1.56A-7, Ryan Connery at (202) 317-6933, concerning proposed §§1.56A-8 and 1.59-4, John J. Lee

at (202) 317-6936, concerning proposed

§1.56A-26(d), Michelle L. Ng at (202)

317-6939, concerning proposed §1.56A27, Joel Deuth at (202) 317-6938, and concerning proposed §1.59-3, Karen Walny at

(202) 317-6938, each of the Office of Associate Chief Counsel (International); concerning proposed §§1.56A-18, 1.56A-19,

1.56A-21, 1.56A-26, 1.1502-2, 1.1502-3,

1.1502-53, 1.1502-55, and 1.1502-56A,

Jeremy Aron-Dine, William W. Burhop,

787

or John Lovelace, concerning proposed

§§1.56A-23(e) and (f) and 1.59-2(f) and

(h), Jeremy Aron-Dine and William W.

Burhop, each of the Office of Associate

Chief Counsel (Corporate) at (202) 3173181; concerning proposed §1.56A-13,

Diane Bloom at 202-317-6301, concerning proposed §1.56A-14, Seth Groman

at 202-317-5640, and concerning proposed §1.59-2(e), Chris Dellana at 202317-4726, each of the Office of Associate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes); concerning proposed §§1.56A-5,

1.56A-10, and 1.56A-20, Yosef Koppel,

Elizabeth Zanet, or Brian Barrett, each

of the Office of Associate Chief Counsel

(Passthroughs and Special Industries) at

(202) 317-6850; concerning proposed

§1.56A-22, Ian Follansbee at (202) 3176995, concerning proposed §§1.56A-24

and 1.56A-25, Vanessa Mekpong at (202)

317-6842, each of the Office of Associate Chief Counsel (Financial Institutions

and Products); concerning submissions

of comments or the public hearing, the

Publications and Regulations Section,

(202) 317-6901 (not toll-free numbers) or

by email at publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed additions and amendments to 26 CFR part 1

(Income Tax Regulations) addressing the

application of the corporate alternative

minimum tax (CAMT) imposed by section

55 of the Internal Revenue Code (Code),

as amended by the enactment of section

10101 of Public Law 117-169, 136 Stat.

1818, 1818-1828 (August 16, 2022), commonly known as the Inflation Reduction

Act of 2022 (IRA). The proposed additions and amendments are issued under

section 56A, as added to the Code by the

IRA, section 59 of the Code, as amended

by the IRA, and section 1502 of the Code

(proposed regulations), pursuant to the

express delegations of authority provided

under those sections. The express delegations relied upon are referenced in the parts

October 15, 2024

of the Explanation of Provisions section

of this preamble describing the individual

sections of the proposed regulations. The

proposed regulations are also issued under

the express delegation of authority under

section 7805 of the Code.

Background

I. Overview

As amended by section 10101 of the

IRA, section 55 imposes the CAMT

based on the adjusted financial statement

income, as determined under section 56A

(AFSI), of an applicable corporation, as

determined under section 59, for taxable

years beginning after December 31, 2022.

In general, under section 59(k), a corporation is an applicable corporation subject to

the CAMT for a taxable year if it meets an

average annual AFSI test for one or more

taxable years that (i) are before that taxable year, and (ii) end after December 31,

2021.

Section 55(a) provides that, for the

taxable year of an applicable corporation,

the amount of CAMT equals the excess

(if any) of (i) the tentative minimum tax

for the taxable year, over (ii) the sum of

the regular tax, as defined in section 55(c),

for the taxable year plus the tax imposed

under section 59A (commonly referred to

as the base erosion and anti-abuse tax, or

BEAT). Section 55(b)(2)(A) provides that,

in the case of an applicable corporation,

the tentative minimum tax for the taxable year is the excess of (i) 15 percent

of AFSI for the taxable year, over (ii) the

CAMT foreign tax credit, as determined

under section 59(l), for the taxable year. In

the case of any corporation that is not an

applicable corporation, section 55(b)(2)

(B) provides that the tentative minimum

tax for the taxable year is zero.

II. AFSI Under Section 56A

A. Adjusted financial statement income;

applicable financial statement

Section 56A(a) provides that, for

purposes of sections 55 through 59 of

the Code, the term “AFSI” means, with

respect to any corporation for any taxable

year, the net income or loss of the taxpayer set forth on the taxpayer’s applica-

October 15, 2024

ble financial statement (AFS) for that taxable year, adjusted as provided in section

56A. For purposes of section 56A, section

56A(b) provides that the term “AFS”

means, with respect to any taxable year,

an AFS, as defined in section 451(b)(3) of

the Code or as specified by the Secretary

in regulations or other guidance, that covers that taxable year.

B. Adjustments to AFSI

Section 56A(c) provides general

adjustments to be made to AFSI. Section 56A(c)(1) provides that appropriate

adjustments are to be made to AFSI in

any case in which an AFS covers a period

other than the taxable year. Section 56A(c)

(2) provides special rules for related entities. Section 56A(c)(2)(A) provides that,

if the financial results of a taxpayer are

reported on the AFS for a group of entities

(financial statement group), rules similar

to the rules of section 451(b)(5) apply.

Section 451(b)(5) provides that, in such a

situation, the consolidated financial statement of the financial statement group is

treated as the AFS of the taxpayer. However, for purposes of section 451(b)(5),

if the taxpayer’s financial results are also

reported on a separate financial statement

that is of equal or higher priority to the

consolidated financial statement, then the

taxpayer’s AFS is the separate financial

statement. See §1.451-3(h)(1)(i). Section

1.451-3(h)(2) and (3) provide rules under

section 451(b)(5) for determining the

extent to which income reflected on the

consolidated financial statement and the

underlying source documents is allocable

to the taxpayer for purposes of applying

the rules under section 451(b).

Section 56A(c)(2)(B) provides a general rule that, if the taxpayer is part of an

affiliated group of corporations that join in

filing (or that are required to join in filing)

a consolidated return for Federal income

tax purposes (tax consolidated group) for

any taxable year, AFSI for that group for

that taxable year must take into account

items on the group’s AFS that are properly allocable to members of that group.

However, section 56A(c)(2)(B) authorizes

the Secretary to prescribe by regulation

exceptions to that general rule.

Section 56A(c)(2)(C) provides that,

in the case of any corporation that is not

788

included on a consolidated return with

the taxpayer, AFSI of the taxpayer with

respect to that other corporation is determined by only taking into account dividends received from that other corporation (reduced to the extent provided by the

Secretary in regulations or other guidance)

and other amounts that are includible in

gross income or deductible as a loss under

chapter 1 of the Code (chapter 1), other

than amounts required to be included

under sections 951 and 951A of the Code

or such other amounts as provided by the

Secretary, with respect to that other corporation.

Section 56A(c)(2)(D)(i) provides that,

except as provided by the Secretary, if the

taxpayer is a partner in a partnership, the

taxpayer’s AFSI with respect to such partnership is adjusted to take into account

only the taxpayer’s distributive share of

such partnership’s AFSI. Section 56A(c)

(2)(D)(ii) provides that, for purposes of

sections 55 through 59, the AFSI of a partnership is the partnership’s net income or

loss set forth on that partnership’s AFS

(adjusted under rules similar to the rules

set forth in section 56A).

Section 56A(c)(3)(A) provides an

adjustment to the AFSI of a taxpayer for

any taxable year in which the taxpayer is

a United States shareholder (within the

meaning of section 951(b) or, if applicable, section 953(c)(1)(A) of the Code

(each shareholder, a “U.S. shareholder”))

of one or more controlled foreign corporations (each within the meaning of section

957 of the Code or, if applicable, section

953(c)(1)(B)) (CFC). Under this rule, the

AFSI of the taxpayer with respect to the

CFC (as determined under section 56A(c)

(2)(C)) is adjusted to also take into account

the taxpayer’s pro rata share (determined

under rules similar to the rules under section 951(a)(2)) of items taken into account

in computing the net income or loss set

forth on the AFS (as adjusted under rules

similar to those that apply in determining

AFSI) of each CFC with respect to which

the taxpayer is a U.S. shareholder. Section

56A(c)(3)(B) provides that, if the adjustment determined under section 56A(c)(3)

(A) would result in a negative adjustment

for the taxable year, (i) no adjustment is

made to the taxpayer’s AFSI for that year,

and (ii) the amount of the adjustment

determined under section 56A(c)(3)(A)

Bulletin No. 2024–42

for the succeeding taxable year is reduced

by an amount equal to the negative amount

from the prior taxable year.

Section 56A(c)(4) provides that, in

determining the AFSI of a foreign corporation, the principles of section 882 of the

Code (which subjects a foreign corporation to Federal income tax on its taxable

income that is effectively connected with

the conduct of a trade or business within

the United States) apply.

Section 56A(c)(5) provides the general

rule that AFSI is appropriately adjusted

to disregard any Federal income taxes, or

income, war profits, or excess profits taxes

(within the meaning of section 901 of the

Code) with respect to a foreign country

or possession of the United States, which

are taken into account on the taxpayer’s

AFS. To the extent provided by the Secretary, this general rule does not apply to

such foreign taxes taken into account on

the taxpayer’s AFS if the taxpayer does

not choose to claim a foreign tax credit

(FTC) under section 27 of the Code (regular FTC). Section 56A(c)(5) also authorizes the Secretary to prescribe regulations

or other guidance on the proper treatment

of current and deferred taxes for purposes

of section 56A(c)(5), including the time at

which such taxes are properly taken into

account.

Section 56A(c)(6) requires AFSI to be

adjusted to take into account any AFSI of a

disregarded entity owned by the taxpayer.

Section 56A(c)(7) and (8) provide special

rules for cooperatives and Alaska Native

Corporations (within the meaning of section 3 of the Alaska Native Claims Settlement Act (ANCSA) (43 USC 1602(m))),

respectively.

Section 56A(c)(9) requires AFSI to be

appropriately adjusted to disregard any

amount treated as a payment against the

tax imposed by subtitle A of the Code

(subtitle A) pursuant to an election under

section 48D(d) or 6417 of the Code and

included in the net income or loss set forth

on the taxpayer’s AFS. However, if such

amount is otherwise disregarded under

the adjustment rule in section 56A(c)(5)

(concerning AFSI adjustments for certain

taxes), the adjustment in section 56A(c)

(9) does not apply.

Section 56A(c)(10)(A) requires AFSI

to be adjusted so as not to include any item

of income in connection with a mortgage

Bulletin No. 2024–42

servicing contract any earlier than when

the income is included in gross income

under any other provision of chapter 1.

Section 56A(c)(10)(B) authorizes the Secretary to provide regulations to prevent

the avoidance of taxes imposed by chapter

1 with respect to amounts not representing

reasonable compensation (as determined

by the Secretary) with respect to a mortgage servicing contract.

Section 56A(c)(11)(A) provides that

AFSI is (i) adjusted to disregard any

amount of income, cost, or expense that

otherwise would be included on the AFS in

connection with any covered benefit plan,

(ii) increased by any amount of income in

connection with any such covered benefit

plan that is included in the gross income

of the corporation under chapter 1, and

(iii) reduced by any deductions allowed

under any other provision of chapter 1

with respect to any such covered benefit

plan. Section 56A(c)(11)(B) defines the

term “covered benefit plan” to mean: (i)

a defined benefit plan (other than a multiemployer plan described in section 414(f)

of the Code) if the trust that is part of such

plan is an employees’ trust described in

section 401(a) of the Code that is exempt

from tax under section 501(a) of the Code;

(ii) any qualified foreign plan (as defined

in section 404A(e) of the Code); or (iii)

any other defined benefit plan that provides post-employment benefits other than

pension benefits.

Section 56A(c)(12) requires AFSI to

be appropriately adjusted, in the case of

an organization subject to tax under section 511 of the Code, to take into account

only AFSI (i) of an unrelated trade or

business of such organization, as defined

in section 513 of the Code, or (ii) derived

from debt-financed property, as defined in

section 514 of the Code, to the extent that

income from such property is treated as

unrelated business taxable income.

Section 56A(c)(13)(A) requires AFSI

to be reduced by depreciation deductions

allowed under section 167 of the Code

with respect to property to which section

168 of the Code applies, to the extent

of the amount allowed as deductions in

computing taxable income for the taxable

year. In addition, section 56A(c)(13)(B)

(i) requires appropriate adjustments to

AFSI to disregard any amount of depreciation expense that is taken into account

789

on the taxpayer’s AFS with respect to such

property. Section 56A(c)(13)(B)(ii) further provides that AFSI is appropriately

adjusted to take into account any other

item specified by the Secretary in order

to provide that such property is accounted

for in the same manner as that property is

accounted for under chapter 1.

Section 56A(c)(14)(A)(i) requires

AFSI to be reduced by amortization

deductions allowed under section 197 of

the Code with respect to qualified wireless spectrum, to the extent of the amount

allowed as deductions in computing taxable income for the taxable year. Section

56A(c)(14)(A)(ii)(I) requires appropriate adjustments to AFSI to disregard any

amount of amortization expense that is

taken into account on the taxpayer’s AFS

with respect to such qualified wireless

spectrum. Section 56A(c)(14)(A)(ii)(II)

further provides that AFSI is appropriately

adjusted to take into account any other

item specified by the Secretary in order to

provide that such qualified wireless spectrum is accounted for in the same manner

as that property is accounted for under

chapter 1. Section 56A(c)(14)(B) defines

the term “qualified wireless spectrum” as

wireless spectrum that is used in the trade

or business of a wireless telecommunications carrier and that was acquired after

December 31, 2007, and before August

16, 2022.

Section 56A(c)(15) authorizes the Secretary to issue regulations or other guidance to provide for such adjustments to

AFSI as the Secretary determines necessary to carry out the purposes of section

56A, including adjustments to AFSI (i) to

prevent the omission or duplication of any

item, and (ii) to carry out the principles of

part II of subchapter C (relating to corporate liquidations), part III of subchapter C

(relating to corporate organizations and

reorganizations), and part II of subchapter K (relating to partnership contributions

and distributions) of chapter 1.

C. Financial statement net operating

losses

Section 56A(d)(1) provides that AFSI

(determined after the application of section 56A(c), but without regard to section

56A(d)) is reduced by an amount equal

to the lesser of (i) the aggregate amount

October 15, 2024

of financial statement net operating loss

(FSNOL) carryovers to the taxable year,

or (ii) 80 percent of AFSI (determined

after the application of section 56A(c), but

without regard to section 56A(d)). Section 56A(d)(2) provides that the amount

of an FSNOL that can be carried forward

to a taxable year is the FSNOL remaining (if any) after reducing AFSI in prior

taxable years under section 56A(d)(1).

An FSNOL is the net loss set forth on a

taxpayer’s AFS, adjusted as provided by

section 56A(c), but without regard to section 56A(d), for taxable years ending after

December 31, 2019. See section 56A(d)

(3).

Section 56A(e) authorizes the Secretary to provide such regulations and other

guidance as necessary to carry out the

purposes of section 56A, including regulations and other guidance relating to the

effect of the rules of section 56A on partnerships with income taken into account

by an applicable corporation.

III. Applicable Corporations Under

Section 59(k)

Section 59(k)(1)(A) provides that, for

purposes of sections 55 through 59, the

term “applicable corporation” means,

with respect to any taxable year, any corporation other than an S corporation (as

defined in section 1361(a)(1) of the Code),

a regulated investment company (as

defined in section 851 of the Code) (RIC),

or a real estate investment trust (as defined

in section 856 of the Code) (REIT), that

meets the average annual AFSI test under

section 59(k)(1)(B) (AFSI Test) for one or

more taxable years that (i) are prior to that

taxable year, and (ii) end after December

31, 2021.

There are two versions of the AFSI Test

under section 59(k)(1)(B): one version

that applies to corporations that are members of a foreign-parented multinational

group (FPMG); and another version that

applies to all other corporations. Under

section 59(k)(1)(B)(i), a corporation that

is not a member of an FPMG meets the

AFSI test for a taxable year if the average

annual AFSI of that corporation (determined without regard to the adjustment

under section 56A(d) for FSNOLs) for

the three-taxable-year period ending with

that taxable year exceeds $1,000,000,000

October 15, 2024

(general AFSI test). Under section 59(k)

(1)(B)(ii), a corporation that is a member

of an FPMG for any taxable year meets

the AFSI test for that taxable year if (i)

that corporation meets the general AFSI

test (determined after applying the rule in

section 59(k)(2)) (FPMG $1 billion test),

and (ii) the average annual AFSI of that

corporation (determined without regard

to the rule in section 59(k)(2) and without regard to the adjustment described in

section 56A(d) for FSNOLs) for the aforementioned three-taxable-year period is at

least $100,000,000.

Solely for purposes of determining

whether a corporation is an applicable

corporation under section 59(k)(1), section 59(k)(1)(D) provides that all AFSI of

persons treated as a single employer with

the corporation under section 52(a) or (b)

of the Code is treated as AFSI of that corporation.

Section 59(k)(1)(D) also provides

that, solely for purposes of determining

whether a corporation is an applicable

corporation, the AFSI of such corporation must be determined without regard to

the partnership distributive share adjustment under section 56A(c)(2)(D)(i) and

the adjustments under section 56A(c)

(11) pertaining to covered benefit plans

(as defined in section 56A(c)(11)(B)). In

addition, section 59(k)(2)(A) provides

that, solely for purposes of determining

whether a corporation that is a member

of an FPMG meets the FPMG $1 billion

test, (i) the AFSI of such corporation must

include the AFSI of all members of the

FPMG, and (ii) AFSI is determined without regard to the partnership distributive

share adjustment under section 56A(c)(2)

(D)(i), the CFC pro rata share adjustment

under section 56A(c)(3), the effectively

connected income adjustment under section 56A(c)(4), and the adjustments under

section 56A(c)(11) pertaining to covered

benefit plans.

Section 59(k)(1)(E) provides additional

special rules for purposes of determining

whether a corporation is an applicable

corporation. With regard to a corporation

with AFSI for any taxable year of less than

12 months, the AFSI of that corporation

(including any predecessor) is annualized by multiplying the AFSI for the short

period by 12 and dividing the result by the

number of months composing the short

790

period. See section 59(k)(1)(E)(ii) and

(iii).

Section 59(k)(1)(E)(i) provides that,

if a corporation has been in existence for

less than three taxable years, the AFSI

tests are applied to that corporation on the

basis of the period during which that corporation was in existence. Section 59(k)

(1)(E)(iii) provides that a reference in section 59(k)(1)(E) to a corporation includes

a reference to any predecessor of such

corporation. Accordingly, for purposes of

determining whether a corporation was

in existence for less than three taxable

years and, if so, the period on the basis of

which the AFSI Tests are applied to that

corporation, the period(s) of existence of

any predecessor(s) of such corporation are

included. See section 59(k)(1)(E)(i) and

(iii).

Section 59(k)(1)(C) excludes a corporation from the definition of “applicable

corporation” if the following requirements

are satisfied. First, the corporation must

have either (i) a change in ownership,

or (ii) a specified number of consecutive

taxable years (as determined by the Secretary, taking into account the taxpayer’s

facts and circumstances), including the

most recent taxable year, in which the

corporation does not meet an AFSI test.

See section 59(k)(1)(C)(i). Second, the

Secretary must determine that it would

not be appropriate to continue to treat that

corporation as an applicable corporation

(appropriateness determination). See section 59(k)(1)(C)(ii). However, as provided

in the last sentence of section 59(k)(1)

(C), a corporation that satisfies these two

requirements for exclusion from applicable corporation status nonetheless will be

treated as an applicable corporation if that

corporation subsequently meets an AFSI

test for any taxable year beginning after

the first taxable year for which an appropriateness determination applies.

For purposes of applying section 59(k)

(2)(A), section 59(k)(2)(B) defines an

FPMG, with respect to a taxable year,

as two or more entities if (i) at least one

entity is a domestic corporation and

another entity is a foreign corporation, (ii)

the entities are included in the same AFS

for the year, and (iii) either the common

parent of the entities is a foreign corporation or, if there is no common parent, the

entities are treated as having a common

Bulletin No. 2024–42

parent that is a foreign corporation under

rules provided by the Secretary under the

authority granted by section 59(k)(2)(D)

(the common parent or the entity treated

as the common parent, the FPMG Common Parent). For purposes of applying

section 59(k)(2), if a foreign corporation

is engaged in a trade or business in the

United States, that trade or business is

treated as a separate domestic corporation

that is wholly owned by the foreign corporation. See section 59(k)(2)(C).

Section 59(k)(2)(D) authorizes the

Secretary to provide regulations or other

guidance applying the principles of section 59(k)(2), including rules to determine

the entities treated as having an FPMG

Common Parent, the entities included in

an FPMG, and the FPMG Common Parent.

Section 59(k)(3) authorizes the Secretary to provide regulations or other guidance for purposes of applying section

59(k), including providing a simplified

method for determining whether a corporation meets the requirements of section

59(k)(1), and addressing the application

of section 59(k) to a corporation that experiences a change in ownership.

IV. CAMT FTC

Section 59(l)(1) provides rules for

determining the amount of the CAMT

FTC for a taxable year if an applicable

corporation chooses to claim the Regular

FTC for the taxable year. The CAMT FTC

of the applicable corporation for a taxable

year is the sum of two amounts. The first

amount (CFC Taxes) is equal to the lesser

of: (i) the aggregate of the applicable corporation’s pro rata share (as determined

under section 56A(c)(3)) of the amount

of income, war profits, and excess profits taxes (within the meaning of section

901) imposed by any foreign country or

possession of the United States that are

(A) taken into account on the AFS of each

CFC with respect to which the applicable corporation is a U.S. shareholder, and

(B) paid or accrued (for Federal income

tax purposes) by each such CFC; or (ii)

15 percent of the applicable corporation’s

adjustment under section 56A(c)(3)(A)

(CFC FTC Limitation). See section 59(l)

(1)(A). The second amount is equal to the

amount of income, war profits, and excess

Bulletin No. 2024–42

profits taxes (within the meaning of section 901) imposed by any foreign country

or possession of the United States that are

(i) taken into account on the AFS of the

applicable corporation, and (ii) paid or

accrued (for Federal income tax purposes)

by the applicable corporation. See section

59(l)(1)(B).

Section 59(l)(2) provides that, for any

taxable year for which an applicable corporation chooses to claim the Regular

FTC, the amount of CFC Taxes for the

taxable year in excess of the CFC FTC

Limitation for the taxable year is carried

forward for up to the five succeeding taxable years and increases the amount of

CFC Taxes in any of those succeeding

taxable years to the extent not taken into

account in a prior taxable year.

Section 59(l)(3) authorizes the Secretary to provide regulations or other guidance as is necessary to carry out the purposes of the CAMT FTC rules in section

59(l).

V. Consolidated Return Regulations

Section 1502 authorizes the Secretary

to prescribe regulations to clearly reflect

the Federal income tax liability of a tax

consolidated group and to prevent avoidance of such tax liability. See §1.15021(h) (defining the term “consolidated

group” for Federal income tax purposes).

For purposes of carrying out those objectives, section 1502 explicitly permits the

Secretary to prescribe rules that may be

different from the provisions of chapter 1

that would apply if the corporations composing the tax consolidated group filed

separate returns.

VI. Prior Guidance Relating to the

CAMT

The Treasury Department and the IRS

have issued seven notices with respect to

the CAMT (CAMT notices).

A. Notice 2023-7

On January 17, 2023, the Treasury Department and the IRS published

Notice 2023-7, 2023-3 I.R.B. 390, which

announced the intention of the Treasury

Department and the IRS to issue proposed

regulations addressing the application of

791

the CAMT. Notice 2023-7 provides interim

guidance on certain issues relating to the

CAMT, including issues regarding subchapters C and K of chapter 1, troubled

corporations, tax consolidated groups,

depreciation of property to which section

168 applies, the treatment of certain Federal income tax credits under the CAMT,

and the determination of applicable corporation status in circumstances involving

certain partnerships. Notice 2023-7 also

describes a simplified method for determining whether a corporation is an applicable corporation subject to the CAMT.

B. Notice 2023-20

On March 6, 2023, the Treasury Department and the IRS published Notice 202320, 2023-10 I.R.B. 523, to provide interim

guidance on the determination of an insurance company’s AFSI as it relates to (i)

variable contracts (and similar contracts),

and (ii) funds withheld reinsurance and

modified coinsurance agreements. Notice

2023-20 also provides interim guidance

on the determination of AFSI as it relates

to the basis of certain assets held by certain previously tax-exempt entities that

received a “fresh start” basis adjustment.

C. Notice 2023-42

On June 7, 2023, the Treasury Department and the IRS published Notice 202342, 2023-26 I.R.B. 1085, to provide relief

from the addition to tax under section

6655 of the Code with respect to the tax

imposed under section 55(a) (CAMT liability) for any taxable year that begins

after December 31, 2022, and before January 1, 2024.

D. Notice 2023-64

On October 2, 2023, the Treasury

Department and the IRS published Notice

2023-64, 2023-40 I.R.B. 974, to provide

additional interim guidance on determining a taxpayer’s AFS and AFSI, including

guidance applicable to tax consolidated

groups and certain foreign corporations.

Notice 2023-64 also describes guidance

related to (i) AFSI adjustments with

respect to depreciation of property to

which section 168 applies, (ii) the amortization of qualified wireless spectrum, (iii)

October 15, 2024

the treatment of certain taxes, (iv) the prevention of certain duplications and omissions, (v) the determination of applicable

corporation status, (vi) the CAMT FTC,

and (vii) FSNOLs.

E. Notice 2024-10

On January 16, 2024, the Treasury

Department and the IRS published Notice

2024-10, 2024-3 I.R.B. 406, to provide

additional interim guidance on determining the AFSI of a U.S. shareholder if a

CFC pays a dividend. Notice 2024-10 also

modifies and clarifies interim guidance

provided in Notice 2023-64 regarding the

AFS of a tax consolidated group.

F. Notice 2024-33

On April 15, 2024, the Treasury

Department and the IRS issued Notice

2024-33, 2024-18 I.R.B. 959, which provided a limited waiver of the addition to

tax under section 6655 to the extent the

amount of any underpayment is attributable to a portion of a corporation’s CAMT

liability. The relief provided in Notice

2024-33 applied only for the purpose of

calculating the installment of estimated

tax by a corporate taxpayer that was due

on or before April 15, 2024, or May 15,

2024 (in the case of a fiscal-year taxpayer

with a taxable year beginning in February

2024), with respect to a taxable year that

began in 2024.

G. Notice 2024-47

On June 13, 2024, the Treasury Department and the IRS issued Notice 2024-47,

2024-27 I.R.B. 1, extending the relief provided in Notice 2024-33. Under Notice

2024-47, the limited waiver of the addition to tax under section 6655 that is

attributable to a corporation’s CAMT liability was extended to include the calculation of any installment of estimated tax

by a corporate taxpayer that was due on or

before August 15, 2024, with respect to a

taxable year that began in 2024.

H. Reliance on notices

Except as provided in the next paragraph, pursuant to section 15.02 of Notice

2023-64, a taxpayer may rely on the

October 15, 2024

interim guidance provided in sections 3

through 7 of Notice 2023-7 (as modified

and clarified by Notice 2023-64), sections

3 through 5 of Notice 2023-20, and sections 3 through 14 of Notice 2023-64, for

taxable years ending on or before September 13, 2024.

Pursuant to section 5.01 of Notice

2024-10, taxpayers may rely on the

interim guidance described in section 3 of

Notice 2024-10 for Covered CFC Distributions (as defined therein) received on or

before September 13, 2024. In addition,

pursuant to section 5.02 of Notice 202410, taxpayers may rely on the interim

guidance described in section 4.02(5)(b)

and section 6.02 of Notice 2023-64 (as

modified by Notice 2024-10) and section

4.04 of Notice 2024-10 for taxable years

ending before September 13, 2024. A taxpayer may not rely on the unmodified text

of sections 4.02(5)(b)(i) or 6.02 of Notice

2023-64 for any tax return filed on or after

December 15, 2023.

I. Feedback received

The Treasury Department and the IRS

have received feedback from taxpayers,

tax professionals, and other stakeholders

regarding the CAMT, including feedback

received in response to the CAMT notices.

Based on the feedback received, and based

on further consideration of sections 55,

56A, 59 and 1502, and the CAMT notices,

the Treasury Department and the IRS are

proposing these regulations under sections

55, 56A, 59, 1502, and 7805 as described

in the Authority section. Certain CAMT

issues with respect to which stakeholders

have provided feedback, as well as issues

on which the Treasury Department and the

IRS have further reflected after publication of the CAMT notices, are discussed in

the following Explanation of Provisions.

Explanation of Provisions

I. Proposed §1.56A-1: Adjusted Financial

Statement Income (AFSI)

Pursuant to the authority granted by

section 56A(c)(2)(B), (c)(15), and (e),

proposed §1.56A-1 would provide definitions and general rules for determining the

AFSI of a CAMT entity (that is, any entity

identified in section 7701 of the Code and

792

the regulations under section 7701 other

than a disregarded entity) for purposes of

sections 55 through 59 of the Code.

Proposed §1.56A-1(a) would provide

an overview of proposed §1.56A-1 and

clarify the scope of the section 56A regulations, which term is defined to mean

proposed §§1.56A-1 through 1.56A-27

and §1.1502-56A. Specifically, proposed

§1.56A-1(a)(2) would provide that the

section 56A regulations apply to determine a CAMT entity’s AFSI, as defined in

proposed §1.56A-1(b)(1), modified FSI,

as defined in proposed §1.56A-1(b)(32)

(in the case of a partnership), or adjusted

net income or loss, as defined in proposed

§1.56A-1(b)(2) (in the case of a CFC), for

purposes of sections 55 through 59. Proposed §1.56A-1(a)(2) would also provide

that the section 56A regulations apply to

any CAMT entity whose AFSI, modified FSI, or adjusted net income or loss,

as applicable, is relevant for determining

whether that CAMT entity, or any other

CAMT entity, is an applicable corporation under section 59(k), or the tentative

minimum tax amount under section 55(b)

(2)(A) of that CAMT entity, or any other

CAMT entity. Significantly, while the

definition of “CAMT entity” in proposed

§1.56A-1(b)(8) would include any entity

identified in section 7701 of the Code and

the regulations under section 7701 other

than a disregarded entity, not all such entities are applicable corporations, nor are all

relevant to the determination of CAMT

liability for an applicable corporation, or

to the determination of CAMT status.

Proposed §1.56A-1(b) would provide definitions that apply for purposes

of the section 56A regulations. Proposed §1.56A-1(b)(1) would provide that

the term “adjusted financial statement

income” (AFSI) means the CAMT entity’s FSI for the taxable year, adjusted as

provided in the section 56A regulations.

Proposed §1.56A-1(b)(20) would provide that the term “financial statement

income” (FSI) means the net income or

loss of the CAMT entity set forth on the

income statement included in the CAMT

entity’s applicable financial statement

(AFS) for the taxable year. FSI includes

all the CAMT entity’s items of income,

expense, gain, and loss reflected in the

net income or loss set forth on the income

statement for the taxable year, including

Bulletin No. 2024–42

nonrecurring items and net income or loss

from discontinued operations, but does

not include items reflected elsewhere in

the CAMT entity’s AFS, including equity

accounts such as retained earnings and

other comprehensive income (OCI). OCI

is not included in the net income or loss

reflected on financial statements prepared

in accordance with United States Generally Accepted Accounting Principles

(GAAP) or International Financial Reporting Standards (IFRS). See Accounting

Standards Codification (ASC) 220-10-20

and International Accounting Standards

(IAS) 1.82A. Accordingly, because the

determination of FSI starts with the net

income or loss set forth on an AFS, OCI

would not be included in that determination.1

Proposed §1.56A-1(b)(4) would provide that the term “AFS consolidation

entries” means the financial accounting

journal entries that are made in preparing

a consolidated financial statement for a

financial statement group in order to present the financial results of that financial

statement group as though all members of

the financial statement group were a single

economic entity. Proposed §1.56A-1(b)

(6) would provide that the term “applicable financial statement” (AFS) is defined

in proposed §1.56A-2(b). AFS means a

CAMT entity’s financial statement from

which a CAMT entity’s FSI and AFSI

is determined. Proposed §1.56A-1(b)

(7) would provide that the term “CAMT

basis” means the basis of an item for purposes of determining AFSI. Except as otherwise provided in the section 56A regulations, the CAMT basis of an item would

be the AFS basis of the item, adjusted as

provided in the section 56A regulations.

Proposed §1.56A-1(b)(22) would provide

that the term “for regular tax purposes”

means for the purposes of computing a

CAMT entity’s regular tax liability, as

defined under section 26(b) of the Code,

or, if the CAMT entity is a pass-through

entity or a CFC, the regular tax liability

of a direct or indirect owner of the CAMT

entity, as applicable.

Proposed §1.56A-1(c) would provide

general rules for determining a CAMT

entity’s FSI, which is the starting point

for determining the CAMT entity’s AFSI.

The rules in proposed §1.56A-1(c) generally would be consistent with section 5 of

Notice 2023-64 and section 4 of Notice

2024-10.

Proposed §1.56A-1(c)(1) would provide that FSI includes all items of income,

expense, gain, and loss reflected in the

net income or loss reported in the CAMT

entity’s income statement, regardless of

the treatment of these items for regular tax

purposes. For example, FSI includes gain

on a like-kind exchange that qualifies for

non-recognition treatment under section

1031.

Proposed §1.56A-1(c)(2) would set

forth rules for determining the FSI of a tax

consolidated group and CAMT entities

that own disregarded entities. If the AFS

of each member of the tax consolidated

group is not the same consolidated financial statement (as determined under proposed §1.56A-2(g)), the financial results

of all CAMT entities reflected in the different AFSs of its members are combined

to form a single consolidated financial

statement that is treated as the AFS of

the tax consolidated group. Adjustments

are made to avoid duplication of financial

results and to record any AFS consolidation entries that would have been made

if such a consolidated financial statement

actually had been prepared to the extent

not already reflected in the financial results

of any member. Proposed §1.56A-1(c)(2)

(i) would also provide that additional rules

for determining the FSI of a tax consolidated group are under proposed §1.150256A. Proposed §1.56A-1(c)(2)(ii) would

provide that special rules for determining

the FSI of a CAMT entity that owns a disregarded entity or branch are under proposed §1.56A-9.

Proposed §1.56A-1(c)(3) and (4)

would provide the rules for determining

the entity-level FSI, AFS basis, and balance sheet account amounts for a CAMT

entity whose financial results are included

in a single consolidated financial statement. It is necessary for a CAMT entity to

determine entity-level FSI, AFS basis, and

balance sheet account amounts because

section 56A and other CAMT provisions

require certain AFSI computations or

adjustments to be performed at the entity

level. For example, see section 56A(c)

(2)(D), which determines the AFSI of a

CAMT entity that is a partner in a partnership; section 56A(c)(3), which adjusts the

AFSI of a CAMT entity for any taxable

year that the CAMT entity is a U.S. shareholder of one or more CFCs; and section

55, which assesses the CAMT liability for

each corporate filer notwithstanding that

multiple corporations may be part of the

same financial statement group.

Proposed §1.56A-1(c)(3) would set

forth rules for determining a CAMT entity’s FSI if the CAMT entity’s AFS is a

consolidated financial statement (consolidated AFS) that reflects FSI for the

financial statement group (consolidated

FSI). Under the proposed rules, consolidated FSI that is the CAMT entity’s FSI

must be (i) supported by the CAMT entity’s separate books and records, including

trial balances, used to create the consolidated AFS, and (ii) generally determined

without regard to the financial results of

the other financial statement group members. Accordingly, the loss of one member

of the financial statement group may not

generally offset the income of another

member in determining the consolidated

FSI that is the CAMT entity’s FSI, even

though the amounts are reflected in consolidated FSI on a net basis. See proposed

§1.56A-1(c)(3)(ii).

Additionally, under the proposed rules,

the consolidated FSI that is the CAMT

entity’s FSI would be determined without

regard to AFS consolidation entries that

are made in preparing the consolidated

AFS and that either: eliminate the effect

of transactions between the CAMT entity

and other CAMT entities that are members

of the same financial statement group;

or eliminate any income, loss, expense,

asset, liability, or other item of the CAMT

entity with respect to its investment in

another CAMT entity that is a member of

the same financial statement group. These

elimination entries are disregarded due to

the statutory requirement for entity-level

AFSI computations. Absent the rules in

This approach would be consistent with Senator Ron Wyden’s August 6, 2022, colloquy with Senator Ben Cardin, stating that OCI is not included in the definition of FSI for the purposes

of applying the CAMT. 168 Cong. Rec. S4166 (2022).

1

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793

October 15, 2024

proposed §1.56A-1(c)(3)(iii), items would

be improperly omitted from AFSI because

they would not be reflected in FSI. If

the CAMT entity has an investment in a

partnership or domestic corporation that

is a member of the same financial statement group, the CAMT entity’s FSI with

respect to the investment is determined as

though the CAMT entity had prepared a

separate financial statement in which the

investment was properly accounted for

under the relevant accounting standards,

for example, the Parent-Entity Financial

Statement accounting standards described

in ASC 810-10-45-11 (unless the CAMT

entity already accounts for the investment

in this manner in its separate books and

records). Under this approach, parent

company financial statements present the

parent company’s investment in its subsidiaries as a single line item on the balance

sheet. The amount recorded as the investment reflects the parent’s proportionate

share of the subsidiary’s net assets. Similarly, the parent company financial statements reflect the result of operations of the

subsidiary as a single line item reflecting

the parent’s proportionate results. See

proposed §1.56A-1(c)(3)(iii). This rule is

necessary because the investment account

may not be properly maintained in the

separate books of the CAMT entity investor, given that the FSI of the partnership

or domestic corporation in which it has an

investment is already included in the consolidated financial statement.

To prevent amounts from being duplicated or omitted from a CAMT entity’s

FSI, proposed §1.56A-1(c)(3)(iv) would

provide that AFS consolidation entries,

other than elimination entries, that relate

to one or more CAMT entities that are

members of the financial statement group

but are not reflected in the separate books

and records of the CAMT entities are

appropriately allocated or pushed down

(or both), as applicable, to each CAMT

entity to which the AFS consolidation

entries relate and taken into account in

each CAMT entity’s FSI.

To ensure all items on a consolidated

financial statement are properly accounted

for by each CAMT entity that is a member of the financial statement group, proposed §1.56A-1(c)(3)(v) would require

each CAMT entity to maintain books and

records sufficient to demonstrate how the

October 15, 2024

CAMT entity’s FSI, determined under the

rules in proposed §1.56A-1(c)(3), reconciles to consolidated FSI of the financial

statement group.

For reasons similar to those underlying proposed §1.56A-1(c)(3), proposed

§1.56A-1(c)(4)(i) would provide that, if

a CAMT entity’s AFS is a consolidated

financial statement, and if the CAMT entity’s balance sheet accounts or AFS basis

in an item is relevant for determining the

CAMT entity’s AFSI, then the CAMT

entity uses the balance sheet accounts or

AFS basis reflected in the CAMT entity’s

separate books and records used to create

the CAMT entity’s consolidated financial

statement, determined under rules similar to the rules in proposed §1.56A-1(c)

(3)(iii) and (iv). Proposed §1.56A-1(c)

(4)(ii) would provide, in part, that any

adjustments under purchase accounting

(as defined in proposed §1.56A-1(b)(35))

or push down accounting (as defined in

proposed §1.56A-1(b)(36)) reflected in a

CAMT entity’s AFS basis, balance sheet

accounts, or FSI as a result of the application of proposed §1.56A-1(c)(4)(i) may be

disregarded for purposes of determining

the CAMT entity’s CAMT basis and AFSI

under other sections of the section 56A

regulations, for example, under proposed

§§1.56A-4 and 1.56A-18. See parts IV and

XVIII of this Explanation of Provisions.

Because it is necessary to determine

a CAMT entity’s FSI before determining

its AFSI, proposed §1.56A-1(c)(5) would

provide that proposed §1.56A-1(c) applies

before proposed §1.56A-1(d) and (e) and

before all other sections of the section 56A

regulations, other than proposed §1.56A2. Accordingly, references to AFS basis

and FSI in proposed §1.56A-1(d) and

(e) and in proposed §§1.56A-3 through

1.56A-27 mean AFS basis and FSI as

determined under the proposed §1.56A1(c) rules described previously.

Proposed §1.56A-1(c)(6) would provide examples illustrating these rules.

Proposed §1.56A-1(d) would provide

general rules for determining a CAMT

entity’s AFSI under the section 56A regulations. The rules in proposed §1.56A-1(d)

for determining AFSI generally would be

consistent with section 5 of Notice 202364. Accordingly, proposed §1.56A-1(d)

(1) would provide that AFSI includes all

items of income, expense, gain, and loss

794

reflected in a CAMT entity’s FSI regardless of the treatment of these items for regular tax purposes, unless an exception is

provided in another section of the section

56A regulations. For example, if a CAMT

entity’s FSI reflects gain or loss from a

transaction that qualifies for nonrecognition treatment for regular tax purposes,

then the gain or loss is included in AFSI

except as otherwise provided in the section 56A regulations.

Proposed §1.56A-1(d)(2) would limit

the adjustments allowed in determining

a CAMT entity’s AFSI to those provided

in the section 56A regulations or in IRB

guidance (as defined in proposed §1.56A1(b)(31)). The section 56A regulations

would encompass all statutory AFSI

adjustments and any AFSI adjustments

provided with the use of the regulatory

authority of the Treasury Department and

the IRS described in the Authority section. Certain AFSI adjustments are based

on the authority granted in section 56A(c)

(15), which authorizes “such adjustments

to adjusted financial statement income

as the Secretary determines necessary to

carry out the purposes of this section . .

. .” Examples of AFSI adjustments based

on section 56A(c)(15) authority are those

found in proposed §1.56A-21 (regarding troubled companies) and proposed

§1.56A-12(b)(2) (regarding the proceeds

of certain credit transfers).

Proposed §1.56A-1(d)(3) generally

would provide that the AFSI adjustments

described in the section 56A regulations,

including those adjustments that affect

the CAMT basis of an item, are made for

taxable years ending after December 31,

2019. However, a transition rule in proposed §1.56A-1(d)(3)(ii) generally would

provide that, except as otherwise provided in the section 56A regulations (for

example, in §1.56A-15(c)(6) and (e)(2)

(ii)(A) for AFSI adjustments for section

168 property), AFSI adjustments that otherwise affect the computation of AFSI in

taxable years ending after December 31,

2019, but that arise from a transaction or

an event that occurred in a taxable year

ending on or before December 31, 2019,

are not made. The rules underlying proposed §1.56A-1(d)(3) are derived from

the statute. For example, under section

59(k)(1)(A) and (B), a corporation is an

applicable corporation for a taxable year

Bulletin No. 2024–42

if the average annual adjusted financial

statement income of the corporation for a

3-taxable-year period that is prior to such

taxable year and that ends after December 31, 2021, exceeds certain thresholds.

In addition, section 56A(d)(3) defines a

FSNOL as the amount of the net loss on

the corporation’s AFS for taxable years

ending after 2019. The statute generally

contemplates that events that occur before

2020 but affect AFSI computations and

adjustments in 2020 and later need to be

considered in determining AFSI in later

years. Such an approach, however, may

not be administrable in certain cases.

Accordingly, except where it is appropriate to carry out the purposes of section

56A (for example, for section 168 property), the transition rule would neither

permit nor require AFSI adjustments with

respect to pre-2020 transactions or events.

To prevent duplications and omissions,

proposed §1.56A-1(d)(4) generally would

provide that, if a gain or loss is reflected

in FSI with respect to an item that has a

CAMT basis that is different than the

item’s AFS basis, and if the gain or loss

is required to be recognized for AFSI purposes, then the gain or loss reflected in

FSI is redetermined for AFSI purposes by

reference to the CAMT basis of the item.

Proposed §1.56A-1(e) would provide

that a CAMT entity whose AFSI is not

expressed in U.S. dollars must translate its

AFSI, after having made all other applicable adjustments under the section 56A

regulations except for those adjustments

that already are expressed in U.S. dollars,

to U.S. dollars using the weighted average

exchange rate, as defined in §1.989(b)-1,

for the CAMT entity’s taxable year. See

part VI.C. of this Explanation of Provisions for a discussion of the separate

rules under proposed §1.56A-6(c)(1) that

apply for translating a CFC’s adjusted net

income or loss to U.S. dollars.

Proposed §1.56A-1(f) would provide

that the classification of an entity for regular tax purposes applies for purposes of

the section 56A regulations regardless

of whether the entity or arrangement is

classified differently for AFS purposes.

The proposed regulations would follow

regular tax principles for purposes of

determining whether an organization or

other arrangement is treated as an entity

separate from its owners, and whether an

Bulletin No. 2024–42

unincorporated organization or contractual arrangement is treated as a partnership. Accordingly, regardless of the AFS

treatment, a participant in a contractual

arrangement that rises to the level of an

entity classified as a partnership for Federal income tax purposes is treated as

owning a partnership investment to which

section 56A(c)(2)(D)(i) adjustments may

apply. This interpretation is supported by

references in section 56A to entity classifications that do not exist for AFS purposes, such as disregarded entities, and

provides for administrative consistency in

situations in which the financial accounting rules and the Federal income tax rules

provide for disparate structural characterizations. For example, the Treasury and

the IRS understand that in certain situations IFRS may treat a CAMT entity that

is treated as a partner in a partnership for

Federal income tax purposes as owning

100 percent of the partnership’s equity,

while treating another CAMT entity that

is also treated as a partner in the partnership for Federal income tax purposes as a

lender to that partnership. Although under

IFRS a CAMT entity’s partnership investment might be treated as that of a lender,

the section 56A(c)(2)(D)(i) adjustment

applies if the CAMT entity is treated as

a partner in the partnership for Federal

income tax purposes.

Proposed

§1.56A-1(g)(1)

would

require an applicable corporation to

maintain books and records sufficient to

demonstrate its compliance with the section 56A regulations, including the identification of the corporation’s AFS, the

determination of the corporation’s FSI

(including how FSI reconciles to consolidated FSI if determined under proposed

§1.56A-1(c)(3)), the substantiation of any

adjustments required by the section 56A

regulations, and the substantiation of AFS

basis and CAMT basis. Proposed §1.56A1(h) would require an annual return

on Form 4626, Alternative Minimum

Tax-Corporations, setting forth information in the form and manner as the form or

instructions prescribe.

II. Proposed §1.56A-2: Applicable

Financial Statement (AFS)

Pursuant to the authority granted by

section 56A(b), (c)(15), and (e), proposed

795

§1.56A-2 would provide rules under section 56A(b) regarding the meaning and

identification of an “applicable financial

statement” and under section 56A(c)(2)

(A) regarding the priority of consolidated

financial statements.

A. Defining and identifying an AFS

Section 56A(b) generally defines an

“applicable financial statement” (AFS) for

any taxable year as an applicable financial

statement as defined in section 451(b)(3)

or as specified by the Secretary in regulations or other guidance. Section 451(b)

(3) and §1.451-3(a)(5), which implements

section 451(b)(3), generally provide that

a taxpayer’s AFS is the taxpayer’s financial statement listed therein that has the

highest priority. The financial statements

listed in §1.451-3(a)(5) are financial

statements certified as being prepared in

accordance with GAAP or IFRS, or financial statements filed with the Federal or

a State government, an agency thereof,

or a self-regulatory organization. Under

§1.451-3(a)(5), the financial statements

that would take the highest priority are

those prepared in accordance with GAAP,

followed by those prepared in accordance

with IFRS, followed by those filed with

certain Federal, State, and foreign governments or agencies thereof.

Consistent with sections 56A(b) and

451(b)(3), proposed §1.56A-2(b) generally would provide that the term “AFS”

means a CAMT entity’s financial statement listed in proposed §1.56A-2(c) that

has the highest priority. Proposed §1.56A2(c) generally would adopt the list of

financial statements and their order of

priority set forth in section 451(b)(3) and

§1.451-3(a)(5).

However, proposed §1.56A-2(c)(3)

would expand the list of financial statements to include certain certified financial

statements prepared in accordance with

accounting standards other than GAAP

and IFRS but issued by an accounting

standards board charged with developing

accounting standards for one or more jurisdictions. Because these statements have

been certified, they would take a higher

priority than financial statements filed

with governments or agencies thereof,

which are not subject to a certification

requirement. However, these statements

October 15, 2024

would take a lower priority than financial

statements certified as being prepared in

accordance with GAAP or IFRS.

Additionally, proposed §1.56A-2(c)

(5) and (6) would add two additional categories of financial statements of lower

priority: (i) financial statements that are

unaudited (or audited but not certified)

and that are prepared using accepted

accounting standards for an external nontax purpose; and (ii) the CAMT entity’s

Federal income tax return or information

return. These categories would be added

to ensure CAMT entities that do not prepare a financial statement described in any

of the other categories can perform the

necessary AFSI computations required

under sections 56A and 59(k), including

for purposes of determining whether a

corporation is an applicable corporation

under section 59(k) or determining the

AFSI of an applicable corporation under

section 56A.

As discussed previously, the list of

financial statements in proposed §1.56A2(c) would include certain certified

financial statements that are used for a

substantial non-tax purpose. Proposed

§1.56A-2(h) would provide examples

illustrating the presence or absence of a

substantial non-tax purpose. Comments

are requested on whether additional examples are necessary to illustrate other cases

in which a financial statement is used for a

substantial non-tax purpose.

A stakeholder requested guidance on

what it means for a financial statement to

be “certified,” as section 451(b)(3) and

§1.451-3(a)(5) do not address this issue.

Proposed §1.56A-2(d) would provide that

a financial statement is certified for purposes of proposed §1.56A-2(c) if it is:

(i) certified by an independent financial

statement auditor to present fairly the

financial position and results of operations

of a CAMT entity or financial statement

group in conformity with the relevant

financial accounting standards (that is, an

unqualified or unmodified “clean” opinion); (ii) subject to a qualified or modified

opinion by an independent financial statement auditor that the financial statement

presents fairly the financial position and

results of operations of a CAMT entity

or financial statement group in conformity with the relevant financial accounting standards, except for the effects of

October 15, 2024

the matter to which the qualification or

modification relates (that is, a qualified

or modified “except for” opinion); or (iii)

subject to an adverse opinion by an independent financial statement auditor, but

only if the auditor discloses the amount

of the disagreement with the statement.

This definition of the term “certified”

generally follows the Public Company

Accounting Oversight Board’s rules governing an audit opinion of an independent

financial statement auditor and the definition of a “certified audited” financial

statement in former §1.56-1(c)(1)(ii) (see

TD 8307, 55 FR 33671, 33679 (August

17, 1990)) (1990 Regulations). See AS

3101, The Auditor’s Report on an Audit

of Financial Statements When the Auditor

Expresses an Unqualified Opinion; AS

3105, Departures from Unqualified Opinions and Other Reporting Circumstances;

SEC Release No. 34-81916 (October 23,

2017).

Consistent with §1.451-3(a)(5)(iv),

proposed §1.56A-2(e) and (f) would provide additional rules for prioritizing a

restated financial statement over an original financial statement if the restated

financial statement is issued prior to the

date the CAMT entity files its original

Federal income tax return for that taxable

year, and for prioritizing annual financial

statements over periodic financial statements.

B. Priority of a consolidated financial

statement

Section 56A(c)(2)(A) provides that, if

a taxpayer’s financial results are reported

on the AFS for a group of entities (that is,

a financial statement group), rules similar

to the rules in section 451(b)(5) apply.

Section 451(b)(5) provides that, in such a

situation, the AFS for the financial statement group is treated as the AFS of the

taxpayer. The rules in §1.451-3(h) generally provide that the AFS for the group is

treated as the AFS of the taxpayer, unless

the taxpayer has a separate financial statement that is of equal or higher priority than

the AFS for the financial statement group.

Proposed §1.56A-2(g)(1) would provide general rules for determining a

CAMT entity’s AFS if the financial results

of the CAMT entity are included in a consolidated financial statement (that is, a

796

financial statement that consolidates the

financial results of more than one CAMT

entity to treat such CAMT entities as if

they were a single economic unit). This

section generally would provide that,

if a CAMT entity’s financial results are

included in one or more consolidated

financial statements described in proposed

§1.56A-2(c)(1) through (5) (that is, financial statements other than a tax return), the

CAMT entity’s AFS is the consolidated

financial statement with the highest priority within those sections. However, if the

CAMT entity’s financial results are also

reported on one or more separate financial

statements that are of equal or higher priority to the highest priority consolidated

financial statement (as determined under

proposed §1.56A-2(c)), then the CAMT

entity’s AFS is the separate financial statement with the highest priority under proposed §1.56A-2(c).

Proposed §1.56A-2(g)(2)(i) through

(iv) would provide exceptions to the use

of a separate financial statement if the

CAMT entity is a member of a tax consolidated group.

Proposed §1.56A-2(g)(2)(i) generally

would require a CAMT entity that is a

member of a tax consolidated group that

has only one consolidated financial statement described in proposed §1.56A-2(c)

(1) through (5) that contains the financial

results of all members of the tax consolidated group to use that consolidated financial statement as the CAMT entity’s AFS,

even if the CAMT entity’s financial results

also are reported on a separate financial

statement (or a consolidated financial

statement that has the financial results of

some, but not all, members of the tax consolidated group) that is of equal or higher

priority to that consolidated financial

statement.

Proposed §1.56A-2(g)(2)(ii) generally would provide that, if there is more

than one consolidated financial statement described in proposed §1.56A-2(c)

(1) through (5) that contains the financial

results of all members of a tax consolidated group, then a CAMT entity that is

a member of the tax consolidated group

uses the consolidated financial statement with the highest priority, even if the

CAMT entity’s financial results also are

reported on a separate financial statement

(or a consolidated financial statement

Bulletin No. 2024–42

that has the financial results of some, but

not all, members of the tax consolidated

group) that is of equal or higher priority to

that consolidated financial statement. Proposed §1.56A-2(g)(2)(iii) and (iv) would

provide additional exceptions that apply if

there are no consolidated financial statements that contain the financial results of

all members of a tax consolidated group.

As noted previously, if the AFS of each

member of a tax consolidated group is not

the same consolidated financial statement

after the application of proposed §1.56A2(g), proposed §1.56A-1(c)(2) would

provide rules for combining the different

financial statements of the members of the

tax consolidated group to form a single

consolidated financial statement that is

treated as the AFS of the tax consolidated

group for purposes of determining FSI

and AFSI of the tax consolidated group

under the section 56A regulations.

The foregoing rules would be consistent with the treatment of the members

of a tax consolidated group as a single

corporation for purposes of the CAMT.

See section 56A(c)(2)(B) and proposed

§1.1502-56A(a)(2). In addition, these

proposed rules would alleviate the administrative burden of determining the FSI

and AFSI of a tax consolidated group by

pulling information from financial statements of different members using different accounting standards.

In order to minimize the inconsistent

treatment of transactions between FPMG

members computing AFSI based on different financial accounting standards, proposed §1.56A-2(g)(2)(v) would provide

an additional exception to the use of a

separate financial statement for a CAMT

entity that is a member of an FPMG. Proposed §1.56A-2(g)(2)(v) would provide

that, if the FPMG common parent (as

defined in proposed §1.56A-1(b)(25)) prepares a consolidated financial statement

(FPMG consolidated AFS) that includes

the CAMT entity, the CAMT entity uses

the FPMG consolidated AFS as the CAMT

entity’s AFS, regardless of whether the

CAMT entity’s financial results also are

reported on a separate financial statement

that is of equal or higher priority to the

FPMG consolidated AFS.

Proposed §1.56A-9, discussed later,

would provide rules for attributing items

of a disregarded entity or branch to its

Bulletin No. 2024–42

CAMT entity owner by treating them as

a single CAMT entity. For this purpose,

proposed §1.56A-2(h) would provide that

if the financial results of a disregarded

entity or branch are reflected in the CAMT

entity owner’s AFS, the disregarded entity

or branch may not determine its own AFS

under the rules of §1.56A-2 as if it were a

separate CAMT entity (that is, the CAMT

entity owner uses its AFS to determine

its FSI and AFSI under the rules in proposed §1.56A-9). Proposed §1.56A-2(h)

would further provide that if the financial

results of a disregarded entity or branch

are not reflected in the CAMT entity owner’s AFS, the disregarded entity or branch

determines its own AFS under the rules of

proposed §1.56A-2, as if it were a CAMT

entity (however, see proposed §1.56A9(b)(3) for rules for determining the FSI

and AFSI of a CAMT entity that owns a

disregarded entity or branch that determines its own AFS).

Proposed §1.56A-2 generally would be

consistent with the guidance described in

section 4 of Notice 2023-64, as modified

and clarified in section 4 of Notice 202410.

III. Proposed §1.56A-3: AFSI

Adjustments for AFS Year and Taxable

Year Differences

Pursuant to the authority granted by

sections 56A(c)(1), (c)(15), and (e), proposed §1.56A-3 would provide rules under

section 56A(c)(1) regarding appropriate

adjustments that are made to AFSI if an

AFS covers a period other than the taxable

year. If a CAMT entity’s AFS is prepared

on the basis of a financial accounting

period that differs from the CAMT entity’s

taxable year, proposed §1.56A-3(b) would

require the CAMT entity to compute FSI

and AFSI as if the financial reporting

period were the same as the taxable year

by conducting an interim closing of the

books using the accounting standards the

CAMT entity uses to prepare the AFS.

The Treasury Department and the IRS

considered the methods in the 1990 Regulations and in §1.451-3(h)(4), among

other methods, in determining which

adjustments are appropriate under section 56A(c)(1). Those methods included

(i) performing an interim closing of the

books, (ii) using pro rata amounts for each

797

financial accounting year that includes

any part of the taxable year, and (iii) in the

case of an accounting year ending at least

five months after the end of the taxable

year, using the amount reported for the

financial accounting year ending within

the taxable year. The proposed regulations

would provide for adjustments based on

an interim closing of the books because

this method carries out the purposes of the

statute by producing an accurate measurement of AFSI for the taxable year.

Proposed §1.56A-3(b)(2) would provide examples illustrating the application of an interim closing of the books to

determine FSI and AFSI when a CAMT

entity’s AFS is prepared on the basis of

a financial accounting period that differs

from the taxable year.

IV. Proposed §1.56A-4: AFSI

Adjustments and Basis Determinations

with Respect to Foreign Corporations

A. Overview

Section 56A(c)(2)(C) provides that

a taxpayer’s AFSI with respect to a corporation that is not a member of the taxpayer’s tax consolidated group generally only takes into account dividends

(reduced to the extent provided by the

Secretary in regulations or other guidance) and other amounts that are includible in gross income or deductible as a

loss under chapter 1 (other than amounts

required to be included under sections 951

and 951A or such other amounts as provided by the Secretary). Section 56A(c)

(3)(A) provides that the AFSI of a taxpayer that is a U.S. shareholder of one or

more CFCs is adjusted to also take into

account the taxpayer’s pro rata share of

items taken into account in computing the

net income or loss set forth on the AFS (as

adjusted under rules similar to those that

apply in determining AFSI) of each CFC

with respect to which the taxpayer is a

U.S. shareholder. See proposed §1.56A-6

(AFSI adjustments with respect to CFCs).

Section 56A(c)(15) authorizes the Secretary to issue regulations or other guidance to provide for such adjustments to

AFSI as the Secretary determines necessary to carry out the purposes of section

56A, including: (i) adjustments to prevent

the omission or duplication of any item;

October 15, 2024

and (ii) adjustments to carry out the principles of part II of subchapter C of chapter

1 (relating to corporate liquidations) and

part III of subchapter C of chapter 1 (relating to corporate organizations and reorganizations). See also section 56A(e).

Pursuant to the authority granted by

sections 56A(c)(2)(C), (c)(15), and (e),

proposed §1.56A-4 would provide rules

concerning foreign corporations. More

specifically, proposed §1.56A-4 would

provide rules under section 56A(c)(2)(C)

for determining the amount of AFSI of a

CAMT entity that results solely from the

CAMT entity’s ownership of stock of a

foreign corporation. Additionally, proposed §1.56A-4 would provide (i) rules

under section 56A(c)(15)(B) for determining the AFSI and CAMT basis consequences of certain transactions involving

foreign corporations (referred to as covered asset transactions); (ii) rules regarding the treatment of elections made under

section 338(g) of the Code for acquisitions of stock of foreign corporations; (iii)

rules regarding the treatment of purchase

accounting and push down accounting

with respect to acquisitions of stock of

foreign corporations; (iv) rules for adjusting AFSI in certain circumstances when

basis in foreign stock received is determined under section 358 of the Code; (v)

rules for adjusting modified FSI of a partnership in certain circumstances when the

partnership distributes stock of a foreign

corporation; and (vi) examples illustrating application of the rules in proposed

§1.56A-4.

The interaction of section 56A(c)(2)

(C) and (c)(3) raises unique double-counting issues with respect to distributions by

CFCs and transfers of stock of CFCs. For

example, absent guidance, distributions

by CFCs could result in earnings of CFCs

being included in the AFSI of a U.S. shareholder of the CFC more than once. Specifically, a duplication of items may result

if the U.S. shareholder includes in AFSI,

under section 56A(c)(2)(C), the amount of

a dividend received from earnings associated with adjusted net income or loss that

the U.S. shareholder also includes in AFSI

under section 56A(c)(3). A duplication of

items may also result if an upper-tier CFC

includes in adjusted net income or loss

the amount of a dividend received from a

lower-tier CFC from earnings associated

October 15, 2024

with adjusted net income or loss that the

U.S. shareholder includes in AFSI under

section 56A(c)(3) with respect to the lower-tier CFC. Section 56A grants the Secretary broad authority to address this issue.

See section 56A(c)(2)(C), (c)(15)(A), and

(e).

The Treasury Department and the IRS

considered various approaches to applying section 56A(c)(2)(C) to items that

result solely from a CAMT entity’s ownership of stock of a CFC. As indicated previously, the interaction of section 56A(c)

(2)(C) and (c)(3) raises unique duplication

concerns that are not present in the case

of a CAMT entity’s ownership of stock

of a domestic corporation. In the regular

tax context, similar duplication concerns

relating to U.S. taxpayers owning the

stock of CFCs have given rise to complex

rules (see, for example, sections 959 and

961). Creating a similar system for CAMT

would be a substantial undertaking and

an impediment to releasing timely guidance addressing this issue and would also

increase taxpayers’ compliance burden

and the administrative burden on the IRS.

To avoid these issues, the proposed regulations would require taxpayers to rely

on existing regular tax rules with respect

to CFCs within CAMT. Because the regular tax rules apply to both distributions

by CFCs and transfers of stock of CFCs,

the proposed regulations would require

taxpayers to rely on certain regular tax

rules for determining both the earnings

and profits of foreign corporations and the

basis of the stock of foreign corporations.

Additionally, relying on the regular tax

rules would be consistent with the statutory language of section 56A(c)(2)(C).

See for example, the statutory language of

section 56A(c)(2)(C) (referring to “other

amounts which are includible in gross

income or deductible as a loss under this

chapter”).

The Treasury Department and the IRS

also are of the view that ownership of

stock of all foreign corporations should

be subject to the same rules under proposed §1.56A-4 to avoid the need for, and

complexity arising from, rules addressing

foreign corporations’ transition into and

out of CFC status. Accordingly, proposed

§1.56A-4 would apply to the ownership of

stock of any foreign corporation, regardless of whether the foreign corporation

798

is a CFC. Compare the discussion in part

XVIII of this Explanation of Provisions

of the rules under section 56A(c)(2)(C)

regarding investments in domestic corporations that are not members of the CAMT

entity’s tax consolidated group and the

rules under section 56A regarding certain

transactions involving domestic corporations.

B. General rule for ownership of foreign

stock

Proposed §1.56A-4(c)(1) would provide for adjustments to a CAMT entity’s

AFSI as a result of direct ownership of

stock of a foreign corporation. Specifically, consistent with Notice 2024-10,

proposed §1.56A-4(c)(1)(i) would require

a CAMT entity, in calculating AFSI, to

disregard any items of income, expense,

gain, and loss resulting from ownership of

stock of the foreign corporation, including

any such items that result from acquiring

or transferring such stock, reflected in the

CAMT entity’s FSI. Proposed §1.56A4(c)(1)(ii) would generally require the

CAMT entity to include in AFSI any

items of income, deduction, gain, and loss

for regular tax purposes resulting from

ownership of stock of the foreign corporation, including any items that result

from acquiring or transferring such stock

(for example, transaction costs). Proposed

§1.56A-4(e) would provide that if a partnership directly owns stock of a foreign

corporation, then in determining the AFSI

of a CAMT entity that is a partner in the

partnership (or an indirect partner, in the

case of tiered partnerships), the partner

takes into account the tax items described

in proposed §1.56A-4(c)(1)(ii) (described

in the preceding sentence) that are allocated to the partner for regular tax purposes. However, proposed §1.56A-4(c)

(1)(i) (disregarding certain items reflected

in FSI) would apply at the partnership

level because the partnership, as the direct

owner of the stock of the foreign corporation, may have reflected certain items

resulting from the ownership of stock of

the foreign corporation in its FSI.

As one illustration of proposed §1.56A4(c)(1), the AFSI of a CAMT entity that is

a domestic corporation would not reflect

any inclusion with respect to a dividend

received from a foreign corporation if

Bulletin No. 2024–42

the CAMT entity is eligible for a dividends-received deduction under section

245A of the Code for the entire amount

of the dividend, because the item of FSI

with respect to the dividend would be disregarded, and the regular tax income item

with respect to the dividend would be offset by an item of deduction resulting from

the receipt of the dividend. As another

example, the AFSI of a CAMT entity that

is a domestic corporation would generally

not reflect any inclusion with respect to a

distribution of previously taxed earnings

and profits (PTEP) (described in section

959 of the Code) by a foreign corporation to the CAMT entity because the item

of FSI with respect to the distribution

would be disregarded and section 959(a)

excludes the regular tax amount of the distribution of PTEP from the CAMT entity’s

gross income. See also proposed §1.56A6(c)(2) (applying similar rules in the context of dividends received by a CFC from

a foreign corporation) and part VI of this

Explanation of Provisions (regarding

AFSI adjustments with respect to CFCs).

Also, under proposed §1.56A-4(c)(1)(ii),

the AFSI of a CAMT entity that is a shareholder of a passive foreign investment

company (as defined in section 1297 of

the Code) would include regular tax items

resulting from the ownership of the stock

of the passive foreign investment company, including any amounts under sections 1291, 1293, and 1296 of the Code.

The Treasury Department and the IRS

are considering whether additional rules

should be included in the final regulations

to address passive foreign investment

companies, including rules that would

specifically address adjustments to AFSI

with respect to the ownership of stock in

a section 1291 fund and the indirect ownership of stock in a lower-tier passive foreign investment company. In addition, the

Treasury Department and the IRS are considering whether rules specific to passive

foreign investment companies would be

appropriate in §1.59-4 (CAMT foreign tax

credit), including rules similar to the rules

in section 1291(g)(1)(C)(ii) in respect of

foreign taxes paid by section 1291 funds

and rules similar to the rules in section

1293(f) in respect of foreign taxes paid by

qualifying electing funds. The Treasury

Department and the IRS request comments on this topic.

Bulletin No. 2024–42

Under proposed §1.56A-4(c)(1)(ii),

no adjustment to AFSI would be made

for amounts included in a CAMT entity’s gross income under sections 951 and

951A. See section 56A(c)(2)(C). Furthermore, because a deduction under section

250 of the Code arises with respect to a

foreign corporation only in connection

with an income inclusion under section

951A, no adjustment is made to AFSI

for amounts deducted under section 250.

Additionally, because adjusted net income

or loss of a CFC is computed without

regard to foreign income taxes (see proposed §§1.56A-8(b) and 1.56A-6(c)(1)),

no adjustment would be made for the

gross-up for deemed-paid foreign tax

credits under section 78 of the Code.

The items described in proposed

§1.56A-4(c)(1)(ii) are determined under

regular tax rules, including subchapter C

of chapter 1 (subchapter C), taking into

account the CAMT entity’s basis in the

stock of the foreign corporation for regular tax purposes and the foreign corporation’s earnings and profits for regular

tax purposes. Accordingly, any AFSI consequences of a distribution in respect of,

or transfer of, stock of a foreign corporation would be determined, as applicable,

by reference to the earnings and profits

of the foreign corporation for regular tax

purposes or the basis in such stock for

regular tax purposes. See, for example,

proposed §1.56A-4(d)(5) (CAMT basis in

foreign stock is equal to its basis for regular tax purposes). Further, CAMT retained

earnings are not relevant in determining

AFSI in respect of ownership of stock of

foreign corporations. Certain earnings and

profits of a foreign corporation for regular tax purposes carry over to a domestic

corporation under section 381(c)(2) of the

Code for purposes of determining that

domestic corporation’s CAMT retained

earnings. See §1.367(b)-3(f)(1) (providing the extent to which earnings and

profits of a foreign corporation carryover

to a domestic corporation in an inbound

nonrecognition transaction); proposed

§1.56A-4(h)(8) (Example 8); and proposed §1.56A-18(c)(7)(i). CAMT retained

earnings of a domestic corporation would

not carry over to a foreign corporation

under section 381(c)(2) because CAMT

retained earnings are not relevant in determining AFSI in respect of ownership of

799

stock of foreign corporations. This is the

case even though earnings and profits of

a domestic corporation may carry over to

a foreign corporation under section 381(c)

(2) for purposes of determining the foreign corporation’s earnings and profits for

regular tax purposes.

While proposed §1.56A-4(c)(1)(ii)

would determine the AFSI consequences

resulting from ownership of stock of a

foreign corporation by reference to the

basis in that stock for regular tax purposes

and the foreign corporation’s earnings

and profits for regular tax purposes, the

rules in proposed §§1.56A-18 and 1.56A19 generally would determine the AFSI

consequences resulting from ownership

of stock of a domestic corporation by reference to the CAMT basis in that stock

and the domestic corporation’s CAMT

retained earnings.

C. Covered asset transactions

Pursuant to the authority granted

by section 56A(c)(15)(B), proposed

§1.56A-4 would incorporate certain rules

under subchapter C for determining the

AFSI and CAMT basis consequences of

certain transactions involving foreign

corporations (referred to as covered asset

transactions). However, the proposed

rules would use the CAMT basis of transferred assets to determine the AFSI consequences of such transfers and that basis

may be different than the basis for regular

tax purposes, except in the case of foreign

stock. Using CAMT basis for assets other

than foreign stock is consistent with the

general rule in proposed §1.56A-1 and

appropriate because the duplication concerns that exist for foreign stock are not

present.

Proposed §1.56A-4(b), which would

provide definitions that apply for purposes

of proposed §1.56A-4, would define the

term covered asset transaction. The definition of covered asset transaction uses the

concept of a component transaction (within

the meaning of proposed §1.56A-18(b)(6))

to distinguish the fact patterns in which the

rules of proposed §1.56A-4 (which apply

to ownership of foreign stock) apply versus the rules of proposed §§1.56A-18 and

1.56A-19 (which generally apply to ownership of domestic stock). The rules of

proposed §§1.56A-18 and 1.56A-19 apply

October 15, 2024

on a component transaction-by-component

transaction basis. Covered asset transactions include two categories of transactions.

The first category of covered asset

transactions involves a transfer of an asset

to, or by, a foreign corporation. More

specifically, this first category includes a

component transaction in which one or

more assets are: (i) transferred by a foreign

corporation in a transfer to which section

311 of the Code applies; (ii) transferred

by a foreign corporation in a transfer that

is part of a complete liquidation to which

sections 332 and 337 of the Code apply;

(iii) transferred to a foreign corporation in

a transfer to which section 351 or section

361 of the Code applies; (iv) transferred

by a foreign corporation in a transfer to

which section 361 applies; (v) stock, or

stock and securities, of a domestic corporation described in section 355(a)(1)(A)

of the Code and transferred by a foreign

corporation in a transfer to which section

355 applies; or (vi) securities of a foreign

corporation that is a party to a reorganization described in section 368(a)(1) and

transferred in a transfer to which section

354 or 356 applies.

The second category of covered asset

transactions involves a transfer of foreign

stock to or by a domestic corporation.

That is, this second category includes

a component transaction in which one

or more assets, at least one of which is

stock of a foreign corporation, are: (i)

transferred by a domestic corporation in

a transfer to which section 311 applies;

(ii) transferred by a domestic corporation

in a transfer that is part of a complete liquidation to which sections 332 and 337

apply; (iii) transferred to a domestic corporation in a transfer to which section 351

or section 361applies; (iv) transferred by

a domestic corporation in a transfer to

which section 361 applies; (v) stock, or

stock and securities, of a foreign corporation described in section 355(a)(1)(A)

and transferred by a domestic corporation in a transfer to which section 355

applies; or (vi) securities of a domestic

corporation that is a party to a reorganization described in section 368(a)(1) and

transferred in a transfer to which section

354 or 356 applies, provided the securities are exchanged for stock or securities

of a foreign corporation that is a party the

reorganization .

October 15, 2024

Proposed §1.56A-4(c)(2) would provide for adjustments to a CAMT entity’s

AFSI as a result of a transfer of an asset

other than stock of a foreign corporation

in a covered asset transaction. Specifically,

proposed §1.56A-4(c)(2)(i) would require

a CAMT entity, in calculating AFSI, to

disregard any items of income, expense,

gain, and loss with respect to the transferred asset resulting from the covered

asset transaction reflected in the CAMT

entity’s FSI. Proposed §1.56A-4(c)(2)(ii)

would require the CAMT entity to include

any items of income, deduction, gain, and

loss for regular tax purposes with respect

to the transferred asset resulting from the

covered asset transaction; however, for

this purpose, the amount of each such

item would be computed by substituting

the CAMT entity’s CAMT basis in the

transferred asset for the CAMT entity’s

basis in the transferred asset for regular

tax purposes.

Proposed §1.56A-4(d)(1) would provide rules for determining the CAMT

basis in an asset that is transferred in a

covered asset transaction. The rules for

determining CAMT basis would rely on

the principles of the Code that apply to

these transactions for determining basis

for regular tax purposes, but use CAMT

basis instead of regular tax basis as applicable. If the asset is transferred in a covered asset transaction described in section

311, the transferee’s CAMT basis in the

asset would be determined in the manner

described in section 301(d) of the Code. If

the asset is transferred in a covered asset

transaction described in sections 332 and

337, the transferee’s CAMT basis in the

asset would be determined in the manner

described in section 334(b) of the Code,

substituting the transferor’s CAMT basis

in the asset for the transferor’s basis in the

asset for regular tax purposes. If the asset

is transferred in a covered asset transaction

described in section 351 or 361, the transferee’s CAMT basis in the asset would

be determined in the manner described

in section 362 of the Code, substituting

the transferor’s CAMT basis in the asset

for the transferor’s basis in the asset for

regular tax purposes and substituting the

amount of gain included in the transferor’s

AFSI for the amount of gain recognized

to the transferor for regular tax purposes.

However, if the transferor is not a CAMT

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entity, the transferee’s CAMT basis in the

asset would be equal to the transferee’s

basis in the asset for regular tax purposes.

Thus, if an individual transfers an asset

to a foreign corporation in a transaction

described in section 351, this rule would

apply to the extent the individual is not a

CAMT entity (that is, an individual that

does not operate a trade or business that

would not be required to determine AFSI

for any purpose under the section 56A regulations).

If the asset transferred is stock or securities of a domestic corporation described

in section 355(a)(1)(A) and the asset is

transferred by a foreign corporation in a

covered asset transaction to which section

355 applies, the transferee’s CAMT basis

in the transferred stock or securities of

the domestic corporation would be equal

to the transferee’s basis in the stock or

securities for regular tax purposes. If the

asset transferred is stock or securities of

a foreign corporation described in section

355(a)(1)(A) and the asset is transferred

by a domestic corporation in a covered

asset transaction to which section 355

applies, the transferee’s CAMT basis in

the stock or securities of the domestic corporation would be determined by applying

section 358, substituting the transferee’s

CAMT basis in the stock or securities of

the domestic corporation for the transferee’s basis in the stock of the domestic

corporation for regular tax purposes. If the

asset transferred is securities of a foreign

corporation that is a party to a reorganization described in section 368(a)(1) and

the asset received in exchange for the

securities is not stock of a foreign corporation that is a party to the reorganization,

the transferee’s CAMT basis in the asset

received would be determined by applying

section 358, substituting the transferee’s

CAMT basis in the securities of the foreign corporation for the transferee’s basis

in such securities for regular tax purposes.

If the asset transferred is securities of a

domestic corporation that is a party to a

reorganization described in section 368(a)

(1) and the asset received in exchange

for the securities is not stock of a foreign

corporation that is a party to the reorganization, the transferee’s CAMT basis in

the asset received would be determined

by applying section 358, substituting the

transferee’s CAMT basis in the securities

Bulletin No. 2024–42

of the domestic corporation for the transferee’s basis in such securities for regular

tax purposes.

D. Section 338(g) transactions

Proposed §1.56A-4(c)(3) would provide adjustments to the AFSI of a foreign

corporation the stock of which is purchased in a transaction where the purchaser makes an election under section

338(g) (a section 338(g) transaction), consistent with the general principles underlying the rules in proposed §1.56A-4 to

follow regular tax rules for foreign stock

and transactions involving foreign corporations. Specifically, proposed §1.56A4(c)(3) would require such a foreign

corporation, when calculating AFSI, to

include any net gain or loss that results

for regular tax purposes with respect to

all assets the foreign corporation is treated

as selling by reason of the section 338(g)

transaction; however, for this purpose,

the amount of gain or loss with respect

to each asset that the foreign corporation

is deemed to have sold by reason of the

section 338(g) transaction is computed

by substituting the foreign corporation’s

CAMT basis in the asset for the foreign

corporation’s basis in the asset for regular tax purposes. Proposed §1.56A-4(d)

(2) would provide a parallel rule that if

stock of a foreign corporation is acquired

in a section 338(g) transaction, immediately after the section 338(g) transaction,

the foreign corporation’s CAMT basis in

the assets it is deemed to have purchased

by reason of the section 388(g) transaction is equal to the foreign corporation’s

basis in those assets for regular tax purposes. See proposed §1.56A-18(g)(2) and

(4) (addressing AFSI consequences to a

domestic target corporation and CAMT

basis in the target corporation’s assets in

a transaction where there is an election

under section 336(e), 338(g), or 338(h)

(10) of the Code).

E. Purchase accounting and push down

accounting adjustments

Proposed §1.56A-1(c)(4)(ii) would

provide that, except as otherwise provided,

any purchase accounting and push down

accounting adjustments, as applicable, are

required to be reflected in the CAMT enti-

Bulletin No. 2024–42

ty’s AFS basis, balance sheet accounts,

and FSI. Proposed §1.56A-4(c)(4) would

provide an exception to this general rule

such that any purchase accounting or push

down accounting adjustments, as applicable, with respect to an acquisition of the

stock of a foreign corporation by a CAMT

entity would be disregarded for purposes

of determining the CAMT entity’s AFSI.

Proposed §1.56A-4(d)(4) would provide

a parallel rule that any purchase accounting or push down accounting adjustments,

as applicable, with respect to an acquisition of the stock of a foreign corporation

by a CAMT entity would be disregarded

for purposes of determining the CAMT

basis in the foreign corporation’s assets.

See proposed §1.56A-18(c)(3) (addressing purchase accounting and push down

accounting adjustments where the stock

of a domestic corporation is acquired).

F. AFSI adjustments in certain cases in

which basis in foreign stock is determined

under section 358

CAMT basis in stock of a foreign corporation is equal to the basis in the stock

for regular tax purposes. See proposed

§1.56A-4(d)(5). If stock of a foreign corporation is received in a transaction subject to section 358, the recipient CAMT

entity’s basis in the foreign stock received

for regular tax purposes is determined in

whole or in part by reference to the basis

in other property for regular tax purposes,

which may be different than the CAMT

basis in such property. For example, if the

stock of a foreign corporation is received

by reason of an asset transferred to the foreign corporation in a transaction described

in section 351(a), the transferor’s basis

in the stock of the foreign corporation

received is determined under section 358

by reference to the transferor’s basis in

the asset transferred. As another example, if the stock of a foreign corporation

is received in a distribution described in

section 355, the distributee’s basis in the

stock of the foreign corporation received

is determined under section 358 by reference to the distributee’s basis in the stock

of the distributing corporation.

Proposed §1.56A-4(f) would provide

rules that apply to certain cases in which

a CAMT entity receives stock of a foreign

corporation in a covered asset transaction

801

and the CAMT entity’s basis in the stock

of the foreign corporation for regular tax

purposes is determined under section 358.

These rules compare the CAMT basis

in the stock of the foreign corporation

(which equals its basis for regular tax purposes) with what the CAMT basis would

have been had it been determined under

section 358, substituting the CAMT basis

for the basis for regular tax purposes in the

property by reference to which the basis of

the foreign stock for regular tax purposes

is determined in whole or in part (such

amount, the hypothetical CAMT basis).

To the extent a CAMT entity’s basis in the

stock of the foreign corporation received

for regular tax purposes exceeds its hypothetical CAMT basis in that stock (referred

to as basis disparity in this part IV of this

Explanation of Provisions), the CAMT

entity increases its AFSI for the taxable

year in which the foreign stock is received

if either of two requirements is satisfied.

The first requirement is satisfied if a

principal purpose of the covered asset

transaction is to avoid treatment of the

CAMT entity or another CAMT entity as

an applicable corporation or to reduce or

otherwise avoid a liability under section

55(a) (principal purpose rule). The second

requirement is satisfied if within two years

of the date the stock of the foreign corporation is received, the basis in such stock

of the foreign corporation is taken into

account, in whole or in part, in determining the AFSI of the recipient CAMT entity

or another CAMT entity (two-year rule).

The principles of the two-year rule apply

with respect to any asset whose basis

for regular tax purposes is determined in

whole or in part by reference to the basis

of the foreign stock received. For example, if stock of the foreign corporation

received is subsequently transferred in a

transaction described in section 351(a) to

another foreign corporation in exchange

for stock of such other foreign corporation (or if the foreign stock received is

exchanged under section 354 of the Code

for stock in another foreign corporation),

then the two-year rule applies to both the

stock of the foreign corporation received

in the initial transfer as well as the stock

of the other foreign corporation received

in the subsequent transfer.

To illustrate the principal purpose

rule, consider the following fact pattern.

October 15, 2024

USP, a domestic corporation, owns all the

stock of a controlled foreign corporation

(CFC1), which has a functional currency

of the U.S. dollar. CFC1 owns Asset A,

with a basis for regular tax purposes of

$10x, a CAMT basis of $4x, and fair market value of $20x. The intent is for CFC1

to sell Asset A. For CAMT purposes, if

CFC1 were to sell Asset A, CFC1 would

include $16x in adjusted net income or

loss under proposed §1.56A-6 (fair market value of $20x, less CAMT basis of

$4x) and USP’s pro rata share of CFC1’s

adjusted net income or loss would take

into account the $16x. With a principal

purpose of reducing CFC1’s adjusted net

income or loss and USP’s pro rata share,

Asset A is contributed to a newly formed

foreign corporation (CFC2) in exchange

solely for stock of CFC2 in a transaction

that qualifies under section 351(a) for

regular tax purposes and therefore is a

covered asset acquisition (asset transfer).

CFC1’s CAMT basis in the stock of CFC2

received is equal to $10x (the amount of

CFC1’s basis in the stock of CFC2 for regular tax purposes), and CFC1’s hypothetical CAMT basis in the stock of CFC2 is

$4x. In a transaction purported to be separate from the asset transfer for purposes of

qualifying the asset transfer under section

351, CFC1 then subsequently sells the

stock of CFC2 to a third party in exchange

for cash, and the CAMT basis for purposes of determining the amount included

in CFC1’s adjusted net income or loss is

$10x. Under the principal purpose rule,

CFC1’s adjusted net income or loss is

increased by the $6x basis disparity (the

excess of the basis in the stock of CFC2

for regular tax purposes and CAMT purposes ($10x) over the hypothetical CAMT

basis ($4x)) for the taxable year in which

the asset transfer occurs.

The Treasury Department and the IRS

considered alternatives to addressing the

basis disparity concern. One alternative is

to adjust (increase or decrease) the recipient CAMT entity’s AFSI in all cases in

which there is a basis disparity, including

if the basis disparity arises when a CAMT

entity’s basis in stock of the foreign corporation received for regular tax purposes

is less than the hypothetical CAMT basis.

However, in this case, if the CAMT entity

and the foreign corporation whose stock

is received are related, the decrease in

October 15, 2024

AFSI would be allowed only when the

recipient CAMT entity and the foreign

corporation are no longer related. Another

alternative is to implement an account

system whereby the basis disparity would

be tracked and taken into account as an

increase or decrease to AFSI, as applicable, as the basis in the stock of the foreign

corporation received is taken into account,

for example, upon a taxable sale or a

return of basis distribution under section

301. A concern with an account tracking

system is that it would introduce complexity, including the need to track the account

reflecting stock of each foreign corporation for a potentially significant period

and address subsequent transactions that

duplicate basis in the foreign stock (transactions in which basis in another asset is

determined by reference to the basis in the

foreign stock, including section 351 transfers of the foreign stock). The Treasury

Department and the IRS welcome comments on the proposed rule and whether

alternatives should be further considered.

G. Adjustments to AFSI when certain

foreign stock is distributed by a

partnership

Proposed §1.56A-4(g) would provide

rules for distributions of certain stock of

a foreign corporation by a partnership to a

related CAMT entity. If a partnership distributes stock of a foreign corporation and

the distributee partner increases its basis

in the stock pursuant to section 732(b) of

the Code for regular tax purposes, section 734(b)(2)(B) of the Code generally

requires the partnership to reduce the

basis of its remaining property for regular tax purposes if either the partnership

has an election under section 754 of the

Code in effect or the distribution results in

a substantial basis reduction as defined in

section 734(d). There is no similar mechanism under CAMT, however, for the

partnership to reduce its basis in remaining property, other than its basis in any

remaining foreign stock to the extent the

basis in such stock is reduced for regular

tax purposes. As a result, if the distributee

partner were to subsequently dispose of

the foreign stock, there would be an omission from AFSI in the amount of the basis

increase under section 732(b) that did not

result in a corresponding basis decrease

802

under section 734(b)(2)(B) to any remaining foreign stock held by the partnership.

The Treasury Department and the IRS

are concerned that related parties might

abuse the rules relating to the CAMT basis

of foreign stock distributed by a partnership to create omissions from AFSI.

Accordingly, proposed §1.56A-4(g)(1)

would provide that if a partnership distributes stock of a foreign corporation to a

partner that is a related CAMT entity, and

the basis for regular tax purposes in the

foreign stock to the related CAMT entity

distributee is increased pursuant to section

732(b) (distributee step-up amount), and

the distributee step-up amount is greater

than the amount, if any, that the distributing partnership is required to decrease

its basis for regular tax purposes in any

remaining foreign stock pursuant to section 734(b)(2)(B) (partnership basis

decrease amount), the distributing partnership must increase its modified FSI for

the taxable year of the distribution by any

excess of the distributee step-up amount

over the partnership basis decrease

amount. For purposes of this rule, a partner would be a related CAMT entity if

immediately before the distribution, the

partner is related to the distributing partnership or any partner in the distributing

partnership within the meaning of sections

267(b) or 707(b)(1) of the Code, without

regard to section 267(c)(3).

The proposed rule would be limited

to related party partnerships and basis

increases in order to address potentially abusive transactions. The Treasury

Department and the IRS request comments on proposed §1.56A-4(g), including

whether it is appropriate to limit the rule

to related party partnerships and whether

rules are needed to prevent duplications

to AFSI for distributions of foreign stock

by a partnership where the distributee

partner decreases the basis for regular tax

purposes of the distributed foreign stock

pursuant to section 732(a)(2) or (b).

V. Proposed §1.56A-5: AFSI Adjustments

for Partner’s Distributive Share of

Partnership AFSI

Pursuant to the authority granted by

section 56A(c)(2)(D)(i), (c)(15), and (e),

proposed §1.56A-5 would provide rules

under section 56A(c)(2)(D) regarding a

Bulletin No. 2024–42

partner’s distributive share of partnership

AFSI. Section 56A(c)(2)(D)(i) provides

that, except as provided by the Secretary,

if the taxpayer is a partner in a partnership, AFSI of the taxpayer with respect to

such partnership is adjusted to only take

into account the taxpayer’s distributive

share of AFSI of such partnership. Section 56A(c)(2)(D)(ii) provides that, for

the purposes of the CAMT, the AFSI of a

partnership is the partnership’s net income

or loss set forth on the partnership’s AFS

adjusted under rules similar to the rules of

section 56A.

Stakeholders have suggested various approaches to determining a CAMT

entity’s distributive share of AFSI from a

partnership investment (that is, a CAMT

entity’s interest in a partnership). One suggested approach is a “top-down” method

that would start with the FSI amount

reported by the CAMT entity on its AFS

and adjustments to this amount under section 56A. Under a top-down method, a

CAMT entity’s distributive share of AFSI

from a partnership investment generally

would be based on the CAMT entity’s

method used to account for the investment

for AFS purposes.

Another suggested approach is a “bottom-up” method. Under this method, a

partnership would calculate its AFSI and

allocate each partner a “distributive share”

of the partnership’s AFSI. Stakeholders

have suggested that a partner’s “distributive share” of a partnership’s AFSI could

be based on tax principles (for example,

section 704(b) or (c) of the Code) or financial accounting principles (for example,

the equity method (as described in proposed §1.56A-1(b)(15))). Other suggested

approaches included allowing CAMT

entities to use their regular tax income

amounts from a partnership investment

as their distributive share amount of AFSI

from such investment.

A bottom-up approach is consistent

with the statute and is more conducive to

taking into account section 56A adjustments. A bottom-up approach supports

the framework of section 56A(c)(2)(D)

(ii), which suggests that a partnership

calculates its AFSI prior to determining

the partners’ distributive shares of such

AFSI. Additionally, a bottom-up approach

allows for a consistent methodology to be

used to calculate a CAMT entity’s distrib-

Bulletin No. 2024–42

utive share of partnership AFSI regardless

of the method used by a CAMT entity to

account for its partnership investment for

AFS purposes. For example, if a CAMT

entity accounts for a partnership investment by using the fair value method for

AFS purposes (as described in proposed

§1.56A-1(b)(17)), a top-down approach

would require the CAMT entity to report

a mark-to-market amount with respect to

that partnership investment for purposes

of its FSI, although making applicable

adjustments to that amount under section

56A in a precise manner might not be

possible. As a result, under a top-down

approach, multiple methodologies might

be required to calculate the applicable

adjustments under section 56A, depending

on the CAMT entity’s method to account

for its partnership investment for AFS

purposes. Under a bottom-up approach,

all CAMT entities would calculate their

distributive share amounts of AFSI from

a partnership investment using a consistent methodology, which is referred to in

proposed §1.56A-5(c) as the “applicable

method.”

Additionally, under a bottom-up

approach, a CAMT entity’s distributive share of AFSI generally should be

based on the income it reports for AFS

purposes with respect to its partnership

investment rather than the amount of its

taxable income with respect to the partnership investment. Accordingly, under

proposed §1.56A-5, a CAMT entity’s

distributive share of AFSI from a partnership investment generally would be based

on the share of the partnership’s FSI that

the CAMT entity reports on its AFS with

respect to such investment, rather than on

the CAMT entity’s allocations of partnership items for regular tax purposes. This

rule comports with the structure of the

CAMT, which generally imposes a tax

that is based on book income with certain

adjustments. Proposed §1.56A-5 would

provide certain exceptions that would be

consistent with the statute’s adjustments

to FSI.

A. General rule

Proposed §1.56A-5 would provide

rules for the applicable method (that is,

a bottom-up approach) to determine a

CAMT entity’s distributive share of AFSI

803

with respect to its partnership investment.

In a tiered partnership structure, each partnership would be a CAMT entity with

respect to the partnership in which it is a

partner and would be required to compute

its distributive share of AFSI with respect

to its interest in the lower-tier partnership.

Proposed §1.56A-5(b) generally would

provide that, if a CAMT entity is a partner in a partnership, its AFSI with respect

to its partnership investment is adjusted

as required under the applicable method

in proposed §1.56A-5(c) and the rules in

proposed §1.56A-20 (concerning AFSI

adjustments to apply certain principles of

subchapter K of chapter 1 (subchapter K))

to take into account its distributive share

of the partnership’s AFSI. A CAMT entity

must use the applicable method described

in proposed §1.56A-5(c) to determine its

AFSI adjustment regardless of the CAMT

entity’s method used to account for its

partnership investment for AFS purposes.

B. Applicable method

Under the applicable method in proposed §1.56A-5(c), a CAMT entity would

compute its distributive share of AFSI

with respect to its partnership investment by first disregarding any amount

the CAMT entity reflects in its FSI with

respect to that investment for the taxable

year (for example, under the fair value

method or the equity method), except as

provided in proposed §1.56A-5(d). See

proposed §1.56A-5(c)(1). The CAMT

entity then would include its “distributive

share amount” (as determined under proposed §1.56A-5(e)) for the taxable year in

its AFSI with respect to its investment in

the partnership. See proposed §1.56A-5(c)

(2).

C. Amounts not disregarded

The statutory directive in section

56A(c)(2)(D) to take into account only

the taxpayer’s distributive share of a

partnership’s AFSI does not mean that a

CAMT entity may disregard all amounts

with respect to a partnership investment

that are outside the scope of the “distributive share amount,” as computed under

proposed §1.56A-5(e), in determining

its FSI with respect to that investment.

Section 56A(c)(2)(D) and the applicable

October 15, 2024

method implementing this statutory provision address only a CAMT entity’s AFSI

amount based on a partnership’s AFSI.

FSI amounts resulting from transactions

such as a transfer, sale or exchange, or

deconsolidation of a partnership investment are not covered by section 56A(c)(2)

(D). Accordingly, proposed §1.56A-5(d)

would clarify the amounts of FSI with

respect to the CAMT entity’s partnership

investment that may not be disregarded

in applying the applicable method under

proposed §1.56A-5(c). Under proposed

§1.56A-5(d), a CAMT entity may not disregard any FSI amounts attributable to a

transfer, sale or exchange, contribution,

distribution, dilution, deconsolidation,

change in ownership, or any other transaction between any partners (including

the CAMT entity) and the partnership,

or between any partners (including the

CAMT entity), that are not derived from,

and included in, the partnership’s FSI. As a

result, such amounts are not excluded from

a CAMT entity’s AFSI under the applicable method. However, these amounts

may be subject to adjustment under proposed §§1.56A-1(d)(4) (concerning redetermination of FSI gains and losses) and

1.56A-20 (concerning AFSI adjustments

to apply certain subchapter K principles).

In addition, in the case of a CAMT entity

and a partnership that are members of the

same financial statement group, proposed

§1.56A-5(d) would provide that the FSI of

the CAMT entity with respect to the partnership investment is determined under

proposed §1.56A-1(c)(3)(iii) (concerning

elimination journal entries).

D. Distributive share amount

The rules for computing the distributive share amount included in a CAMT

entity’s AFSI with respect to its partnership investment under proposed §1.56A5(c)(2) are contained in proposed §1.56A5(e). Proposed §1.56A-5(e)(1) would

provide that a CAMT entity’s distributive share amount is computed for each

taxable year based on the following four

steps: (i) the CAMT entity determining its

distributive share percentage; (ii) the partnership determining its modified FSI; (iii)

the CAMT entity multiplying its distributive share percentage by the modified FSI

of the partnership (as reported by the part-

October 15, 2024

nership); and (iv) the CAMT entity adjusting the product of the amount determined

in (iii) for certain separately stated section

56A adjustments.

Proposed §1.56A-5(e)(2) would provide rules for how a CAMT entity determines its distributive share percentage. As

described previously in this part V of the

Explanation of Provisions, determining a

CAMT entity’s distributive share percentage based on the amount of FSI it reports

on its AFS with respect to its partnership

investment, and not on its economic interest for regular tax purposes, is appropriate because the CAMT is a tax based on

income reported by a CAMT entity for

AFS purposes.

Accordingly, proposed §1.56A-5(e)(2)

would provide that a CAMT entity’s distributive share percentage is a fraction, the

numerator of which is the FSI amount that

is disregarded under the applicable method

(but redetermined based on the partnership’s taxable year if the taxable year of

the partnership and the CAMT entity are

different), and the denominator of which

depends on the method of accounting the

CAMT entity uses for AFS purposes, but

in each case, as determined by the CAMT

entity for AFS purposes.

In the case of a CAMT entity and a

partnership that are members of the same

financial statement group, or in the case of

a CAMT entity that uses the equity method

to account for its partnership investment

(including the hypothetical liquidation

at book value method under the equity

method), the denominator would be 100

percent of the partnership’s FSI for the

partnership’s taxable year. See proposed

§1.56A-5(e)(2)(i). In the case of a CAMT

entity that uses the fair value method to

account for its partnership investment, the

denominator would be the total change in

the fair value of the partnership during the

partnership’s taxable year as determined

by the CAMT entity for inclusion of its

share of the total change in its AFS. See

proposed §1.56A-5(e)(2)(ii). In the case

of a CAMT entity that treats its partnership investment as other than equity for

AFS purposes (for example, as debt) (a

non-AFS partner), the denominator would

be 100 percent of the partnership’s FSI

for the taxable year plus the FSI amount

included in the numerator of the distributive share percentage for the taxable year.

804

See proposed §1.56A-5(e)(2)(iii). In the

case of a CAMT entity that treats itself as

owning 100 percent of the equity in the

partnership for AFS purposes because the

CAMT entity treats all other partners as

non-AFS partners, the denominator would

be 100 percent of the partnership’s FSI

for the taxable year plus the sum of any

amounts reflected in the partnership’s FSI

that are treated as paid or accrued to the

other partners for the partnership’s taxable

year. See proposed §1.56A-5(e)(2)(iv). In

the case of a CAMT entity that uses any

other method of accounting to account

for its partnership investment, the denominator would be an amount determined

under the principles set forth in proposed

§1.56A-5(e)(2)(i) and (ii) that is reasonable under the facts and circumstances

and reflective of the proportionate amount

of the partnership’s FSI the CAMT entity

is reporting for AFS purposes. See proposed §1.56A-5(e)(2)(v).

It is possible for the distributive share

percentage to be a negative number. This

situation may arise if a partner is using

the equity method to account for its partnership investment and the partnership’s

FSI is positive but the CAMT entity is

reporting a negative FSI amount. In such

cases, the negative distributive share percentage is multiplied by the partnership’s

modified FSI. If the distributive share

percentage is negative and the partnership’s modified FSI is positive, the result

for the CAMT entity’s share of modified

FSI will be a negative amount. Similarly,

if the distributive share percentage is

negative and the partnership’s modified

FSI is negative, the result for the CAMT

entity’s share of modified FSI will be a

positive amount. Examples under proposed §1.56A-5 would include illustrations on computing the distributive share

percentage. See proposed §1.56A-5(k).

The Treasury Department and the IRS

appreciate that the calculation methodology provided for in proposed §1.56A-5(e)

(2) may produce imprecise results under

certain circumstances, particularly in the

case of a CAMT entity that uses the hypothetical liquidation at book value method

under the equity method to account for

its partnership investment for AFS purposes, treats itself as a non-AFS partner,

or treats itself as owning 100 percent of

the equity in the partnership because the

Bulletin No. 2024–42

CAMT entity treats all other partners in

the partnership as non-AFS partners. The

Treasury Department and the IRS request

comments on more precise methods that

could be used to calculate a CAMT entity’s distributive share percentage, including in the circumstances described in the

previous sentence. The Treasury Department and the IRS also request comments

on whether AFSI with respect to a nonAFS partner’s partnership investment

should be determined other than by use

of a distributive share percentage and the

applicable method, including in situations

where more than one CAMT entity is a

non-AFS partner in the partnership.

The second step in the distributive share

amount computation is for the partnership

to determine its modified FSI. To facilitate this computation, proposed §1.56A5(e)(3) would provide that a partnership

starts with its FSI for its taxable year (as

determined under proposed §1.56A-1(c))

and makes all AFSI adjustments provided

for in the section 56A regulations that are

applicable to partnerships, with certain

enumerated exceptions.

The third step in the distributive share

amount computation is for the CAMT

entity to multiply its distributive share

percentage by the partnership’s modified

FSI, as reported by the partnership to the

CAMT entity. See proposed §1.56A-5(e)

(1)(iii).

The fourth and final step in the distributive share amount computation is for the

CAMT entity to adjust the amount determined in the previous sentence (that is, in

the third step) by certain AFSI items that

are separately stated to the CAMT entity

and not taken into account by the partnership in determining its modified FSI.

See proposed §1.56A-5(e)(1)(iv) and (e)

(4)(ii). Separately stated AFSI items that

adjust a CAMT entity’s distributive share

amount would include certain AFSI items

with respect to basis adjustments under

section 743(b) and §1.1017-1(g)(2) attributable to section 168 property or qualified

wireless spectrum and would be based

on the CAMT entity’s distributive share

of the items for regular tax purposes. See

proposed §§1.56A-15(d)(2)(ii) and (iv)

and 1.56A-16(d)(2)(ii) and (iv).

Separately stated AFSI items that adjust

a CAMT entity’s distributive share amount

would also include certain amounts result-

Bulletin No. 2024–42

ing from a disposition of section 168 property or qualified wireless spectrum by a

partnership to which the CAMT entity had

a basis adjustment under section 743(b)

or §1.1017-1(g)(2) in place, as provided

under proposed §§1.56A-15(e)(3)(iii) and

(iv) and 1.56A-16(e)(3)(iii) and (iv). See

proposed §§1.56A-15(e)(3)(iii) and (iv)

and 1.56A-16(e)(3)(iii) and (iv).

Lastly, separately stated AFSI items

that adjust a CAMT entity’s distributive

share amount would include the CAMT

entity’s distributive share of deferred

distribution gain or loss described in proposed §1.56A-20(d)(1)(ii), which would

be equal to the CAMT entity’s allocable

share of the items as provided in proposed

§1.56A-20(d)(2)(i), taking into account

any acceleration event under proposed

§1.56A-20(d)(1)(iii) and (d)(2)(ii).

Under proposed §1.56A-5(e)(4)(iii),

certain AFSI items would be separately

stated by the partnership but would not

be taken into account as adjustments to a

CAMT entity’s distributive share amount.

Instead, these AFSI items would be taken

into account by a CAMT entity in determining its AFSI. These AFSI items include

items described in proposed §1.56A-4(c)

(1)(ii) with respect to stock of foreign

corporations owned by the partnership,

as provided under proposed §1.56A-4(e);

items described in proposed §1.56A-6(c)

(2)(iii) with respect to stock of foreign

corporations owned by the partnership, as

provided under proposed §1.56A-6(c)(2)

(iv); items described in proposed §1.56A8(c) with respect to creditable foreign tax

expenditures of a partnership, as provided

under proposed §1.56A-8(c); and the item

described in proposed §1.56A-21(e)(2)

(iii) with respect to discharge of indebtedness income reflected in the partnership’s FSI, as provided under proposed

§1.56A-21(e)(2)(ii). Although proposed

§1.56A-5(e)(4)(iii) refers to the items

described in §1.56A-6(c)(2)(iii) as “AFSI

items,” these items represent adjustments

to the adjusted net income or loss of a

CFC. See §1.56A-6(c)(1) (generally providing that for purposes of determining a

CFC’s adjusted net income or loss, references to AFSI in other sections of the section 56A regulations are treated as references to adjusted net income or loss).

The adjustment to AFSI described in

proposed §1.56A-6(b) is not included as a

805

separately stated item because, under proposed §1.56A-6(b)(1) (which incorporates

the principles of section 951(a)(2)), a partnership is not treated as owning stock of

a CFC for purposes of proposed §1.56A6(b)(1), and therefore proposed §1.56A6(b) does not result in an adjustment to

modified FSI of a partnership. Rather, in

the case of a partnership that owns stock

of a CFC, a partner that is a U.S. shareholder with respect to the CFC determines

its own pro rata share of the adjusted net

income or loss of the CFC and makes an

appropriate adjustment to its AFSI directly

under proposed §1.56A-6(b)(1). See proposed §1.56A-6(e)(3) (Example 3).

Proposed §1.56A-5(e)(5) would provide rules coordinating the effect of

equity method basis adjustments for AFS

purposes with a CAMT entity’s adjustments to a partnership’s modified FSI

under the applicable method. If a CAMT

entity includes in its FSI amortization of

an equity method basis adjustment with

respect to a partnership investment that

is attributable to section 168 property or

qualified wireless spectrum held by the

partnership, and if the CAMT entity has

a basis adjustment under section 743(b)

with respect to the same property that

affects the CAMT entity’s distributive

share amount, then the CAMT entity

adjusts its AFSI to disregard any such

FSI amortization. The rule in proposed

§1.56A-5(e)(5) is intended to remove the

potential for a duplicative reduction to

AFSI for an equity method basis adjustment and section 743(b) basis adjustment

that relates to the same property.

Proposed §1.56A-5(e)(6)(i) would provide rules for determining a CAMT entity’s distributive share amount if the partnership treats as its AFS its Federal income

tax return pursuant to proposed §1.56A2(c)(6). In such case, a CAMT entity’s

distributive share amount with respect to

its partnership investment would be equal

to the amount of FSI disregarded under

proposed §1.56A-5(c)(1) of the applicable

method further adjusted to disregard any

items described in proposed §§1.56A4(b)(1) and 1.56A-8(b) that are reflected

in such amount. Additionally, the AFSI

items described in proposed §1.56A-5(e)

(4)(iii)(A) through (C) would still apply

to determine the CAMT entity partner’s

AFSI, but not the AFSI item described in

October 15, 2024

proposed §1.56A-5(e)(4)(iii)(D) since the

AFSI item in proposed §1.56A-5(e)(4)

(iii)(D) is dependent on the partnership’s

FSI and, pursuant to §1.56A-5(e)(6)(i),

the partnership effectively does not have

an FSI amount if it treats as its AFS its

Federal income tax return. See proposed

§1.56A-21(e)(2)(iii).

Proposed §1.56A-5(f) would provide

that, in the case of a tiered entity structure,

if a CAMT entity is a partner in a partnership (UTP) that directly or indirectly owns

an investment in a lower-tier partnership

(LTP), each partnership, starting with the

lowest-tier partnership and continuing in

order up the chain of ownership, must use

the applicable method to determine the

distributive share amounts of each CAMT

entity partner in the tiered-partnership

chain. Because each UTP determines its

own distributive share amount, amounts

separately stated under proposed §1.56A5(e)(4)(ii) to an UTP are included in determining the UTP’s modified FSI under the

applicable method in proposed §1.56A5(c). Under proposed §1.56A-5(g), the

distributive share amount required to be

included in a CAMT entity’s AFSI for a

taxable year with respect to a partnership

investment under proposed §1.56A-5(c)

(2) is based on the modified FSI of the

partnership for any taxable year of the

partnership ending within or with the taxable year of the CAMT entity.

E. Reporting and filing requirements—

partner

Proposed §1.56A-5(h) would provide

rules on the reporting and filing requirements for a CAMT entity that is a partner

in a partnership. The Treasury Department

and the IRS are aware that, in order to

compute its distributive share of a partnership’s AFSI, a CAMT entity may require

information from the partnership. To facilitate information reporting by partnerships,

the proposed regulations would require a

partnership to provide the information to

the CAMT entity if the CAMT entity cannot determine its distributive share of the

partnership’s AFSI without the information and the CAMT entity makes a timely

request for the information.

Under proposed §1.56A-5(h)(1), if a

CAMT entity cannot determine its distributive share of a partnership’s AFSI with-

October 15, 2024

out receiving certain information from

the partnership, the CAMT entity would

be required to request the information

from the partnership by the 30th day after

the close of the partnership’s taxable year

to which the information request relates.

The information, and the requests made

for the information, would be required to

be maintained by the CAMT entity in its

books and records. The partnership would

be required to continue to provide the

information to the CAMT entity for each

subsequent taxable year unless the partnership receives written notification from

the CAMT entity that the information is

not required.

The Treasury Department and the IRS

are aware that a CAMT entity might not

timely receive the requested information

from the partnership. Under proposed

§1.56A-5(h)(2)(i), a CAMT entity that

does not timely receive the requested

information from the partnership would be

required to make a good-faith estimate of

its distributive share of the partnership’s

AFSI. Except as provided in proposed §

1.56A-5(h)(2)(iii)(B), once the CAMT

entity receives the information from the

partnership, the CAMT entity (if not also

an applicable corporation) should report

the information to its partners, including any UTP (which would then report

the information to its partners), until the

information is received by an applicable

corporation. See proposed §1.56A-5(h)(2)

(ii) and (iii)(B).

In the case of a partnership subject to

the centralized partnership audit regime

in subchapter C of chapter 63 of the Code

(BBA partnership), if making the required

estimate requires the CAMT entity to treat

a partnership-related item (PRI) in a manner that is inconsistent with the BBA partnership’s treatment of the PRI, the CAMT

entity must follow the procedures for filing a notice of inconsistent treatment with

respect to the PRI. See proposed §1.56A5(h)(2)(iii)(A). If, as part of providing a

CAMT entity with information under

proposed §1.56A-5(h)(1), the BBA partnership must change a PRI reported on

its partnership return for a taxable year

and the due date for filing the return has

passed, the BBA partnership must file an

administrative adjustment request (AAR)

under section 6227 of the Code to adjust

the PRI. Pursuant to the centralized part-

806

nership audit regime, the adjustment is

determined and taken into account under

section 6227 and the regulations thereunder. See proposed §1.56A-5(h)(2)(iii)(B).

F. Reporting and filing requirements—

partnerships

Proposed §1.56A-5(i) would provide

rules for a partnership that receives a

request from a CAMT entity for information to determine the CAMT entity’s distributive share amount, including

information necessary to determine the

denominator for the distributive share percentage as described in proposed §1.56A5(e)(2), the partnership’s modified FSI as

described in proposed §1.56A-5(e)(3), and

for the CAMT entity to make the AFSI

adjustments as described in proposed

§1.56A-5(e)(4). The partnership would be

required to file the information with the

IRS in forthcoming forms, instructions, or

other guidance, as described in proposed

§1.56A-5(i)(1).

Proposed §1.56A-5(i)(2) would provide special rules for tiered partnership

structures. These rules would require

an UTP that has a reporting and filing

requirement under proposed §1.56A-5(i)

to request the information from an LTP,

which then must file the requested information with the IRS and furnish it to the

UTP as described in proposed §1.56A5(i)(1). The information would be

required to be requested by the UTP by

the later of the 30th day after the close of

the taxable year to which the information

request relates or 14 days after the date

the UTP receives an information request

from another UTP.

Under proposed §1.56A-5(i)(3), the

partnership would be required to provide

the requested information by the date prescribed under section 6031(b) of the Code.

However, under proposed §1.56A-5(i)(3)

(iii) a partnership would not be required

to furnish information to a CAMT entity

until it has received a notice of request.

A partnership would be considered to

have received a notice of request when it

receives the request either electronically

or in the manner agreed to by the parties, or the partnership has an obligation

to continue providing information to a

CAMT entity due to the CAMT entity’s

request in a prior taxable year.

Bulletin No. 2024–42

Under proposed §1.56A-5(i)(4), the

information would be requested electronically or in the manner agreed to by

the parties. Under proposed §1.56A-5(i)

(5), the partnership would be required to

retain in its books and records a copy of

the information request and the date it was

received. Under proposed §1.56A-5(i)

(6), a partnership that fails to furnish the

requested information would be subject to

penalties under section 6722 of the Code.

The Treasury Department and the IRS

request comments on whether exceptions

to the reporting requirements should apply

for partnerships that meet certain criteria.

For example, such criteria may include

the fair market value of the partnership’s

assets or whether the partnership is controlled (either directly or indirectly) by an

applicable corporation. If a partnership

is exempt from some or all of the reporting requirements outlined in proposed

§1.56A-5(i), the Treasury Department and

the IRS request comments on how a partner in the partnership would determine its

distributive share of AFSI with respect

to its partnership investment. The Treasury Department and the IRS also request

comments regarding the application of

the requirement in proposed §1.56A-5(i)

(3) that a partnership provide information

requested by a partner by the date prescribed under section 6031(b) of the Code

for filing its partnership return when the

partnership to which the request is made

is a UTP or LTP in a tiered partnership

structure.

G. Limitation on allowance of negative

distributive share amount

Proposed §1.56A-5(j)(1) would provide a rule limiting the amount of a

CAMT entity’s negative distributive share

amount from a partnership investment for

a taxable year that can be included in the

CAMT entity’s AFSI for such taxable year

in a manner similar to the rule in section

704(d) that applies for regular tax purposes. This rule would provide that, if a

CAMT entity’s distributive share amount

with respect to a partnership investment

for a taxable year, as determined under

proposed §1.56A-5(e), is negative, such

distributive share amount for the taxable

year would include only the negative

distributive share amount that does not

Bulletin No. 2024–42

exceed the CAMT entity’s CAMT basis

in its partnership investment as of the end

of the partnership’s taxable year. Ordering

rules similar to the rules in §1.704-1(d)

(2) apply in computing a CAMT entity’s

CAMT basis in its partnership investment

for purposes of applying the loss limitation rule for negative distributive share

amounts. The Treasury Department and

the IRS request comments regarding the

application of the ordering rule in §1.7041(d)(2) and whether more specific ordering rules are needed for purposes of applying the loss limitation rule for negative

distributive share amounts.

Proposed §1.56A-5(j)(2) would provide that any excess negative distributive

amount that is disallowed for a taxable

year under proposed §1.56A-5(j)(1) is

carried forward and may be used by the

CAMT entity in a subsequent taxable year

to the extent such negative amount does

not exceed a CAMT entity’s CAMT basis

in its partnership investment in the subsequent taxable year.

Proposed §1.56A-5(j)(3) would provide rules for determining a CAMT entity’s CAMT basis in a partnership investment. These rules would be similar to the

rules in section 705 of the Code that apply

for regular tax purposes.

A CAMT entity’s CAMT basis in a

partnership investment would start with

the basis of the investment for AFS purposes as of the first day of the partnership’s

first taxable year ending after December

31, 2019 in which the CAMT entity held

its interest in the partnership and would

reflect certain adjustments for each taxable year of the partnership ending after

December 31, 2019 (but not adjustments

that would make the CAMT basis less

than zero). See proposed §1.56A-5(j)(3).

VI. Proposed §1.56A-6: AFSI

Adjustments with Respect to Controlled

Foreign Corporations

A. General rule for adjusting AFSI under

proposed §1.56A-6(b)

Pursuant to the authority granted by

section 56A(c)(5), (c)(15), and (e), proposed §1.56A-6 would provide rules

under section 56A(c)(3) regarding an

adjustment to the AFSI of a CAMT entity

for any taxable year in which the CAMT

807

entity is a U.S. shareholder of one or more

CFCs. Under proposed §1.56A-6(b)(1), if

a CAMT entity is a U.S. shareholder of a

CFC, the CAMT entity’s AFSI is generally adjusted for its pro rata share of the

CFC’s adjusted net income or loss, which

generally means the CFC’s FSI for the

CFC’s taxable year, adjusted for all AFSI

adjustments provided under the section

56A regulations (except as provided under

proposed §1.56A-6(c)(2) through (5),

which are described later in this Explanation of Provisions). More specifically, proposed §1.56A-6(b)(1) would provide that,

except as provided in proposed §1.56A6(b)(3) (concerning an aggregate negative adjustment), for any taxable year, a

CAMT entity that is a U.S. shareholder of

one or more CFCs makes a single adjustment to the CAMT entity’s AFSI that is

equal to the sum of the CAMT entity’s pro

rata shares of the adjusted net income or

loss of each such CFC, with such aggregate amount reduced as provided in proposed §1.56A-6(b)(2) (reduction for taxes

if an applicable corporation does not claim

foreign tax credits) and (4) (reduction for

utilization of a CFC adjustment carryover,

as defined in proposed §1.56A-6(b)(6)).

The CAMT entity’s pro rata share of the

adjusted net income or loss of a CFC is

determined for the taxable year of the CFC

that ends with or within the taxable year of

the CAMT entity and is determined under

the principles of section 951(a)(2). These

principles include, for example, rules similar to those described in section 951(a)(2)

(A) and (B) and the aggregation rules in

§1.958-1(d).

A single adjustment under section

56A(c)(3) is consistent with the statutory language. See section 56A(c)(3)(B)

(which refers to “the adjustment determined under subparagraph (A)” rather

than multiple “adjustments”) and section

59(l) (which refers to “the adjustment

under section 56A(c)(3)” in the singular

and provides for the aggregation of an

applicable corporation’s pro rata share of

creditable taxes paid or accrued by each

CFC). Accordingly, to calculate the adjustment under section 56A(c)(3) for a U.S.

shareholder of several CFCs, the net loss

of a CFC may offset net income of another

CFC in the same taxable year under proposed §1.56A-6(b). This rule would be

consistent with the guidance provided in

October 15, 2024

section 7.02(2) of Notice 2023-64. If the

sum of the pro rata share of the adjusted

net income or loss of each CFC of which

the CAMT entity is a U.S. shareholder

produces a negative amount, this amount

is carried to the succeeding taxable year,

as described subsequently in more detail.

For purposes of determining inclusions of subpart F income and global

intangible low-taxed income under sections 951 and 951A, a domestic partnership is not treated as owning stock of a

foreign corporation within the meaning

of section 958(a) of the Code and therefore has no inclusions under section

951 or 951A with respect to any stock

of a CFC it owns. See §§1.951-1(a)(4)

(directing taxpayers to §1.958-1(d) for

rules regarding the ownership of stock of

a foreign corporation through a domestic

partnership for purposes of section 951)

and 1.958-1(d) (providing generally that

for purposes of applying sections 951

and 951A, a domestic partnership is not

treated as owning stock of a foreign corporation). Accordingly, because a CAMT

entity’s pro rata share of the adjusted net

income or loss of a CFC is determined

under the principles of section 951(a)(2),

a domestic partnership would have no pro

rata share with respect to the adjusted net

income or loss of any stock of a CFC it

owns and no adjustment would be made

to the partnership’s modified FSI under

proposed §1.56A-6(b)(1). However,

if a partner in the partnership is a U.S.

shareholder with respect to the CFC, the

partner would determine its own pro rata

share of the adjusted net income or loss

of the CFC and would make an appropriate adjustment to its AFSI directly under

proposed §1.56A-6(b)(1). See proposed

§1.56A-6(e)(3) (Example 3).

B. Additional mechanics for adjusting

AFSI under proposed §1.56A-6(b)

Solely for purposes of determining

AFSI under section 56A (and not under

section 59(k)), proposed §1.56A-6(b)(2)

would require an applicable corporation

that is not claiming foreign tax credits

for the taxable year to reduce the amount

of the adjustment determined under proposed §1.56A-6(b)(1) by its share of eligible current year taxes of CFCs for the

taxable year (calculated under proposed

October 15, 2024

§1.59-4(d)(3) as if the applicable corporation had claimed foreign tax credits for

the taxable year). For this purpose, the

applicable corporation’s share of eligible

current year taxes of CFCs is reduced to

reflect the suspensions and disallowances

described in proposed §1.59-4(b)(1) that

apply at the level of the U.S. shareholder

for purposes of determining foreign

income taxes eligible for the CAMT FTC.

Finally, the proposed regulations would

not permit a reduction to the amount of the

adjustment under proposed §1.56A-6(b)

(1) for taxes deemed paid by the applicable corporation on distributions of PTEP

under section 960(b) (PTEP taxes).

Proposed §1.56A-6(b)(3) would provide that, if the amount of the adjustment

determined under proposed §1.56A-6(b)

(1) with respect to a taxable year of a

U.S. shareholder would be negative (after

taking into account the tax reduction provided under proposed §1.56A-6(b)(2)

but before taking the CFC adjustment

carryovers under proposed §1.56A-6(b)

(4) into account), then there is no adjustment under proposed §1.56A-6(b)(1) for

the taxable year. This would-be negative

adjustment amount would give rise to a

CFC adjustment carryover generated in

the taxable year. Proposed §1.56A-6(b)

(4) would provide that if the adjustment

determined under proposed §1.56A-6(b)

(1) with respect to a taxable year of a

U.S. shareholder would be positive (after

taking into account the tax reduction provided under proposed §1.56A-6(b)(2)

but before taking proposed §1.56A-6(b)

(4) into account), then the adjustment

under proposed §1.56A-6(b)(1) (after

taking into account the tax reduction

provided under proposed §1.56A-6(b)

(2)) is reduced by the aggregate amount

of CFC adjustment carryovers to the taxable year, but not below zero. Proposed

§1.56A-6(b)(5) would provide rules

describing the ordering and use of CFC

adjustment carryovers, which parallel

similar rules for FSNOL carryovers in

proposed §1.56A-23(d).

Proposed §1.56A-6(b)(7) would provide that members of a tax consolidated

group are treated as a single entity for

purposes of proposed §1.56A-6(b). See

also proposed §1.1502-56A(h) for rules

regarding the use of CFC adjustment carryovers by a tax consolidated group.

808

C. Definition of adjusted net income or

loss

Proposed §1.56A-6(c)(1) generally

would define the term adjusted net income

or loss with respect to any CFC, for any

taxable year of the CFC, as the FSI of the

CFC, adjusted for all AFSI adjustments

provided under the section 56A regulations, except as provided in proposed

§1.56A-6(c)(2) through (5). Adjusted

net income or loss of a CFC must be

expressed in U.S. dollars. Accordingly,

items not expressed in U.S. dollars that

are taken into account in determining the

CFC’s adjusted net income or loss must

be translated to U.S. dollars. This translation may be required where the reporting

currency used for a CFC’s AFS is not the

U.S. dollar, because in that case the CFC’s

FSI (the starting point in determining the

CFC’s adjusted net income or loss) will

not be expressed in U.S. dollars. It may

also be required where an adjustment

made in determining the CFC’s adjusted

net income or loss references an amount

as determined for regular tax purposes,

because that regular tax amount may be

denominated in the CFC’s functional currency for regular tax purposes, which may

not be the U.S. dollar (and may also be

different from the reporting currency used

for the CFC’s AFS). In any case in which

currency translation is required under proposed §1.56A-6(c)(1), it is undertaken

using the weighted average exchange rate,

as defined in §1.989(b)-1, for the CFC’s

taxable year. For purposes of translating a

CFC’s adjusted net income or loss to U.S.

dollars, the rules described in proposed

§1.56A-6(c)(1) apply in lieu of the rules

described in proposed §1.56A-1(e)(1).

The adjustments in proposed §1.56A6(c)(2) are intended to address certain

potential duplications of items and would

be generally consistent with, but expand

upon, the guidance provided in Notice

2024-10. See part IV.A of this Explanation

of Provisions describing a potential duplication of items when an upper-tier CFC

owns stock of a lower-tier CFC. Proposed

§1.56A-6(c)(2) would provide adjustments to a CFC’s adjusted net income

or loss relating to the CFC’s ownership

of stock of a foreign corporation, in lieu

of the adjustments described in proposed

§1.56A-4(c)(1). Proposed §1.56A-6(c)(2)

Bulletin No. 2024–42

(ii) would exclude from a CFC’s adjusted

net income or loss any items of income,

expense, gain, and loss resulting from

ownership of stock of a foreign corporation, including from acquiring or transferring such stock, reflected in the CFC’s

FSI. Proposed §1.56A-6(c)(2)(iii) would

include in a CFC’s adjusted net income

or loss any items of income, deduction,

gain, and loss resulting from the CFC’s

ownership of stock of a foreign corporation, including from acquiring or transferring such stock, for regular tax purposes,

except for the amount of any dividend

received from another foreign corporation to the extent the dividend is a CAMT

excluded dividend. Proposed §1.56A-6(d)

would define the term “CAMT excluded

dividend” to mean a dividend received

by a CFC to the extent the dividend is

excluded from (i) the recipient CFC’s

gross income under section 959(b), or

(ii) both (A) the recipient CFC’s foreign

personal holding company income under

section 954(c)(3) or (c)(6) of the Code,

and (B) the recipient CFC’s gross tested

income under §1.951A-2(c)(1)(iv).

Because a CFC’s adjusted net income

or loss reflects all AFSI adjustments provided under the section 56A regulations,

except as provided in proposed §1.56A6(c)(2) through (5), if a CFC is a partner

in any partnership or the owner of any

disregarded entity, the items taken into

account in computing the CFC’s adjusted

net income or loss generally include the

CFC’s distributive share amount of modified FSI from any such partnership (see

proposed §1.56A-5) and the AFSI of any

such disregarded entity (see proposed

§1.56A-9). This would be consistent with

the guidance provided in section 7.02(3)

of Notice 2023-64. Proposed §1.56A-6(c)

(2)(iv) would further provide that if a

partnership directly owns stock of a foreign corporation, then in determining the

adjusted net income or loss of a CFC that

is a partner in the partnership (or an indirect partner in the case of tiered partnerships), the partner takes into account the

items described in proposed §1.56A-6(c)

(2)(iii) (including taking into account the

exception for CAMT excluded dividends)

that are reported to the partner by the partnership for regular tax purposes.

Section 56A(c)(3)(A) provides that

the AFSI of a CAMT entity that is a U.S.

Bulletin No. 2024–42

shareholder of a CFC should be adjusted

to take into account a pro rata share of

CFC items under rules similar to the rules

under section 951(a)(2). Reading section

56A(c)(3) as limited only to the pro rata

share of CFC items that would be taken

into account in computing AFSI under

section 56A(c)(4) and proposed §1.56A-7

(that is, items of income that are effectively connected with the conduct of a

trade or business within the United States

and deductions connected with such

income) would be underinclusive. Thus,

proposed §1.56A-6(c)(3) would provide

that a CFC’s adjusted net income or loss is

not limited to amounts taken into account

in determining AFSI under proposed

§1.56A-7, which would generally limit

the AFSI of a foreign corporation to taxable income that is effectively connected

with the conduct of a trade or business

within the United States.

Moreover, where an amount is subject to CAMT under section 56A(c)(4)

and proposed §1.56A-7 because a CFC

is itself an applicable corporation, such

amount should be excluded from a U.S.

shareholder’s adjustment under 56A(c)

(3) to prevent double counting of the

same income of the CFC. Thus, proposed

§1.56A-6(c)(3) would provide that, if

a CFC is an applicable corporation, the

CFC’s adjusted net income or loss is

reduced by the amount of AFSI of the

CFC (with such AFSI determined by taking proposed §1.56A-7 into account). The

rule in proposed §1.56A-6(c)(3) would be

consistent with the guidance provided in

section 7.02(5) of Notice 2023-64.

Proposed §1.56A-6(c)(4) would provide that the AFSI adjustment provided

under proposed §1.56A-8(c) does not

apply in computing a CFC’s adjusted net

income or loss. Proposed §1.56A-8(c)

generally would provide a reduction in the

AFSI of an applicable corporation by the

amount of foreign income taxes deducted

by the applicable corporation, if the applicable corporation does not choose to claim

foreign tax credits for the taxable year.

Proposed §1.56A-6(c)(5) would provide that the AFSI adjustment provided

under proposed §1.56A-23(c) (providing a reduction to AFSI for FSNOL carryovers) does not apply in computing

a CFC’s adjusted net income or loss.

Allowing a CFC to make the adjustment

809

for FSNOL carryovers provided by proposed §1.56A-23(c) when determining

the CFC’s adjusted net income or loss,

while also allowing for the use of CFC

adjustment carryovers to reduce a U.S.

shareholder’s adjustment to AFSI under

proposed §1.56A-6(b)(1), would lead to

an improper double counting of loss carryovers.

VII. Proposed §1.56A-7: AFSI

Adjustments with Respect to Effectively

Connected Income

Pursuant to the authority granted by

section 56A(c)(15) and (e), proposed

§1.56A-7 would provide rules under section 56A(c)(4) for applying the principles

of section 882 to determine a foreign corporation’s AFSI. As amended by section

10101 of the IRA, section 882(a)(1) provides, in part, that a foreign corporation

engaged in a trade or business within the

United States during the taxable year is

taxable under the CAMT on its taxable

income which is effectively connected

with the conduct of a trade or business

within the United States.

In determining taxable income for purposes of section 882(a)(1), gross income

includes only gross income which is effectively connected with the conduct of a

trade or business within the United States

(ECI). See section 882(a)(2). Deductions

are generally allowed for these purposes

only if and to the extent they are connected with income which is ECI. See section 882(c)(1)(A). Accordingly, proposed

§1.56A-7(b) would provide that, for purposes of section 56A(c)(4), the AFSI of a

foreign corporation is adjusted to include

only amounts and items of FSI that would

be included in ECI or allowable as a

deduction by such corporation for purposes of section 882(c) had such amount

or item accrued for regular tax purposes in

the taxable year.

Section 7.02(5) of Notice 2023-64 provides guidance under which, for purposes

of applying section 56A(c)(4), in the case

of a foreign corporation that qualifies

for and claims the benefits of the business profits provisions of an applicable

income tax treaty, the principles of those

provisions would apply in determining

the foreign corporation’s AFSI. This guidance was intended to clarify that a foreign

October 15, 2024

corporation entitled to benefits under an

income tax treaty may apply the treaty to

determine its AFSI. After further consideration, the Treasury Department and the

IRS are of the view that it is not necessary

to make this clarification in the proposed

regulations, because section 894(a) of the

Code already provides that the Code is

applied with due regard to any income tax

treaty obligation of the United States that

applies to a taxpayer, and nothing in the

IRA changes the normal operation of U.S.

income tax treaties in this context.

VIII. Proposed §1.56A-8: AFSI

Adjustments for Certain Federal and

Foreign Income Taxes

Section 56A(c)(5) provides that AFSI

is appropriately adjusted to disregard

any Federal income taxes or income, war

profits, or excess profits taxes (within the

meaning of section 901) with respect to a

foreign country or possession of the United

States which are taken into account in the

taxpayer’s AFS. Further, the statute provides a grant of authority to the Secretary

to provide an exception to this rule for a

taxpayer that does not choose to claim foreign tax credits for a taxable year. Finally,

section 56A(c)(5) authorizes the Secretary

to prescribe such regulations or other guidance as may be necessary or appropriate to

provide for the proper treatment of current

and deferred taxes for purposes of section

56A(c)(5), including the time at which the

taxes are properly taken into account.

Pursuant to the authority granted by

section 56A(c)(5), (c)(15), and (e), proposed §1.56A-8(b)(1) would adjust AFSI

to disregard any applicable income taxes,

as defined in proposed §1.56A-8(b)(2),

that are taken into account in a CAMT

entity’s AFS. The proposed regulations

would define applicable income taxes

as Federal income taxes and foreign

income taxes that are taken into account

in a CAMT entity’s AFS as current tax

expense (or benefit), as deferred tax

expense (or benefit), or through increases

or decreases to other AFS accounts of the

CAMT entity (for example, AFS accounts

used to account for FSI from investments

in other CAMT entities, AFS accounts

used to account for section 168 property,

or AFS accounts used to account for other

items of income and expense). See pro-

October 15, 2024

posed §1.56A-8(b)(2). Additionally, the

proposed regulations would define Federal

income taxes to mean any taxes imposed

by subtitle A of the Code and to include

amounts allowed as credits against taxes

imposed by subtitle A, including credit

amounts that are generated by a partnership and passed through to a partner.

See proposed §1.56A-1(b)(18). Proposed

§1.56A-1(b)(23) would define foreign

income tax to have the meaning provided

in §1.901-2.

AFSI is relevant in determining both

whether a corporation is an applicable

corporation and the amount of an applicable corporation’s CAMT liability under

section 55(a). For purposes of determining whether a corporation is an applicable

corporation, the Treasury Department and

the IRS are of the view that AFSI should

be determined on a pre-tax basis for all

taxpayers, regardless of whether the taxpayer chooses to claim foreign tax credits

for the taxable year. This ensures that all

taxpayers determine whether a corporation is an applicable corporation using the

same metric (pre-tax AFSI) and ensures

that the choice of whether to claim foreign

tax credits has no effect on the determination of whether a corporation is an applicable corporation.

For purposes of determining the amount

of an applicable corporation’s CAMT liability under section 55(a), however, the

Treasury Department and the IRS are of

the view that it is an appropriate exercise

of the regulatory authority granted under

section 56A(c)(5) to allow a reduction to

AFSI (similar to the deduction for regular tax purposes under section 164 of the

Code) for foreign income taxes if an applicable corporation does not choose to claim

foreign tax credits for the taxable year and

thus is not eligible to claim a CAMT FTC

under section 59(l).

Accordingly, proposed §1.56A-8(c)

would provide that an applicable corp

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