Corporate Alternative Minimum Tax Applicable After 2022

Federal RegisterSep 13, 2024

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-112129-23]

RIN 1545-BQ84

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 submitting 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 Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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 (REG-112129-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 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) 317-6938, 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 § 1.56A-27, 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, 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) 317-3181; 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 202-317-4726, 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) 317-6995, 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 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 applicable 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 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 56(c)(3)(A) 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 U.S.C. 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 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 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 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 (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 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 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 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

§ 1.1502-1(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 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 2023-20, 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 2023-42, 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) 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., 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 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 2024-10, 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 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 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.

Given the application of paragraph (c)(3)(iii)(B) of this section to disregard the AFS consolidation entry eliminating the $200x loss from X's investment in Y, the sum of the separate amounts of consolidated FSI that are X's FSI and Y's FSI ($1,950x less 500x, or $1,450x) is $200x less than the consolidated FSI for the XY Consolidated AFS ($1,650x).

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 § 1.1502-56A. 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 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 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 § 1.56A-2. 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 § 1.56A-1(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 2023-64. Accordingly, proposed § 1.56A-1(d)(1) would provide that AFSI includes all items of income, expense, gain, and loss 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 § 1.56A-1(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 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 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 § 1.56A-1(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 § 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 § 1.56A-2(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 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 non-tax 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 § 1.56A-2(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 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 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 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 § 1.56A-2(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 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 § 1.56A-9(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 2024-10.

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 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; 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

proposed § 1.56A-6(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.

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 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 1.56A-19 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 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.

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 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 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 § 1.56A-4(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 entity'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 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. 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 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 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 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 distributive 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 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 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 § 1.56A-5(c)(2) are contained in proposed § 1.56A-5(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 partnership); 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.

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 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 non-AFS 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 § 1.56A-5(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 resulting 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 § 1.56A-8(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 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 § 1.56A-6(b)(1), and therefore proposed § 1.56A-6(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 § 1.56A-2(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 §§ 1.56A-4(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 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 § 1.56A-5(e)(4)(ii) to an UTP are included in determining the UTP's modified FSI under the applicable method in proposed § 1.56A-5(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 without 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 § 1.56A-5(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 partnership 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 § 1.56A-5(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 § 1.56A-5(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.

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 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 § 1.704-1(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 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 § 1.56A-6(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 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 § 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).